Alliance agreements

How can the quality of construction be improved while reducing the costs? Do alliance agreements solve these issues?

Traditionally, building projects in Finland are executed so that the buyer makes a plan and, afterwards, the contractor is chosen through competitive bidding. In doing so, the solutions regarding planning and realisation have in practice already been decided upon when construction begins and will be limited to these decisions thereafter. However, different kinds of project management contracts have changed the traditional way of executing building projects. It is characteristic for these kinds of arrangements to place the buyer and the contractor on opposite sides, thereby forcing the parties to secure their rights notifying the opposing parties of defects for varied reasons. This juxtaposition causes large and extensive disputes with regards to the construction contracts. It is only a slight exaggeration to say that extensive projects have required that the parties’ attorneys continuously be on duty at the building site.

The primary goal of a building project is always to execute the project in a smooth, high-quality and cost efficient manner. Extensive and long-term building projects require new modes of operation because of increasing cost awareness, inflexible time schedules, and the rapid development of technology during the building project as well as the continuously increased regulation in this area of business.

This need is met by alliance agreements, which allow flexible and cost efficient execution of a project, as well as changes in the design solutions during the construction. In practice, it is established that alliance agreements lead to project costs lower than what is budgeted for.

Alliance agreements are a form of contracting, where the most central parties to the building project enter into a contract for providing the building project or a service. The objective of alliance agreements is to deepen the co-operation between the developer, the buyer, the designers, the contractors and even the investors, and to share both positive and negative risks between the parties to the project.

However, the principal objective of alliance agreements can be summarised as follows: a party should not be able to negatively affect the end result by attempting to maximise its own benefit to the detriment of the project as a whole. In practice, with regard to alliance agreements, this means that the parties act according to the “One room”-principle—they share premises during the duration of the alliance.

In order for the alliance to be successful, the chemistry between the representatives of the companies taking part in the project must be tested. During the alliance, it is also worth remembering that the persons in charge of the alliance are taking direction from the alliance and not their respective employers. In addition, contracts to ensure that the key management personnel remains the same should be drafted.

The criterion for choosing companies to participate in the alliance differ significantly from the criterion for choosing companies for a traditional building project. For example, the importance of personnel compatibility may be 70 percent of the evaluation whereas the price may only account for 30 percent. In some alliance projects, the role of quality may be 80 percent while the price only accounts for 20 percent of the evaluation. Quality, as generally used in alliance agreements, will usually refer to the compatibility of the personnel. The criterion shows that these arrangements are about co-operation with the goal of executing the project effectively and to a very high standard.

However, a negative aspect is that it may be difficult for new actors to enter the market because the criterion for the parties to the alliance gives well-known companies an advantage of more easily entering into negotiations for alliance projects.