VTT CREATES BUSINESS FROM TECHNOLOGY

T echnology and market foresight • Strategic research • Product and service development • IPR and licensing
• Assessments, testing, inspection, certification • Technology and innovation management • Technology partnership
VTT RESEARCH NOTES 2472

• • • VTT RESEARCH NOTES 2471 PROJECT ALLIANCE. THE COMPETITIVE SINGLE TARGET-COST APPROACH
A project alliance is a project procurement method based on the sharing of risks
between the key partners. The publication describes a new model of project allian-
ce that integrates selection of service providers on the basis of price and quality
factors, that takes place early in the process in relation to design, with later
definition of target cost. Tender price and target price are key elements of the
payment basis solution, but the realisation of the project’s qualitative goals also has
an impact on the payments to service providers.
Besides the selection of the design-construction team and the project’s payment
basis solution, the publication also deals with the features and potential advan-
tages and drawbacks of project alliance and evaluates its suitability and the pre-
conditions for its use and the administrative structure of the joint organisation
formed by the partners. Cooperation and incentiveness are key constituents of the
model.

Pertti Lahdenperä

Project alliance
The competitive single
target-cost approach

ISBN 978-951-38-7295-3 (URL: http://www.vtt.fi/publications/index.jsp)

ISSN 1455-0865 (URL: http://www.vtt.fi/publications/index.jsp)
 VTT TIEDOTTEITA – RESEARCH NOTES 2472

Project alliance
The competitive
single target-cost approach

Pertti Lahdenperä
ISBN 978-951-38-7295-3 (URL: http://www.vtt.fi/publications/index.jsp)
ISSN 1455-0865 (URL: http://www.vtt.fi/publications/index.jsp)
Copyright © VTT 2009

JULKAISIJA – UTGIVARE – PUBLISHER

VTT, Vuorimiehentie 5, PL 1000, 02044 VTT
puh. vaihde 020 722 111, faksi 020 722 4374
VTT, Bergsmansvägen 5, PB 1000, 02044 VTT
tel. växel 020 722 111, fax 020 722 4374
VTT Technical Research Centre of Finland, Vuorimiehentie 5, P.O.Box 1000, FI-02044 VTT, Finland
phone internat. +358 20 722 111, fax + 358 20 722 4374

This publication is a translation of an original in Finnish (VTT Research Notes 2471)

that used English-language references. Due to the back-and-forth translation, some con-
cepts and statements may deviate from said references.

The translation is by Mr. Jorma Tiainen with a contribution from the author.

Technical editing Leena Ukskoski

Lahdenperä, Pertti. Project alliance. The competitive single target-cost approach. Espoo 2009. VTT Tie-
dotteita – Research Notes 2472. 74 p.
Key words: project alliance, alliance contracting, integrated project delivery, procurement systems,
cooperation, incentive contract, target cost contracting, construction project

Abstract
This publication reports on the development work focusing on the procedures of a pro-
curement method for a construction project that integrates early, competitive implemen-
ter selection and sharing of risks between the parties. An approach where the key parties
bear the risk jointly and service providers are rewarded based on the success of the
overall project, encourages the actors to consider each other’s views and to cooperate
effectively. The integration of know-how creates a basis for innovation and excellent
performance – especially in the case of projects that involve a great deal of uncertainty.

The procurement (or project delivery) method in question is project alliance where
competitive selection is integrated with collaborative and early selection of service pro-
viders from the viewpoint of design in a novel way. The publication describes an opera-
tional model where selection takes place through elimination of candidates and a subse-
quent two-phase tendering process: the qualitative tender precedes the workshops that
are part of evaluation, followed by submission of tender price data. The price is made
up of unit prices and overhead rates while price and scope assessments common to all
competitors are used selectively for comparison calculations.

In the developed operational model selected service providers, designers and builders,
develop the project and its designs in cooperation with the owner before the actual tar-
get cost is set. The revised tender price and target cost together with the predetermined
allocations of cost overruns and underruns determine the rewards of service providers at
different performance levels. The idea is to spur actors to invest especially in the pre-
implementation development phase which is also promoted by the project’s incentive
system. An attempt should also be made to incorporate into the system the impact of the
realisation of the key qualitative target areas.

Other issues the publication deals with include the features of project alliance, its potential
advantages and drawbacks, assessment of the suitability of alliancing and prerequisites for
using it as well as the administrative structure of the organisation formed by the partners.
The so-called competitive single target-cost project alliance presented has been developed
in close cooperation with a wide expert network of practical actors. Their view is that the
project alliance approach produced as a result of the work is a suitable and useful for the
implementation of demanding transport infrastructure projects, road and railway pro-
jects, which were the primary application.

3
Foreword
This publication is the result of the Alliancing in infrastructure projects study carried
out at VTT aimed at developing procedures and ground rules for a construction project
procurement method based on partnership and risk sharing. The initial stimulus for the
project came from the favourable feedback from Australia about the performance and
suitability of the procurement method especially for transport infrastructure projects.
Another stimulus was the interest raised by alliancing in the Innovation promoting com-
petition project* financed by Tekes, among others. The development work reported in
this publication was launched as part of that project.

