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Partnering, Alliances and inadequate contracts
Last week, I participated in a seminar run by the law firm Eversheds at their London offices. The topic was Contract Management and Disputes in the Energy Industry.
Having attracted around 100 attendees, there was clearly interest in the topic and the audience came from a varied functional background. The presentations reinforced IACCM’s conclusions that the importance of contracting is growing. The event had extensive input on ‘collaboration’, in particular the increased use of alliancing. However, it was evident that terms such as ‘alliancing’ and ‘partnering’ actually cover a range of contract structures or models. The real issue is that there is growing consensus about the need for a fairer balance of risk, that traditional turnkey projects are out of favor and that ‘multi-partner’ contracts are becoming the norm.
One presenter summarized alternative forms of contract to address these concerns. These were:
- To incorporate partnering and collaborative working provisions as an overlay to existing forms of contract
- Target cost contracts
- Framework agreements (to address issues of continuity, expanded timeframes for the relationship)
- Individual alliance agreements
- Project alliances, with gain/pain share
- Strategic alliance
There was also discussion about the challenges in moving to one of these models. Organizational culture was often mentioned as a potential inhibitor. Presenters also highlighted the fact that there are no contract models that fully address the industry environment (there is some use of FIDIC, LOGIC, BIMCO and the NEC model – with the NEC approach currently gaining ground due to its perceived flexibility). But whichever model is selected, multi-party contracting creates challenges:
- Dealing with multiple interfaces
- Negotiation and management of contracts
- Maintaining alignment
- Dealing with ‘known unknowns’, such as weather , supply constraints, regulatory changes etc.
- Handling claims
- Marginal project economics
In the end, a key point is that organizations must recognize the need to establish new and different governance and management behaviors if they want to develop truly collaborative relationships – and without these behaviors, collaboration will not work. This includes key issues such as senior management engagement, that both parties must commit interface resources, common methods for communication, accept accountability (eliminate blame) and work together for continuous improvement.
Like many other areas of business, the energy industry is undergoing transformation and has discovered that traditional ways of contracting are not suited to a world of rapid technological innovation, key supply shortages, regulatory uncertainty, challenges over funding and lack of clarity over roles and risk allocations. It was encouraging to see the number of people attending this event, anxious to learn and to share ideas. Given this need for change, it was disappointing to see how few of the audience came from the contracts or commercial management community; they of all people should be anxious to be at the forefront of ideas and innovation in contracting.
