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Project Alliance

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					Project Alliance
        By
   Sunil Shinde


                   1
TATA Realty and Infrastructure Limited
•   Vision
       To develop best-in-class Infrastructure and Real Estate projects which
       contribute to national economy and enhance the quality of life
•   Sectors of Interest
    • Real estate
    • Internal group assets
    • Available market opportunities
    • Urban infrastructure
    • SEZs (special economic zones)
    • Bridges
    • Logistics parks
    • Ports
                                                                                2
Projects in Hand
 •   Multi product SEZ at Chennai- Ramanujan city (>4 million square feet)
 •   IT SEZs for TCS at 8 locations in India – Pune, Ahmedabad, Kolkata (ongoing)
 •   State of the art retail mall at New Amritsar City Centre for integrated development.
 •   Participating in development of world class bridges, roads, highways etc. Its
     subsidiary has won NHAI project on DBFOT model for Pune Solapur section in
     partnership with Atlanta S.p.a. Italy.
 •   Evaluating development of multi product Special Economic Zone (SEZs) in State of
     Orissa , Maharashtra and Andhra Pradesh
 •   The consortium lead by TRIL has qualified for RFP stage of development of
     Udaipur and Amritsar Airports.
 •   Value of the projects under execution is more than Rs.9000 Crore




                                                                                        3
TIDCO Project, Chennai
                         •   Mixed use Development of SEZ of
                             4.2Mn sq ft. comprising IT space
                             convention centre retail, premium
                             residential apartments and 100 Service
                             apartments.
                         •   Concept by international Architect : M/s.
                             Skidmore, Owings & Merrill India, LLC
                             (SOM)
                         •   Project duration 36 months




                                                                     4
Strategic Requirement of the Project
It was necessary to have the contractor on board in early stages to work with
the design team as

 • Contractor can add value during initial stage when project schedule & cost
   can be influenced most.

 • Combined knowledge, expertise, innovative ideas of both Client &
   contractor can be tapped




                                                                                5
Alternate Project Delivery Systems
Prevailing Project delivery systems those allow early introduction of Contractor
are:

a)Design & Build
b)Cost plus
c)Target contracts
d)Build Operate & Transfer
e)Partnering &
f)Project Alliance also called Relationship contracting



                                                                                   6
Why Project Alliance?
•   Due study was done of ongoing & completed contracts in Australia on
    Alliance concept & it was felt that a TATA Group company can adopt
    Alliance project delivery system & set an example for the Construction
    Industry
•   Alliance project delivery is adopted for more than a decade in Australia
•   Traditional master- servant relationship of project owner & contractor does
    not align the interests of the parties
•   Many existing contractual relationships between clients & contractors lead
    to adversarial behavior between parties & this has a negative effect on
    project outcomes




                                                                                  7
Alliance Experience
• More than 200 projects worth $67 Billion have been executed. The
  results were extra ordinary
• The projects were mostly through Government & Private
  partnerships
• Complex infrastructure projects were successfully executed by using
  this concept
   –   Roads, Bridges & Expressways
   –   Railways
   –   Buildings (Museum)
   –   Water Desalination/Purification Plant
   –   Tunnels


                                                                    8
Cost Performance
  Variance between Final project cost & TOC (target outturn cost)
                                10.00
                                 5.00
  Percent difference from TOC




                                 0.00
                                 -5.00   1   3   5   7   9   11   13    15   17   19   21   23   25   27   29

                                -10.00
                                -15.00
                                -20.00
                                -25.00
                                -30.00
                                -35.00
                                                                       Projects


  Source: RMIT - sample of 30 alliance projects

                                                                                                                9   9
Time Performance
 Variance of actual program & Estimated program
                                   60.00
                                   50.00
  Percent difference from Target




                                   40.00
                                   30.00
                                   20.00
              duration




                                   10.00
                                    0.00
                                   -10.00   1   3   5   7   9   11   13    15   17   19   21   23   25   27   29
                                   -20.00
                                   -30.00
                                   -40.00
                                   -50.00
                                                                          Projects