The legal praxis concerning competitive tendering in public procurement was found a
special challenge which is why it was considered that the implementer selection proce-
dure used elsewhere that is based on competence could not be introduced as such. On
the other hand, there was the desire to avoid heavy competition involving design and
total pricing. A comparison method applied early on that stresses competence while also
considering price, to which an incentive system can be linked, was thus heavily
weighted in the work. The end result was a solution that is, as far as is known, novel
also internationally, which the name of the publication also intends to portray – Project
alliance, the competitive single target-cost approach.†

The operational model has been developed in several work groups and workshops, and
many practical actors have contributed to it. Thus it can be said that the result represents
the joint view of the sector on how project alliance can and should be developed to al-
low its application in practice. The Road Administration has committed to using the
operational model and is presently seeking the first suitable projects to be implemented
as project alliances. Through owner organisations the development work has also been
linked to the joint Nordic Gemensam Nordisk Anläggningsmarknad project that devel-

*
See Lahdenperä, P. 2007. Innovaatioita edistämässä. Lähtökohtia ja ajatuksia rakennus- ja infra-alan
hankintamallien kehittämiseen [Fostering innovation. Views and ideas on the development of building
and infrastructure construction procurement]. Espoo, VTT. VTT Working Papers 87. 74 p. (in Finnish)
†
There are variations of project alliance. From the service providers’ selection standpoint there are the
single target-cost approach and the multiple/dual target-cost approach (Department... 2008a; 2008b;
Ross 2006; 2008). In the former, only one consortium is selected through quality-driven comparison, and
the project is developed with it towards definition of target cost and project implementation. In the latter
approach, again, two competing consortia are generally selected to design the project together with the
owner, and the owner selects the implementer only after target costs have been defined which emphasises
the significance of price in selection. “A genuine alliance that stresses trust and cooperation” was selected
as the starting point of the approach described in this work where, in keeping with the first approach, a
single consortium is selected for the development phase. Yet, the competitive elements of selection also
involve price factors which results in a sort of competitive alliance, but the tender price does not directly
define the project target cost. In practice, the concept of competitive alliance has, however, come to refer
to the multiple target-cost approach (e.g. Davis & Cowan 2008; Greenham 2007) which means that nei-
ther competitiveness nor the single target-cost approach alone can define the approach presented here.

4
ops the project practices of road and rail administrations. The aim is to utilise the model
in Finland as well as the other Nordic countries. Naturally, we are dealing with launch-
phase views and many practical challenges still must be met. It is also likely that views
on the solutions presented in this publication will evolve as experiences are gained.

The project has been financed by traffic infrastructure owners, the Finnish Road Ad-
ministration and the Finnish Rail Administration, and sector enterprises Destia Oy,
Lemminkäinen Infra Oy, Skanska Infra Oy and YIT Construction Oy, as well as the
Infra ry association. The contributing consulting companies were Ramboll Finland Oy,
Sito Oy and WSP Finland Oy. The following experts participated in the work as repre-
sentatives appointed by the financiers:

Keijo Haavikko, Niska & Nyyssönen Oy Mikko Mäkelä, Destia Oy

Pertti Heininen, Skanska Infra Oy Seppo Mäkinen, Road Administration ii
Juha Heinonen, YIT Construction Oy i Antti Mölsä, Skanska Infra Oy
Markku Hulkkonen, WSP Finland i Hannu Nurmi, Road Administration
Juhani Ilmonen, Skanska Infra Oy ii Magnus Nygård, Road Administration
Sami Immonen, Niska & Nyyssönen Oy Timo Palokangas, Rudus Oy
Ilkka Jussila, Tekes i Pekka Petäjäniemi, Road Administration
Harri Kailasalo, Lemminkäinen Infra Oy Kari Pudas, Destia Oy
Juha Kansonen, Rail Administration i Sami Rantala, Ins.tsto Seppo Rantala Oy
Arto Kari, Destia Oy i Juho Siipo, Ramboll Finland Oy
Jukka Karjalainen, Road Administration iii Markku Teppo, Road Administration i
Tapani Karonen, Infra ryi Antti Tuomainen, Skanska Infra Oy i
Reijo Kukkonen, Sito Oy i, ii Timo Vikström, Lemminkäinen Infra Oy i
Lauri Merikallio, Destia Oy Juha Virolainen, Rail Administration
Peter Molin, Ramboll Finland Oy i Petri Vuokila, YIT Construction Oy
Anna Myllylä, Road Administration Harri Yli-Villamo, Rail Administration i

Research Scientists Tiina Koppinen and Tarja Mäkelä (Ch. 3) and Senior Research Sci-
entist Leena Korkiala-Tanttu (Ch. 6) from VTT participated in charting and develop-
ment and work groups in addition to the undersigned at various phases as well as pro-
duced material for the publication. iiiiii

Thanks to all those who made the project possible by contributing to it.

