CONS6817_S13'16

Procurement (CONS6817) Lara Tookey
PROCUREMENT – SESSION #13
Alliancing

The Target Outturn Cost

Setting the limits!!!
• The target cost should be realistic
• Not confused with the incentivised develop-
and-construct approaches, where a project
team is encouraged to work from an outline
concept to deliver a solution focused on a
client’s needs.
• It should be set at a level that acts as an incentive.
• Too low, and the contractor will recover costs by
other means. Too high, and inefficient working
may be rewarded.

• It should be based on a detailed programme.
• Without this, it is not possible to assess the
responsibility for delay.
• It is important for the contractor to keep track of
costs incurred relative to the cost, so its own
commercial position is protected.
• In some cases, where subcontractors are also
incentivised, this may involve the project manager
and contractor in the audit of material supply
invoices and labour returns, to confirm levels of
expenditure.

ACTIVITY (20min) Working with your peers
• What are the advantages and disadvantages
of developing / working with a TOC?

Commercial Structure /
Compensation

Under iPAA
• Reimbursement is limited to recovery of actual
costs (with no margin for corporate OH & 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
Source: Jim Ross, Introduction to project alliancing, April 2003

• Limb 1:
• 100% of what they expend directly on the work incl.
project-specific overheads
• Limb 2:
• A fee to cover corporate overheads and profit.
• Limb 3:
• An equivalent sharing between all alliance
participants of gain/pain depending on how actual
outcome compare with pre-agreed targets in cost
and various non-cost key result areas (KRAs)

Pain / Gain share
• 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
(KPI’s), NOP gain additional $$.

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

Key Performance Indicators.
• The real reward for contractors lies in their
performance
• KPIs set to monitor and assess the contractor's
performance and the "at risk" margin then being
allocated accordingly.
• Putting an element of the contractor's reward at
risk depending on its performance ensures that
both parties' goals are aligned i.e. achievement
of the best results for the best price.

• Some examples of KPIs includes:
• meeting the target cost set for each relevant
period;
• meeting the scheduled time for completion;
• safety performance; and
• customer satisfaction levels (measured by
customer (i.e. owner/operator) satisfaction
surveys).

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

Commercial Structure
Direct Cost Fee / Margin Gainshare
• 100% reimbursement
• 100% open book
• Subject to establishment
audit, verification and
accounting audit
• Reimbursement subject to
agreed principles and
exclusions
• Definitions of what is/is
not direct cost is critical
• Agreed after
establishment audit
• Alignment either through
contestable/non-
contestable process
• Must deliver to owner a
discount on historical
performance
• Flexibility to
accommodate alternative
business models and
sectors
• Liability capped at Margin
• Value focus
• Aligns commercial
interests of participants
with owner's project
objectives
• Participants equitable
share of increasing /
decreasing value to owner
of alliance performance
• Structured around key
result areas of value to
owner
• Equitable – no equal

ACTIVITY (1 hour) Working with your peers
• A major trading bank is about to embark on a
programme of refurbishing and rebranding all of
its 250 branches over a period of two years. A
total budget of $25million dollars has been set.
The work to each branch includes:
• New exterior signage
• A complete refurbishment of the interior including:
• New carpet
• Redecoration of all walls and ceilings o Installation of new
counters
• New furniture
• Installation of new electronic security systems
including CCTV

• In some but not all cases the following will also be
done:
• New shopfronts
• New safes
• New internal partitioning
• The layout and design of the branches is to be
standardised as far as is possible through the use of
standardised counter detailing, furniture and
signage. However each branch is different so the
standardised details will need to be customised in
every case.

• The bank’s managers are aware of the potential
to achieve improved project performance by
entering into framework agreements with key
parties in the design and construction of the
refurbishment of these branches.
• Key objectives for the Bank in this programme
are:
• Bringing branch security up to current best practice
• Reinforcement of the bank’s brand image through
the physical appearance of the branches
• Maintenance of security in the branches during
refurbishment
• Minimisation of disruption to customers and staff
(this means that most work will be done on
weekends or overnight)
• Good stakeholder management
• Budget control

• You are a project management consultant
who has been asked to advise them on the
use of framework agreements.
• Which parties they should enter into framework
agreements with in order to achieve the key
objective listed above. (5 marks)
• The process they should use to select the
parties they will enter into framework
agreements with. (15 marks)
• The commercial terms to be set out in the
framework agreement concerning terms of
payment for each project. (10 marks)

• How they will determine the target cost and
contract period for each project. (10 marks)
• How they would use key performance
indicators to achieve improved performance
over the period of the programme (your
answer should include three examples of
non-cost KPIs). (10 marks)

CONS6817_S13'16

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