 Source: RMIT - sample of 30 alliance projects

                                                                                                                   10   10
Alliance in a Nutshell
    Standard Contract     Alliance Contract




          Project                             Project




   Individual Interests   Common Objective


                                                    11
Item rate contracting V/s Alliance contracting
        6-8 weeks               8-10 weeks                 10-14 weeks               12-14 weeks                  ~32-36 months


      Concept stage
                            Schematic stage
                                                     Design development stage
                                                                                      GFC stage

                                                                                                           Construction stage
  Foreign design               Municipal architect                    Services consultants
  architect                    Structural consultant                  Local architect, PMC                Introduction of contractor

 Concept is finalized by architect. Value engineering Limited to finalized concept. Cost is an outcome of the finalized concept i.e. Cost
 is derived

        6-8 weeks              8-10 weeks                  10-14 weeks          4-6 weeks         ~32-36 months


      Concept stage
                            Schematic stage
                                                     Design development stage
                                                                                GFC stage
                                                Construction
                                                stage
   All consultants engaged upfront
   Contractor introduced upfront                               Introduction of contractor
    Concept is jointly evolved keeping Cost as a Target. Value Engineering over the entire process including constructability of the
          concepts

                                                                                                                                       12
Project Alliance
1.         “Project Alliance” is where an owner & one or more service
           providers work as an integrated team to deliver a specific project
           under a contractual framework where their commercial interests
           are aligned with actual project interest#

2.         We have a project specific alliance for the Chennai project with a
           contractor, Local architect, MEP consultant & Structural consultant




# Source: Jim Ross, Introduction to project alliancing, April 2003



                                                                             13
The Difference
•   Many companies & the client make an agreement to work together
    towards common goals - “we are One Team”
•   Design & Construction teams working collaboratively
•   The client is part of the team
•   Pain/Gain sharing: When things go well all parties win. If not, we all lose
•   Managing cost, being efficient & beating the schedule provides big
    benefits to all parties




                                                                             14
                                                       Project Alliance Board (PAB)
 •   Provide governance
                                                                                                          • 1 or 2 from owner
 •   Set policy and delegations
                                                                                                          • 1 or 2 from each of the NOPs
 •   Monitor performance of AMT
                                                                                                          • ALL DECISIONS UNANIMOUS
 •   High level leadership / support
 •   Resolve issues within alliance
                                                  Alliance Management Team (AMT)
                                                 headed by Alliance Project Manager

           •   Deliver Project Objective
                                                                                      AMT comprises key project leaders with
           •   Day to day management
                                                                                      specific project functions, with at least one
           •   Provide leadership to the wider team
                                                                                      representative from each alliance
           •   try to resolve all alliance issues
                                                                                      participant

                                                        Wider Project Team

                              Clearly defined responsibilities & accountabilities within an integrated team
                                                               organization
"IPT"
Integrated Project Team
All roles in the IPT will be filled by                                                                                  No person-marking
personnel drawn from the resources                                                                                      No duplication of roles or systems
of the alliance participants on a
"best-for-project" basis.
                                                                                       Source: Jim Ross, Introduction to project alliancing, April 2003   15
Core Alliance Principles
•   Alignment of Objectives
    –   Companies and client agree on desired project outcomes and
        objectives
    –   Participants focus on meeting and exceeding project objectives
    –   All decisions must be “best for the project”
    –   Individual‟s objectives aligned with project objectives
•   Commercial Alignment
    –   Reimbursement of 100% open book
    –   All participants win or all participants loose
    –   Equitable sharing of risk and reward
    –   Equitable sharing of Gain/Pain

                                                                    16
Core Alliance Principles (Contd.)
•       Collective responsibility
    –      No “us and them”
    –      The alliance participants (together) shall ….
    –      A peer relationship where all participants will have an equal say
    –      Integrated project teams
    –      Full access to “best resources” from all participants
•       No Blame
    –      All decisions of PAB/ALT must be unanimous
    –      Commitments to resolve issues within the alliance
    –      No recourse to litigation
    –      Personal accountability and no blame culture