Helsinki, March 2009

Pertti Lahdenperä Jukka Karjalainen

Research Professor, VTT Procurement Director, Road Administration

i
Member of Project Steering Group
ii
Chairman of Theme Working Group
iii
Chairman of Project Steering Group

5
6
Contents
Abstract..............................................................................................................................3

Foreword............................................................................................................................4

1. Introduction..................................................................................................................9
1.1 Development need ..............................................................................................9
1.2 Development task .............................................................................................11
1.3 Implementation of development work..............................................................11
1.4 Content and structure of publication ................................................................12

2. Main principles and potential.....................................................................................13

2.1 Definition and basic elements ..........................................................................13
2.2 Opportunities and risks.....................................................................................16

3. Selection of service providers....................................................................................18

3.1 Selection process ..............................................................................................18
3.2 Selection criteria...............................................................................................25

4. Cost planning .............................................................................................................32

4.1 Project planning by owner................................................................................32
4.2 Calculated tender price .....................................................................................34
4.3 Target cost determination .................................................................................36
4.4 Fixing of payment bases...................................................................................42
4.5 Implementation and warranty phases ...............................................................46

5. Payments to service providers ...................................................................................48

5.1 Qualitative goals and their measurement .........................................................48
5.2 Quality measurements as part of payment basis...............................................50
5.3 Overall view of payment bases.........................................................................53

6. Administration and decision making .........................................................................58

6.1 Organisational structure....................................................................................58
6.2 Practical division of tasks.................................................................................59
6.3 Contractual issues.............................................................................................62

7. Applications and prerequisites for use.......................................................................64

7.1 Applications and use situations ........................................................................64
7.2 Readinesses and prerequisites ..........................................................................67
7.3 Summary ..........................................................................................................68

References .......................................................................................................................71

7
8
1. Introduction

This chapter ponders the need and possibility of developing infrastructure project im-
plementation and how the development work described in this publication and the solu-
tions it produces meet the challenges. Moreover, it sheds light on the procedures of the
realised development work and summarises the content and structure of the report.

1.1 Development need

The problems related to traditional investment project procurement methods and the
pressure to develop the infra sector are an incentive for seeking new operational models.
Traditional procurement methods do not fully utilise the know-how of the various par-
ties while relatively early fixed solutions disallow continuous project development.1

The uncertainty related to demanding projects highlights the problems of traditional

procurement methods (or project delivery systems). Implementation of projects in the
built environment and the resulting many interfaces and interest groups, heavy traffic as
well as the demandingness of the arrangements during site work are part of the chal-
lenge. As are the uncertainty of conditions and input data and the need to minimise nui-
sances during construction. Technological development also brings opportunities that
are not always known at the launching of a project.

Pricing of that uncertainty may be expensive to the owner when competing with tradi-
tional methods where the approach does not always encourage implementation based on
the owner’s goals. Deviations during construction also tend to increases conflicts of
interest in projects. On the other hand, approaches where the owner bears all risks may
not goad actors to do their best. Thus, it must be possible to allocate risk between the
actors. Risk sharing is a means of increasing cooperation between the parties and mak-
ing it more effective.

Collaborative production may be considered a key factor in trying to improve sector

performance and increase innovation when projects are implemented under demanding
conditions. Yet, competitiveness remains the starting point that produces the needed
stimulus to pursue an excellent level of performance. That leads, for instance, to the
project alliancing process analysed in detail in this publication where:

1
This publication does not delve deeper into the problem areas of the other procurement methods under-
lying the development of project alliance. More detailed information on them can be found e.g. in Scott
(2001), Koppinen & Lahdenperä (2004) and Lahdenperä & Koppinen (2004).

9
• The owner’s goals guide implementation on the project level. To be able to reap the
benefits from the interfaces between competences, the alliance partners are to be
bound to the project as early as possible. Thus price cannot be the key selection cri-
terion, but actors must be chosen with an emphasis on competence and capabilities.

• Selection is also hoped to provide solutions as to procedures and organisation which

is often a compromise of the traditional set of roles. Team building is guided by
openness and pursuit of common interest. Melding into a team is a challenge in it-
self; the parties organise workshops for the purpose already as part of the actor se-
lection process.

• Once the consortium has been selected, the project group continues the design work
in order that, for instance, the project’s target cost can be set and agreed. Lump sum
contracts are not used; the parties share risks. This ensures that the interests of the
various parties coincide and they seek cooperation.

• The project is carried out in cooperation utilising different types of expertise to con-
tinually develop it. As the project proceeds, and especially on its completion, the
outcome is evaluated: shares of cost overruns and savings are determined on the ba-
sis of cost performance as well as qualitative indicators derived from project goals
as agreed in advance.

The basic idea is that an operational model where risk is borne jointly and reward is
shared on the basis of the success of the entire project makes the parties consider each
other’s views better and collaborate more efficiently. Openness and transparency are
features of the approach that build confidence. The integration of different kinds of
competence creates preconditions for discovering new solutions capable of being intro-
duced immediately. This is especially true in special projects, when trying something
new or when the implementation involves more uncertainty than normally.

