Creating commercial - The Alliancing Code of Best Practice for Infrastructure Alliancing

This page explains the 'Creating commercial' cell of the Alliancing Code of Practice grid. This grid helps to understand who needs to do what, at what stage, for a successful infrastructure alliance.

The 'Creating commercial' cell of the Alliancing Code of Practice grid for Infrastructure Alliancing

Create commercial

The commercial model has been collectively developed during the Create an Alliance phase, with a clear and shared understanding of how the required behaviours will be created including:

  1. Selecting the right alliance partners:
    • The procurement process has assessed partner capability, culture and cost in a process aligned with the outcomes required from of the project or programme.
    • The selection process has placed an emphasis on behavioural and cultural capabilities; commercial aspects are limited to an assessment of how the partner will add value and to an assessment of underlying partners’ costs (e.g. cost to employ).
    • Tendering based on costs requires a defined scope; procuring partners based on a cost to deliver a scope defined by the client is inconsistent with an outcome based approach and with alliancing.
  2. An effective commercial model:
    • The commercial model is built around the delivery outcomes or outputs (not scope) - providing a clear opportunity for innovation and improvement.
    • The alliance must be able to develop solutions for a collaborative and integrated model to work. If the client organisation specifies solutions there will be limited opportunity to improve on baseline performance.
    • Incentive arrangements in the commercial model are supported by clear mechanisms, including:
      • How target costs and incentive thresholds are set.
      • Clear thresholds at which all parties generate a return.
      • How shared pain / gain arrangements will work.
    • The commercial model reflects a ‘best for project’ principle in relation to:
      • Work allocation
      • Liabilities for pain and gain – partners are incentivised to collaborate in dealing with commercial challenges.
    • The proposed alliance model creates open and visible relationships across all parties. The relationship between partner and client is contractually the same for all parties.
    • One of the real opportunities in an alliance model is the open and visible performance and the consequent opportunities for improvement and best practice. This opportunity can be undermined by differences in the contractual relationship across partners, by joint ventures or historic and other existing relationships that block visibility within the proposed alliance structure.
    • The commercial model has been evaluated against current best practice and has had wide stakeholder input. Ensuring that a clear understanding of industry best practice and learning has been used to test the characteristics of the model before delivery.
    • The proposed alliance commercial model is recognised by all parties as being challenging, performance focused and fair.
  3. A commercial model focused on the right behaviour:
    • The behaviours required for the success can be mapped directly to mechanisms within the commercial model (for example; collaboration, outperformance, delivery on time, customer service).
    • Identified behaviours must be created and sustained through a business wide understanding of the commercial model; if, for example, behaviours such as collaboration or customer service are required for effective delivery then they must be clearly incentivised in the commercial model.
    • Incentive arrangements are recognised as being self-financing, in that they are generated by outperforming an established baseline or by outperforming an affordability within the original business plan.
    • The commercial model uses variable pain/gain arrangements, to ensure a fair distribution at all levels of performance and to avoid the perceived risk of ‘super’ profits.
    Reward and risk sharing graph
    Typical reward and risk sharing arrangement with partner risk cap
    • The commercial strategy for the wider supply chain extends the commercial principles established for the main alliance partners through the supply chain, increasing the ‘back to back’ principle through all strategic relationships.
  4. Alliance agreement under pinned by key principles:
    • The key principles for the alliance agreement ensure the commercial model, and it’s focus on creating the right behaviours, are embedded in the agreement.
    • Key principles in the alliance agreement

      • A clear definition of how partner return will be generated and how this is aligned with project outcomes (back to back)
      • How incentive mechanisms will work
      • How shared return arrangements will work across all alliance parties - shared pain / gain
      • How target costs and incentive thresholds will be set
      • A no blame - no dispute approach (wilful default being the only direct route to legal process).
      • That all parties will act fairly and on a 'Best for Project' basis
      • A clear definition of the risks that will be collectively assumed by all alliance parties (and any that will be assumed by individual participants - the fewer the better)
      • Full open book costing
      • The establishment of collective leadership teams and management groups
      • Collective and unanimous decision making responsibility (with any exceptions clearly defined)
    • A contract for alliancing?

      The examples of best practice used to inform this CoP all used standard forms of contract for their alliance. The general approach when developing contracts for alliances is:

      • A standard set of contract conditions, with each alliance partner contracted directly with the client.
      • An additional section setting out the particular role and contribution of each partner to the alliance.
      • In some cases a horizontal agreement between the respective partners to capture the principles within the commercial model, particularly those that jointly incentivise performance and create collaboration.

      More detailed aspects of the commercial model, such as out-performance, gain share and payment mechanisms are generally covered in a small number of additional general conditions added to the contract.

      This approach reflects the emphasis that successful alliances place on the commercial model, rather than a specific conditions of contract. It is the commercial model that creates the behaviours required and the creates environment in which the alliance operates.

      Successful alliances demonstrate that the form of contract is not a critical factor. In an alliance standard contracts are used with an emphasis on fair and equitable application - enabling the correct behaviours and relationships to be developed.

  5. Establishing joint ownership of performance:
    • A common reporting framework has been developed. This aligns the reporting requirements of client, alliance and partners - and is built on a single source of performance information.
    • A joint improvement plan, including commercial targets, has been collectively signed-off by the selected partners, with on-going ownership clearly established within the integrated organisation.
    • The commercial model is built on full visibility of all programme or project costs.
    • An integrated commercial process has been defined, ensuring that all costs (client, partner, supply chain) are included within a robust forecasting and exception management process.
    • Alliances work most effectively when the commercial model covers all costs, including client and overhead costs.

      Separation of costs outside the commercial model creates artificial boundaries to collaboration.

Case studies

The following case study provide a detailed look at how organisations have used alliances and the lessons that have been learnt.

What comes next?

The next cell in the Alliancing Code of Practice grid is Developing behaviour

View the complete Alliancing Code of Practice grid

The Alliancing grid

Creating commercial cell of alliancing grid
The 'Creating commercial' cell of the Alliancing Code of Practice grid for Infrastructure Alliancing

The next cell in the Alliancing Code of Practice grid is:

Developing behaviour