                                                                               17
Core Alliance Principles (Contd.)
•       Exceeding Objectives
    –      High performance teams
    –      Commitments to „stretch targets‟
    –      Breakthrough thinking process
    –      Innovative culture
    –      Challenge the status quo – there is always a better way




                                                                     18
Attitudes, Behaviors and Languages
•   Listening openly and without judgment
•   Trust and mutual respect
•   Encourage positively and constructively
•   Open, honest and respectful communication
•   No hidden agendas
•   Visible and unconditional support from senior management
•   Honour commitments
•   Be accountable for your actions




                                                               19
Structural features of a Project Alliance
1.    Owner pays non owner participants for their services in
      accordance with
     A. Project costs & project specific overheads reimbursed at cost
         based on audited actual costs
     B. A fee to cover corporate overheads & normal profit
     C. An equitable share of the “pain“ or “gain” depending on how
         actual project outcomes compare with the pre-agreed targets
         which the parties have jointly committed to achieve




                                                                   20
Structural features of a Project Alliance (contd.)
2.   Project is governed by joint body Project Alliance Board or Alliance
     Leadership Team where all the decisions must be unanimous.
3.   Day-to-day management of the project is by a seamless integrated
     project team where all members are assigned to the team on a
     „best-for-project‟ basis without regard to which party they are
     employed by.
4.   Parties agree to resolve issues within the alliance with no recourse
     to litigation except in the case of a very limited class of prescribed
     „Events of Default‟




                                                                         21
Development of Alliance
                          Selection: The owner to select the right partner
                              and align on the overall framework and
                              primary commercial parameters.

                          iPAA: (interim Project Alliance agreement )The
                              participants enter into a simple
                              consultancy agreement whereby non-
                              owners are reimbursed at cost to work in
                              an integrated team on pre-construction
                              activities. Incl. development of Target
                              Outturn Cost (TOC), Target Schedule and
                              non-cost targets.

                          PAA: (Project Alliance Agreement) After
                             agreeing on TOC and other targets and
                             with owner’s wish to proceed with the
                             alliance , the participants enter into a full
                             agreement.



                              Source: Jim Ross, Introduction to project alliancing,
                              April 2003
                                                                                      22
Alliance Auditor
Owner engages an experienced financial auditor to validate that all
payments under the alliance are fully open book & in accordance with
the terms of compensation

The auditor can also be used to validate that the corporate overhead
and profit are business as usual rates




                                                                       23
Compensation under iPAA
Reimbursement is limited to recovery of actual costs( with no margin for
corporate O.H. & Profit)
    • If the participants proceed into PAA, then the non-owner participants
       recover a margin on the work they did during the iPAA
    • If they do not enter into PAA then the non-owner participants may still
       receive a margin on the iPAA work depending on the reasons
        – not agreeing Target Cost & other targets – no margin on iPAA work
        – other reasons- margins paid
    • No pain: gain in this period though it is a period of very high innovation
      & value-adding




                                                                              24
Compensation under PAA




                                                                                                             Profit
                                                              Limb 2 is 100% at
 Limb 1: 100% of what
                                                                                                                                   Limb 2
                                             Outstanding      risk under the limb 3
 they expand directly on                                                                                                           (Fee)
                                             performance      risk:reward




                                                                                                          O’heads
 the work inc. project-




                                                                                                           Crop
 specific overheads                                           arrangements
                                             & profit
 Limb 2: A fee to cover




                                                                                                         Project- Specific
 corporate overheads and
 profit.