Practical experience also shows that this model, so-called project alliance, creates the
general conditions for achieving great results. Experiences from this procurement
method appear to be almost exclusively positive also in construction2 although the first
successful applications seem to have been made in other industries3. Australia was the
first to apply project alliance in construction on a larger scale – especially in road con-
struction.4

2
CRC (2004); Walker & Hampson (2003b); Thorpe & Dugdale (2004); Steele (2002); Olds (2002);
Skinner and Neale (2003); Evans & Peck (2003); Lin (2005). Project alliance has also been used success-
fully to salvage failed projects in progress based on traditional contracts (Ross 2003b).
3
Condensed historical reviews (and references to broader presentations) are found at least in: KPMG
(1998); Thomsen (2006); Sakal (2005); Ross (2006); Walker & Hampson (2003a). Repeated references

10
1.2 Development task

The aim of the work described in this publication is to develop the procedures and
ground rules of a construction procurement method based on partnership and risk shar-
ing. In practice, that means the so-called project alliance applied to various transport
infrastructure projects, mainly road and rail projects. A special target of development in
relation to existing material was the development of a competitive operational model.5

The general challenge was to 1) understand the possibilities of alliance-type procure-

ment in increasing production efficiency, 2) chart the procedural solutions for project
alliances to the extent the approach has been used worldwide, 3) evaluate the feasibility
of the application of the procurement method in local Finnish (and European) culture
and business and legal environment and, particularly, 4) develop project processes, pro-
cedures and ground rules to support the use of the project alliance in said application
environment.

Thus, development work focused on process engineering and basic contractual solutions
that form a starting point for later preparation of project documentation. The workability
of project alliance which stresses cooperation also requires heavy investment in cultural
and management issues, which were excluded from the work reported here.6

1.3 Implementation of development work

The development work built on a literature study and expert workshops. The several
expert groups involved focused on different sections of the problem field. The groups
consisted of a few dozen experts and practical actors from transport network owner or-
ganisations as well as companies offering corresponding design and construction ser-

were made especially to Knott (1996) and Wandoo (1997), which described the first alliance-type oil
drilling projects but were not available at the writing of this publication.
4
Manley (2002) – international procedural survey; Ross (2006) – summary of Australian projects. Project
alliance has been used to some extent also in other countries (e.g. Manchester... 2009).
5
The applications consist specifically of large public procurements governed by EU Directives (Directive
2004) whose implementation in Finland is governed by the law on transposing said directives (Laki...
2007). Any possible differences have not been addressed, but according to Finnish legal usage evaluation
of economic advantageousness requires using a quite definitive total price in the comparison of tenders.
Thus the developed approach differs from the applications of so-called pure project alliance presented in
the surveyed literature. The procedure makes procurement systematic which is beneficial also for private
sector projects although in their case the presented procedural solutions need not be adhered to.
6
Cooperation and the related building of a joint organisation and project vision as well as creation and
maintenance of project procedures are indispensable for a successful alliance project although they are
excluded from this survey which focuses on the technical ground rules of the alliance.

11
vices. The groups met regularly to comment on and direct development work and ideate
new procedural solutions. Several dozen such workshops were conducted, and the time
spent attending them corresponds to a few person-months of labour.

Workshop activity was speeded up by literature surveys and presentations as well as

procedural constructions prepared in advance by researchers.7 Although an attempt was
made to utilise existing knowledge to the fullest, the research approach is rather con-
structive as a whole due to the scope and multiformity of the problem. The aim is to test
the workability of solutions through later application and further development. The par-
ties appear to be committed to the implementation of (at least a few) projects by the
devised procedural solutions and their derivatives. Thus, the wide participation in the
development project also prepared and committed the markets so as to allow launching
actual test as soon as possible. At publication, the pilot projects are still under planning.

1.4 Content and structure of publication

The publication analyses the principles and conditions for use of project alliance with
special focus on the different procedural solutions of the alliance project:

• Chapter 2 begins by examining the features of project alliance and the advantages it
can provide as well as possible related problems.

• Chapters 3–6 deal with the various solutions of project alliance taking a detailed
look at the procedural solutions developed as part of the work.

• Chapter 7, finally, views the alliance as a whole and seeks to answer the key ques-
tions related to the application and introduction of project alliances.

The key solutions are presented in the body of the text and related figures and tables.
Their reading gives one a general view of the main principles of project alliance. The
supplementary (coloured) information tables analyse the reasoning behind solutions and
their backgrounds or produce other additional information that can be skipped by those
only wishing to learn the basic principles of project alliance. They constitute a sort of
continuation course on the alliance theme and, to some extent, development-related
documentation. The comments in the footnotes serve partly the same purpose and refer-
ences have been placed there to improve the readability of the body of the text.

7
In many instances one or more solutions presented in literature were used as the starting point and were
then frequently worked over as the discussion proceeded and new insights were gained. Thus, the connec-
tion to other presented solutions is not clear, and even apparently similar solutions deviate in most cases
from the original ones. That makes definitive references unjustified, but Ross (2006) deserves to be men-
tioned as a publication that introduces new practical procedural solutions.

12
2. Main principles and potential

This chapter describes the main principles of project alliance by defining the alliance-
type procurement method and by outlining its features of various levels. It also tries to
clarify the difference between alliancing and other procurement methods. General
evaluation of the possibilities and weaknesses of alliances are also dealt with here.

