An International Perspective on Risk/Reward Contracting: Comparison of U.S., Middle East and U.K. Alliances

Abstract

Abstract The purpose of the paper is to compare the structure of six contracts considered by clients and contractors to be partnering or alliance arrangements. Two are in the U.K., three in the U.S. and one in the Middle East. Particular emphasis is placed on the management structure and risk/reward elements found in the contracts. Basic project characteristics such as total value, work scope and length of agreement highlight the impossibility of applying a simple checklist to identify a likely partnering candidate. Each client determines if its project is best served through a partnering arrangement with a risk/reward structure. The management of the agreements has more similarities than differences, with four of the six projects being managed via Integrated Teams. While only two contracts studied are termed alliances, there nevertheless appears to be a trend to alliances by companies with some partnering experience. The risk/reward structure of the six contracts shows a great deal of variability. The sharing of upside potential is most frequently on a 50/50 basis between the client and the contractor. However, as multiple contractors are introduced into an alliance, the percentage sharing changes. One alliance treats all contractors equally for reward sharing, while another rewards in relation to relative value in the contract. The sharing of downside risk is highly dependent on the amount of perceived risk in the contract. One contract shows zero downside for the client, several share 50/50 with the contractors, while another places most of the downside risk on the client. The offshore industry is still at an early stage of implementing partnering, alliancing and risk/reward elements. One would expect an increasing number of alliances and more complex risk/reward structures as companies gain experience with the concepts. Introduction The words "partnering" and "alliances" have become as common in business parlance as "increasing shareholder value, restructuring" and "downsizing". It is hard to disagree with the concept of saving money for both clients and contractors, but some basic questions often remain unanswered. What qualifies as a partnering arrangement? Does one manage a partnership differently? Why does the word "trust" come up with such frequency? How exactly does one implement the risk/reward portion of a partnering contract or an alliance? The purpose of this paper is to compare the structure of six contracts considered by both clients and contractors to be partnering or alliance arrangements and which include a sharing of potential risks and rewards. The paper focuses on analyzing the management structure and the risk/reward elements to determine how contracts differ from one another. Two of the projects are sited in the U.K., three in the United States and one in the Middle East. All relate to marine construction and all are for major oil companies. Terms. Evaluation of the six contracts and discussions with management revealed that each client had a clear, and usually strong, idea of what was to be considered a partnership, what was an alliance, and what should be in risk/reward. Unfortunately, there was little consistency. In fact, there were inconsistencies within the same oil company from one location to another. Some clients insist that a true partnership must be a long term relationship. Some assume that a partnering arrangement is necessarily negotiated and not bid. Still others insist that partnering and alliancing must be managed by Integrated Management Teams. Each of these conditions exists in some agreements and not in others. It was found that the terms currently being used with such fervor have very different meanings for different companies. All of the projects chosen for this paper are considered by the clients to be structured differently from conventional contracts and are called partnerships. Each contract includes risk/reward elements in which gains or losses are shared by more than one party. P. 181