                                                                                                            Overheads
 Limb 3: An equivalent
 sharing between all                         Business as
 alliance participants of                    usual
 gain/pain depending on
 how actual outcome                          performance       Recovery of costs
 compare with pre-agreed                     and profit        under limb 1 is
 targets in cost and various
 non-cost key result areas                                     guaranteed




                                                                                                            Direct Project Costs
 (KRAs)                                                                                                                            Limb 1
                                                               irrespective of the
                                                                                                                                   (Costs)
  In our case we have                        Capped            outcome under the
 restricted risk up to                       Painshare         limb 3 risk:reward
 margins & capped it to                                        arrangement
 maximum % gain                              For NOPs
                               Performance
                               Adjustment




                                                           Source: Jim Ross, Introduction to project alliancing, April 2003            25
TOC Gainshare/Painshare
                                               NOP Share of Gainshare




                            NOP Share of
                            Gainshare is
                            capped
                                                                        50% Gainshare to NOPs,
                                                                        50% Gainshare to Owner
    Owner Share of                                                                               Owner Share of
    Painshare                                                                                    Gainshare
                     50% Painshare to NOPs,
                     50% Painshare to Owner                     Target Outturn Cost



                                                                 NOP share of
                                                                 Painshare is capped



                                              NOP Share of Painshare
                                                                                                                  26
The Target Outturn Cost
• During iPAA the participants jointly develop TOC
• TOC is used to determine limb 2 fee & as target against which the
  actual cost will be compared to determine the extent of under /
  overrun that is to be shared amongst the alliance participants
• The TOC is intended to be reasonable estimate of what it should
  take to deliver the agreed scope of work taking into account: delivery
  schedule, Quality, Performance in non cost areas such as health &
  safety, environment, community, innovation, etc




                                                                      27
Pain : Gain
• The sharing of cost under/ overruns is usually the primary
  component of the pain: gain arrangements
• The cost overruns may be shared 5O-5O%. Generally there is a cap
  on pain share
• Under runs are also shared is the same way
• For better performance in non cost areas, Non Owner Participants
  gain additionally. It can be additional few % to NOP‟s




                                                                 28
Variations
• The situations that would be treated as “variations” under a
  traditional contract are not variations under the alliance-rather they
  are just part & parcel of the delivery of the project

• If owner changes scope or changes fundamental or design
  requirements, then cost & other performance targets are adjusted




                                                                      29
   Selection Process
                                                        Panel recommends a preferred
                Request for Proposal                                                                                        Owner approves a prefered proponent
                                                                  proponent


       Receive / Evaluate written submissions
                                                                                                            Discussions with the prefered proponent to:




                                                         Financial auditor conducts
                                                           Establishment Audits
               Nominate initial shortlist                                                          Confirm direct cost framework
                      (3 to 6)
                                                                                                   Lock in on fee % (Profit + OH's)
                                                                                                   Agree risk:reward strucutre
 1/2 day interview / discussion with each shortlisted                                              Finalise drafting of iPAA
                   proponent to:                                                                   Agree kick-off Plan incl. budget for iPAA
                                                                                                   Agree on terms/strucutre for PAA
Discuss/ Clarify key issues
Review/Discuss alliance model
Assess alliance understanding / affinity
Assess technical & resource capability
Review expectations

                                                                                                                          Is everything                   No
                                                                                                                             agreed?
                                                                                             Yes
             Nominate final shortlist of 2


   2 day workshop with each of the final shortlisted                                  Owner / NOP's approval to proceed
               proponents to align on:
Commitment to outstanding results
Principles, mission & objectives
Prospective PAB / ALT                                                                     Executive iPAA
Alliance team structure / roles
Compensation framework                                             Project definition, Consultation, site /material
Process for development of TOC                                     investigation, strategic procurement , initiate                        iPAA Period
Alliance management system                                         approvals , develop & agree target etc.
Project kick-off strategy
                                                                                                                                                               30
Legal / Contractual Framework
Lawyers have an important role to play up-front in ensuring that the
intention of the parties is enshrined in a properly structured & legally
effective alliance agreement
• Insurance- It is possible to get the insurance cover without any
  liability arising & without any right of subrogation against any of the
  alliance participants




                                                                            31
References
•   Evans & Peck, Australia
•   Relationship contracting, 1999, Australian Constructors Associations
•   Phillip Greenham, Minter Ellison Lawyers, Australia
•   Jim Ross, Introduction to project alliancing, April 2003




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THANK YOU




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