2.1 Definition and basic elements

The concept of alliance refers generally to an association and agreement between actors
aimed at integrating their goals and/or operations. An arrangement of the type made for
a given project is called a project alliance8 or an alliance contract, which is accurately
defined (for the purposes of this publication) as follows:

• Project alliance is a project delivery method based on a joint contract between the
key actors to a project whereby the parties assume joint responsibility for the design
and construction of the project to be implemented through a joint organisation, and
where the actors share both positive and negative risks related to the project and ob-
serve the principles of information accessibility in pursuing close cooperation.

Project alliance is a collaborative delivery method by nature, intended to ensure coop-

eration through the contract forms used. Thus, project alliance can be primarily de-
scribed through its structural and collaborative features.9

Features related to structural arrangements

• Joint agreement. The tasks of an alliance include project planning and implementa-
tion tasks and (possibly) ones related to them and to the promotion of the project
traditionally performed by the owner, which said actors are jointly responsible for.
The parties enter into a single joint multi-actor contract instead of several bilateral
contracts (different in spirit).

8
Project alliance is a procurement model agreed and used for a certain project. The “project” prefix is
intended to distinguish it from so-called strategic alliance which is a collaborative arrangement covering
several projects or other long-term activity.
9
The starting point of the analysis is Yeung et al. (2007) although three so-called structural features have
been recorded instead of the original two. The content probably follows the spirit of the original analysis
even if owner participation is stressed here (cf. Ross 2006) in distinction to Design-Build which involves
cooperation and risk sharing and is implemented by a consortium (see Table 1).

13
• Joint organisation. The alliance organisation comprises people from all partner
organisations, including the owner’s. Decisions on project implementation are taken
jointly by the parties. The cost estimate covers all related tasks and persons. The
project target cost is defined correspondingly to include the items of various parties
and is consequently the total cost of the project.

• Risk sharing. Alliance partners share the risk of project implementation as concerns
the bulk of both positive and negative risks. Thus, the reward of service providers is
also based on the success of overall project implementation, not on their perform-
ance of their own tasks. The practice requires observing the principles of openness
in cost monitoring.

Features related to nature of collaboration

• Trust. Trust between the partners is a central element of project alliance. It is diffi-
cult to derive any benefits from a model based on risk sharing and openness without
it. The development of trust is tied to emotional and human behaviour and takes
time: thus the arduous actor-selection phase and its knowledge intensity and work-
shops are a natural part of the alliance.

• Commitment. Internalisation of the alliance’s common goals, resolution of prob-

lems faced and continuous improvement are possible only when the actors are
committed to the project. Commitment is determination which people try to create
by incentive systems and joint decision making as well as appropriate organisation
structures which also contribute to an atmosphere of trust.

• Cooperation. Project alliance brings the key partners to a project under a joint and
several contract with the intent of improving and increasing the parties’ mutual co-
operation and interaction: they are the key factors considering the workability of the
alliance. Efforts can be made to improve the preconditions for efficient operations
and information exchange by joint space arrangements and information systems as
well as prearranged decision-making principles.

Of the above, structural features are unambiguous and absolute (hard); in their absence
a project cannot be implemented as an alliance project. Yet, collaborative features are
as much characteristics of and preconditions for functioning project alliance though
difficult to concretise and distinguish by differences of degree (soft). Thus, making
them the primary basis of the definition of project alliance is not sensible.

In addition to the presentation of processes and grounds for decisions, the publication
focuses specifically on structural features, which is why project alliance can also be
considered a project procurement method in its own right (cf. Table 1).

14
 Table 1. Comparison of project alliance with other operational models.

Project alliance is a relatively new concept. Al- Project alliancing, on the other hand, is both a col-
though much effort has been put into defining its laborative procedure and a procurement method.
content, accurate internalisation of its basic idea
Alliancing and procurement methods
may be difficult without comparing it to other
similar approaches and concepts. It has also often been suggested (e.g. Walker and
Hampson 2003a) that the difference between alli-
Alliancing and cooperation
ancing and partnering is that in the latter the
Project alliance emphasises trust between the par- monetary reward of a supplier may vary according
ties, commitment to goals and cooperation. In a to performance, but only based on its own partial
working alliance the parties keep up the team spirit performance (it may even increase at the cost of
and maintain proactive and active information others; Walker et al. 2002), whereas the economic
exchange. The actors also respect each other’s result of all partners in an alliance project depends
opinions and consider them in their own activities. on the success of the overall project.
Thus, another approach stressing similar issues, i.e. One definition maintains that an alliance exists
partnering, naturally often surfaces in discussions when risks are shared between a minimum of three
about project alliance. It always emphasises partners (Halman & Braks 1999).
• trust between the parties, and From the viewpoint of this research, the above as
such is not enough to make alliancing a procure-
• mutual understanding. ment method in its own right. Incentive payment
Some of the following features are typically also bases can be used in many ways in different pro-
part of partnering projects (Nyström 2005): curement methods. For instance, in DB, the reward
of both the contractor and the designer may be tied
• quality-based implementer selection to the success of the overall project (cf. Tanner
• activities undertaken to boost team spirit 1998; Lahdenperä 2001).
• regular cooperation and feedback meetings The decisive factor in the definition of procure-
ment methods is usually the content of the per-
• open information exchange formance obligation which is central also here.
Although the division of tasks is planned also in an
• use of an impartial facilitator alliance, a certain joint performance obligation
• defined problem-solving method exists in project alliance due to the joint organisa-
tion and decision making that include the owner –
• application of economic incentives. all share responsibility for the overall project; it is
The above factors are also likely features of project not merely a question of payment bases. For in-
alliance though practical arrangements may vary. stance, in the DB model, the DB contractor makes
Yet, there is a clear difference between a project decisions on implementation alone within the set
alliance and partnering. boundary conditions.

