New delivery models, new risks

From integrated project delivery to progressive design-build contracts, our experts describe benefits and risks of various models
New delivery models, new risks

From Toronto’s new regional express rail to its massive renovation of Union Station, and Kingston, Ont.’s Third Crossing bridge, cooperative project delivery models are enjoying increased popularity. But experts warn that for newer models such as alliance contracting, the infrastructure industry must carefully examine (and likely change) the traditional behaviours embedded in infrastructure owners, developers and contractors.

To date Union Station remains the only project in Canada to use the alliance contracting model, in which  the participants operate as a fully integrated team under an “alliance charter” that espouses the principles of good faith, unanimous decision-making, transparency, and a no-fault culture, among others.

“The reality of alliance contracts is that the people in the market cannot look at it as a panacea,” says Judy Wilson, a partner in Blake, Cassels & Graydon LLP in Toronto. “For an alliance contract to work it, it requires behaviours to change significantly from the way that the market is used to managing construction contracts, both on the contractor side and the owner side. And that’s not a small thing.”

It may take a generation for people to change their way of thinking, says Mark Bain, a partner in Torys LLP in Toronto. A long history of competitive, contract-based relationships means it will take a long time to establish a level of trust and collaboration more broadly in the market.

“It will be a real change, particularly for people who are more senior in the industry, to give up all the company contractual tools and procurement approaches that they cut their teeth on.”

That said, the traditional claims-based approach to managing complex projects hasn’t made either the owner or contractor side happy, Wilson adds. Much benefit can be derived from alliance projects using alliance principles “and that highly structured collaborative approach as a second stage of your procurement process, or as an integrated part of your procurement: your movement from project all the way into a signed agreement.”

Although it used to be accepted that tendering processes yielded the best price, she says, “sometimes tendering doesn’t always get you the best approach, the best value for money, or the most economical way to manage complex procurements or complex projects in Canada.”

The right delivery model for the right project

The GO Transit Regional Express Rail, aka GO Expansion, which will revitalize the transportation network in the Greater Toronto and Hamilton Areas over the next decade, is a Design Build Operate Maintain (DBOM) project type, which extends the Design-Build model by including the operations and maintenance of the completed project in the same original contract.

“We’re seeing that model having some legs in the rail space,” says Greg Southam, a partner in Davies Ward Phillips & Vineberg LLP in Toronto, with more and more movement towards it for RER projects, in part because of the size and expense of such projects. The GO Expansion project, valued at tens of billions of dollars, “was becoming a bet-the-company-type project, … and I think they were having difficulty getting people to step up to that,” he says, with the contractual model changing more than once. Now, under the alliance model, the project is moving forward.

But a one-size-fits-all approach doesn’t work well, and different approaches are being taken to different contracts, says Southam, depending on the type of job and the appetite and priorities of the procuring agency.

“There isn’t a right approach in a general way, but there’s a better approach depending on the issues of the particular project.”

In Kingston, Ontario, an Integrated Project Delivery (IPD) model is being used for the design and construction of that city’s Third Crossing bridge. Kiewit is the contractor, with Hatch and IBT SYSTRA as the designers. The deputy commissioner of the major projects office at the City of Kingston is reported to have chosen the IPD model to ensure the project was delivered on time and on budget.

The IPD model aims to involve all participants through all phases of design, fabrication, and construction, with a goal of improving project efficiency and reducing waste in project delivery.

There is a large interest in this model, which includes the Canadian Construction Association’s standard-form contract CCDC 30, along with other forms of cooperative procurement models, says Tristan Musgrave, a partner in McCarthy Tétrault LLP in Toronto.

Many public-sector authorities “are extraordinarily sophisticated” with very large facilities that need to be upgraded, maintained, replaced and expanded. Going beyond the typical owner-contractor approach, based on an opposition-risk allocation model, makes an owner feel less like he has a counterparty he is acting against as opposed to cooperating with.

“These forms are extraordinarily attractive, especially for sophisticated owners who have a lot of resources to throw at projects and a lot of sophistication,” says Musgrave. “Even in the last year, there’s been a movement to other forms of cooperative models, like progressive design-build, which goes beyond alliances and IPD contracting.”

There is a trend towards what would broadly be describe as collaborative contracting, says Bain: “things that reduce risks to contractors, or reintroduce that sort of collaborative spirit of partnership into the relationship. IPD, progressive design-build, early contractor involvement [and others] generally involve a more collaborative, less confrontational set of contracts.”

However, he says, there is no one specific flavour that’s dominating right now.

Hits and misses

With a shift in the market and more sophisticated owners, the IPD model has been quite successful, says Samantha Cunliffe, also a partner in McCarthy Tétrault LLP in Toronto.

Torys’ Bain estimates there have been 30 to 40 of these projects across the country, all mid-size projects of medium-size complexity. “They seem to succeed well, for people not hung up on a  precedent, who are prepared to get a fair deal rather than a swing-from-fences great deal,” he says, adding that there are likely more examples of the IPD delivery model than of alliancing and other models.

But where they still have to be proven is on the bigger, more complex projects, with more risk, he says – such a the multibillion-dollar transit project.

Failures? There have been a few in alliance contracting, notably in Australia, which included a briquette factory that suffered a great loss on the project.

“Once you burn through the profit or the fee or both, depending on which model you’re talking about, risk does end up back to the owner,” says Bain. When projects go well, these models will work as well as anything else, he says, and when there is “minor bruising” on a project, an alliance or IPD model will still work well, but may run out of ammunition “if you have a really upside-down project.”

Not having the right governance or institutions in place to support the collaborative approach can be problematic, as well as attempting a collaborative approach with the wrong people, adds Blakes’ Wilson.

And once an alliance contract has been made, neither the owner nor contractor can put it in a drawer and not look at it again, says Mark Johnson, also a Blakes partner in Toronto.

“That’s been the learning on projects that have used this type of model. You need from the outset to recognize that it’s very different, … because the people involved are going to be in a highly collaborative environment. … In a proper alliance, you don’t have that separation [between the parties]. You are integrated.”

How risk is being structured in infrastructure contracts

The past two years have given industry players an opportunity to step back and revisit risk allocation in public-private partnership (PE) contracts, including examining what hasn’t worked in the past, says Cunliffe. “It’s an ongoing process.”

Metrolinx and Infrastructure Ontario have been very open about some of the big risks that are being reconsidered, says Musgrave, including for the City of Toronto’s public transit expansion project, and are trying to find novel ways of, for example, reducing the burden on the private sectors. “That dialogue has been very instructive and ongoing.”

Another trend starting to emerge is a higher emphasis on planned, joint due diligence, says Wilson. This represents a maturing of the market, Johnson adds: understanding the value of real analysis of projects at a very early stage, and considering how to get the project’s risks off the table early on, and as efficiently as possible.

“That’s a good development, but it requires a lot of interaction between owners and contractors in the market to understand, says Johnson, and runs up against the way procurements have traditionally been done in Canada.

Finally, industry players must be realistic about risk and how to deal with it, Wilson says. “As projects get larger and more complex, if you go to the market, and no one can sustain the level of risk, you have to do something to deal with that.

“You can’t have a party and nobody comes,” she adds. “You have to recognize if and when the market is telling you that you’ve got them way over their skis for risk. You have to listen, and you have to be prepared to deal with them.”