Chain Alliance: a remedy against failure costs and delays? New developments in Dutch practice

By Mr. Frank Eradus LLM

Posted: 20th February 2018 08:30

Annually, many tens of millions (around 10% of sales) are lost in the realisation of Dutch infrastructure and construction projects. The main causes are often poor communication and insufficient information. This leads to ambiguities in functional specifications, costly design errors or building faults with delays and (mutual) failure costs as a result.

Clients and contractors are becoming increasingly aware of the importance of good cooperation. Chain alliance seems to be the new motto.

A new motto

Chain alliance is a partnership with other companies or organisations working on the infrastructure or construction project. For this a contract is not strictly necessary, but it is good to have a legal framework in which the objectives and elaboration of the cooperation are clearly and legibly recorded. This is especially important in the case of more complex, multidisciplinary projects involving multiple partners. Think of the realisation of successive large-scale infrastructure projects.

Bird's eye view

Based on a plan-transcending position, the partners contribute in this way to form the right conditions and agreements for the optimal realisation of projects on the basis of equality, taking into account the individual and joint interests.

The aim is to achieve the objectives of the chain cooperation mainly through maximum transparency and improving the building process. The key to success is: good communication, the exchange of information, sufficient trust and a candid, and a flexible attitude.

Added value

This should lead to the creation of added value in comparison to the more traditional way of working. The classic 'vertical column' of building contracts is simply not focused on cooperation. Typically, every party in such a contract environment tries to limit his responsibilities as much as possible. After all, meddling with another partner quickly leads to "attracting" liability. This hampers a healthy incentive for alliance. Chain alliance is precisely focused on that.
 
Traditional or innovative?

In the preparation and realisation of construction projects we see in the current practice both application of traditional and application of integrated (design & build) contract models, such as DB, DC, DBFM (O), EPC (m) and comparable variants. Often both types occur in the hierarchy, but the lack of cross-project alliance and good communication leads to unnecessary problems and extra costs for many projects.
 
The choice for a traditional building contract model (i.e. separate design and execution, such as UAV-, AVA- or Design-bid-Build contracts, etc.) or an integrated building contract models (design and execution in one hand, such as UAV-GC- 2005, DB (M), DC- , EPC-, EPCM- contracts, etc.), is usually determined by the extent to which the client wants to retain influence on the design and realisation of the project. This also determines to a significant extent which risks belong to the client and which do not.

The common theme of the classic hierarchical project models is to minimise one’s own responsibility and inherent risks. Although people are more inclined to cooperate when working with integrated contracts, a goal is far from being that.

A&P

In the meantime, the Anglo-American method of contract models, used in the Netherlands, primarily is focused on cooperation: alliance or partnering contracts. An important characteristic of alliance contracts is the sharing of risks and inherent ‘pain & gain’, based on pre-agreed benchmarks in terms of money and time. In the case of partnering, the emphasis is more on jointly optimising a project, for example on the basis of agreed key performance indicators (KPI’s).

In essence, this type of contract means that the partners, including the client, have a (financial) interest in realising the project within budget and set schedule at the desired quality level. As a result, partners will have no interest in 'extra work' or cost-increasing factors, such as delays. Everyone benefits from the fact that at the end of the ride there is as much as possible money left in the joint pot to distribute. Actually very simple.

Various large-scale infrastructural projects have meanwhile been successfully realised on the basis of alliances (e.g. Waardse alliance, applied for part of the Betuwe train route or the successful Alliance SAAL of ProRail for the Schiphol-Amsterdam-Almere-Lelystad route, etc.). The core of such successfully completed large scale projects is the result of well-regulated cooperation, including a clear chain of aligned contracts reinforced with a healthy mutual incentive to (continue to) perform optimally through smart KPI’s and bonus-malus schemes.
 
Vertical horizon?

How exactly this will work out for the contract parties and at what level has to be made clear and/or may require further development and adjustment. For example, on the basis of which of the contracts in a chain is a dispute in the execution between chain partners to be settled? How does the agreement, in which partners have a 'horizontal' relationship to each other, relate to the subordinate 'vertical columns' of (subcontracting) agreements?

Who, what and how?

Who determines? Which dispute settlement prevails? Which type of contract? What about the KPI’s, for example in the event that a partner cannot comply with this due to errors in a design that might have been warned against? I already see the lawyers among you frowning. But in such questions the importance of the chain alliance agreement has been decided: the linking of all project contracts to one chain in joint responsibility.

The question arises how this, what I would call the 'vertical horizon', should be controlled by the chain alliance. After all, what is a success for one partner can turn out bad for the other. What happens in such a situation within the chain alliance? Who jumps for the underlying partner in the breach? What risk does that entail and for whom? That is soon wrapped up. And before you realise it, your evolving alliance may be in danger. So, first look for the weakest link in the chain, then appoint and distribute the risks if possible!

Conclusion

All things considered, chain alliance is a sensible goal or at least deserves every chance and support to minimise the risk of towering failure costs and unnecessary project delays. Everyone wants that!

If you are involved in large-scale infrastructure or development of real estate projects throughout the Netherlands or cross border and need the right form of alliancing and risk distribution with your partners, please feel free to contact Mr. Frank Eradus LLM, advocate in Amsterdam.

Frank Eradus specializes in construction law, energy law and  European public procurement law. In doing so, he advises on project-related corporate law. His expertise is mainly the tender,  the contracting  and the (re) structuring of large scale projects in the field of construction, renewable energy, and infrastructure. He advises on all relevant legal aspects of the project and provides the correct structure and contracts for successful completion of the project,  such as turnkey EPC contracts  UAV-2012, UAV GC 2005,  FIDIC, DBFM, NEC or contracts made to measure.

With his technical background (TU Delft) and in-depth expertise in construction and renewable energy Frank guides his clients to successful realization and completion of the project. He is an experienced lawyer and  adviser  in the legal restructuring through mergers, demergers or acquisitions for the right legal structure of the project. Frank Eradus works solution oriented. He performs regularly in international arbitrations.

In addition to his law practice in cooperation with Van Diepen Van der Kroef,  Frank Eradus  gives lectures on construction , infrastructure and renewable energy law for several institutions (Institute for construction law and the Institute for agricultural law on the field).

Frank can be contacted on +31 (0)20 - 574 74 74 or by email at f.eradus@vandiepen.com


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