Partnering focuses on improving cooperation but Other concepts and views

is based on traditional contractual frameworks As far as is known, only separate project alliances
(Walker & Hampson 2003a; Ross 2004; Yeung et for construction and maintenance have been used,
al. 2007; Scott 2001) such as traditional contract- but life-cycle alliances have at least been planned
ing or Design-Build (DB). The partnering charter (Clifton & Duffield 2006). However, due e.g. to
signed by the parties is, however, a deviation from the long-term obligations, the latter often necessi-
traditional models. It basically lists the proper tate founding a separate project company which
agreed main principles of cooperation but is not a may mean partnership arrangements, etc.
legally binding document.
Joint ventures are also common in construction.
Project alliance, again, differs from traditional risk- They are generally entered into by service provid-
allocating contractual frameworks as it promotes ers to perform a certain undertaking with joint
procedures that stimulate cooperation also through resources. They differ from project alliances in that
contractual means. Thus, partnering is “merely” a e.g. the owner is not covered by the contractual
collaborative procedure, not an actual construction agreement (ACEA 2005).
procurement method (or project delivery system)

15
Project alliance typically also includes some secondary features such as early selection
of service providers (in relation to design process) and design workshops during selec-
tion. Without them, it is difficult to create a cooperation model based on trust where the
target cost level is fixed only after selection of the partners. Other examples are joint
definition of goals and the strive for continuous improvement. The secondary features
commonly manifest themselves in alliancing, but project alliance may also be realised
without these elements, and therefore their use in defining the procurement method is
not justified. On the other hand, it is also partially a question of a solution of applying
alliancing that is dealt with later in this work.

2.2 Opportunities and risks

Relayed experiences about project alliance have so far been almost exclusively posi-
tive.10 The method has been reported to have cut project costs, speeded up implementa-
tion, and helped attain several other qualitative aims of projects. When considering the
application of this procurement method in new projects and conditions, earlier experi-
ences must nevertheless be regarded only as possibilities – there is no certainty of suc-
cess. The owner and the partners must, therefore, compare potential benefits to possible
failures case by case while launching new projects. To assist in that, Table 2 summa-
rises the potential benefits and weaknesses of an alliance on a general level.

Table 2: Part 1of 2. Evaluation of project alliance.11

Benefits and opportunities Weaknesses and threats

• Early selection of service providers and • The cooperation model and shared risk
cooperation enable relatively quick project limit the possibility to seek compensation
implementation for others’ mistakes
• Incentives boost realisation of qualitative • Liability insurance may not cover damage
goals related to interest groups, the envi- caused by one alliance partner to another
ronment, society, etc. in the alliance relationship
• The collaborative arrangement promotes • Joint discharge of warranty obligations af-
transfer of knowledge and learning as well ter implementation is a challenge as the
as professional development of staff organisation has practically dissolved
• The procedure minimises the need of con- • Changed roles and close cooperation
tract management due to changes during provide an opportunity for evaluation and
work and different interpretations recruitment of staff or other companies

10
See e.g. literature listed in footnotes 2 and 3.
11
Edited mainly from: Ross (2003a; 2004; 2006); Scott (2001); KPMG (1998).

16
 Table 2: Part 2 of 2. Evaluation of project alliance.

Benefits and opportunities Weaknesses and threats

• Successful projects improve reputation • The model requires commitment by part-

and competitive position of project part- ners’ upper management which may be
ners in future quality-based competitions a challenge amid the daily rush
• Decision making is based on comprehen- • Abandoning old set ways in favour of a
sive know-how, and project risks are un- collaborative culture is demanding and
derstood more holistically than normally laborious and may fail
• Life cycle economy of implementation • The procedure is new and its introduction
solutions also improves with increased may fail which would be a blow to part-
responsibility due to the joint approach ners’ reputation in general
• The collaborative procedure improves • Creation of a collaborative culture and es-
innovation opportunities and possibly tablishment and maintaining of an alliance
also promotes sector development require a lot of effort and resources
• A working implementation method allows • Failure to direct incentives according to
benchmarking and benefits indirectly project’s aims when measurable aims
other projects and their development deviate from original ones
• The operational model allows practicing • The model leans heavily on personal rela-
cooperation for possible later strategic tions and trust, and it is possible to fail in
alliance building them
• Staff’s higher job satisfaction and com- Specifically for owner
mitment have a positive impact on part-
• The joint organisation and decision mak-
ners’ organisation cultures
ing force the owner to give up part of its
• The success and principles of the alliance authority in the project
may be used as a catalyst for developing
• The actual price level of the project is not
the rest of the organisation
certain until completion, the maximum
Specifically for owner price being a possible exception
• Transparent pricing and cost monitoring • The low-key price competition makes it
provide a better real time understanding difficult to prove financial soundness to
of the project situation those monitoring the public owner
• Incentives and cost-based payment (no • Payment based on realised costs in-
risk reserves) are likely to allow realising creases the risk of opportunistic and
the project at a competitive price skewed cost allocation
Specifically for service providers • The model requires active participation
of the owner organisation and allocation
• Excellent performance will enable service
of key resources for the project’s use
providers to reap big rewards (in relation
to borne risk) • Staff members of the consortium that won
the quality-based selection may be re-
• The model allows success through knowl-
placed by others as the process continues
edge and development without involve-
ment in unhealthy price competition Specifically for service providers
• Better understanding of customer needs • The partners bear risk for the entire pro-
and activities allows improving own ser- ject and actions of others that they can
vice ability and competitiveness influence only marginally

17
3. Selection of service providers

This chapter examines how the alliance implementing organisation is selected and put to-
gether through competitive dialogue. An answer is sought especially to how the selection
process moves forward and divides into phases, and which qualitative criteria are used to
evaluate candidates and tenderers. The content of the call for tenders is also outlined.

3.1 Selection process

The process of selecting the implementers of project alliance has several phases. They
are described below in more detail on the task level (Figure 1).12, 13

Launching of procurement

1. Preparation of project alliance. The owner makes the decision to use project alli-
ance. The procurement process is normally based on an order authorisation from
Parliament which, again, requires a legally valid transport infrastructure plan (road,
rail or street plan) and a project cost estimate based on it. The goal is to use simula-
tion in preparing the cost estimate (cf. Ch. 4.1) where the order authorisation corre-
sponds, for instance, to a cost level that will be underrun with 90 % probability (so-
called P90 level). At the same time, the owner commits its organisation to alliance-
type implementation, chooses its project representatives and evaluation team, and
provides the sector with advance information on the upcoming project and its im-
plementation as project alliance. If necessary, the owner complements the transport
infrastructure plan as required by the chosen procurement method as well as com-
missions complementary soil investigations, etc.

2. Preparation of procurement notice. A public owner prepares a procurement notice

on the project as required in public procurement and transmits it for publication.14
The procurement procedure is either a negotiated procedure or a competitive dia-
logue. The procurement notice provides information on the project, the selection
process and the roles of partners. It also indicates the minimum and elimination cri-

12
The times of the figure are indicative task-specific minimum durations. The total duration of procure-
ment is generally longer than the sum of the presented time periods.
13
Complementary material on the implementation of selection is found e.g. in relation to public procure-
ment guidelines (Pohjonen 2007) and the organisation and methods of decision making (Lahdenperä &
Sulankivi 2001).
14
In Finland procurement notices are to be transmitted for publication on the free, electronic HILMA informa-
tion system at www.hankintailmoitukset.fi as determined by the Ministry of Employment and the Economy.

18
 teria and the time of the informative meeting. An official procurement notice is al-
ways complemented by more comprehensive project material which describes, for
instance, the formation of the alliance and provides more detailed information of the
project. The notice enables the candidates to launch the assembly of a candidate
consortium and/or organisation as well as to prepare their request to participate.

3. Organising of informative meeting. The owner organises an informative meeting

where companies considering submitting a request to participate are informed about
the operating principles of the alliance and the details of the selection process. At
the meeting candidates can ask questions about the project. All asked questions and
elaborated answers are submitted in writing to all participants after the meeting.

Verification of qualification

4. Submitting of a request to participate. Candidates announce their participation in

the selection by submitting a request to that effect to the owner. A candidate may be a
company providing design and construction services through its own organisation, but
normally it is a consortium that offers the mentioned and other necessary services.
The content and structure of the request must conform to the owner’s requirements set
out in the procurement notice. By the material they provide, companies try to prove
that they are qualified to be an implementer: after the material has been used to evalu-
ate the candidates’ basic qualification as implementers, it is used to rank them.

5. Selection of candidates. The owner evaluates the received requests to participate based
on the announced minimum criteria (Table 5). On the basis of that evaluation the owner
decides which candidates qualify for the next round and which are rejected. Candidates
that meet the minimum criteria are invited to interviews; the rest are excluded.

Reducing the number of candidates

6. Preparing for interviews. The owner prepares the topics/themes and implementa-
tion of interviews. Candidates’ requests to participate are also evaluated preliminar-
ily in order to determine the need and subject of elaborated questions. At the same
time, the owner and the candidates start to commit their key personnel and coach
their teams. The candidates get ready to present their competence and references.

7. Conducting of interviews. Each candidate is interviewed separately. The sessions

are led by the owner and last, for instance, three hours. During the sessions candi-
dates demonstrate their competence through presentations prepared in advance, but
the main focus is on the owner’s prepared questions intended to specify the informa-
tion of the candidates’ requests to participate (references, organising principles, key

19
 personnel, etc.). The possible technical and organisational features of the project are
not actually discussed yet during the interviews. However, the aim is to ensure that
the candidates have understood the principles and procedures of project alliance and
are able to commit to them.

8. Selection of tenderers. Interviews are evaluated immediately after the sessions by

an evaluation group. A summary is made of the interviews where companies’ com-
petence, experience from demanding projects, intended key personnel and proof of
capacity for cooperation are assessed (Table 6). Then the owner selects the three
best candidates for the next round, and the rest are eliminated.15

Selection of best tenderer

9. Delivery of call for tenders. The owner sends a call for tenders to the three best
candidates (Table 3).16 It specifies the selection criteria17 and presents the tentative
bill of quantities for the project and the corresponding detailed cost estimate, tenta-
tive price elements (averages of similar realised projects) common to all for calcu-
lating the tender price, the allocation of tasks and risks between the owner and the
alliance, and the basis of payment system and its tentative qualitative target areas
and their estimated bonus potential. The material also includes comprehensive pro-
ject data. Along with the call for tenders, the owner also sends candidates an invita-
tion to a selection workshop and its programme.

10. Submitting of Part I of tender. Tenderers prepare the reports required for the
Phase I tender, including a budget critique. In it they evaluate the feasibility of the
plans within the set budget framework, bring out the project’s risk factors and their
cost effects and, particularly, address the tentative price factors (used to calculate the
tender price) that are common to all (cf. Ch. 4.2). Tenderers also provide feedback
on the draft alliance contract and comment/prepare proposals for indicators for
measuring qualitative target areas. Candidates also prepare a project organisation
plan and a tentative project plan as part of their tender. Tenderers submit Part I of
the required tender material to the owner by the date indicated in the call for tenders,
i.e. before the workshop.

15
When using the negotiated procedure or the competitive dialogue, at least three candidates must be
invited to the tendering process unless there are fewer suitable candidates (Laki... 2007). Tender phase
workshops are so laborious that it is generally not justified to invite more than that minimum number.
16
Table 3 shows the tentative table of contents of a letter of invitation. It lists the key issues of the call for
tenders and is complemented by broad reference material. It is the Finnish Road Administration’s pres-
ently used model of a letter of invitation complemented e.g. with those sections of calls for tenders of
executed alliance projects (VicRoads 2005; 2006) that will be new additions to project alliance.
17
It should be noted that criteria cannot be changed to the extent that they have already been presented.

20
11. Preparing for selection workshops. The owner’s evaluation and project groups
prepare the content and organisation of the workshop and plan the workshop tasks.
The evaluation group examines submitted Parts I of tenders in order to identify the
features of tenders that need further clarification and revisions that allow making a
decision later on the suitability and merits of tender solutions. Tenderers, for their
part, get ready for presenting their tenders and discussing the features and develop-
ment possibilities that do not clearly conform to the call for tenders.

12. Conducting a selection workshop. In the workshop tenderers present the so-called
qualitative section (Part I) of their tender to the owner, and the owner asks elaborat-
ing questions about it. Discussions may focus on changes in the content of require-
ments and/or a design as well as on tentative innovation possibilities on which a
common view is sought.18 The draft alliance contract is also dealt with. Moreover,
the persons appointed by the owner to the project and the tenderer’s representatives
constitute a team that jointly solves project-related workshop problems as an ex-
periment. In the evaluation of the task section, attention is paid to team work, utili-
sation of know-how, leadership and outcome. The owner’s evaluation group as-
sesses workshop performance in accordance with the evaluation criteria (Table 7)
immediately after the workshop and prepares a summary including reasoning. A
workshop is conducted separately for each tenderer, and its practical duration is
typically about two working days. Issues raised in discussions at workshops are
treated as confidential information.

13. Specification of call for tenders. The owner may specify the call for tenders, if
necessary, due to issues that come up during workshops that require specifying pro-
ject content, the cost estimate, the draft contract or qualitative requirements. At the
same time, the owner fixes the price elements common to all used in determining
the tender price. The owner submits the revised call for tenders to all tenderers.

14. Submitting of Part II of tender. Tenderers submit to the owner Part II of the tender
which contains at least the unit and total costs of the cost items requested in the call for
tenders which are not included in Part I. The qualitative section of the tender is also
complemented as necessary (Part I): to the extent that the specified call for tenders, the
elaborating questions posed at workshops or solutions developed in workshops require.

18
Design by the owner based solely on performance criteria has so far been considered problematic since
excessive degrees of freedom that might lead to still unidentified, possibly tendered, solutions that are
found unworkable, might be accepted. Therefore, it can be assumed that tenderers find the owner’s calls
for tender plans to limit solutions to some extent. The evaluation of tentative innovation possibilities at
workshops is, for its part, intended to lead the discussion toward novel implementation solutions so that
the conformity with requirements or the possibility of changing requirements can be ensured already
before submitting the final tenders since degrees of freedom are generally difficult to set. This justifies the
need of workshops which are also indispensable for the evaluation of the team’s ability to perform its
function and the building of a confidential collaborative relationship.

21
 PHASE OWNER CANDIDATE / TENDERER TIME

Owner’s local detailed plan-level transport infrastructure design

(results in e.g. a legally valid road plan and order authorisation)
[Earlier feasibility study and general planning phases are implemented traditionally]

Presented time requirements are

1. Preparation of 3-12
task-specific minimum durations
project alliance excluding required margins mos
Launching of
procurement

2. Preparation of Receiving owner’s

1 wk
procurement notice advance information

3. Organising of Participation in
1 day
informative meeting informative meeting
Selection of service provider (to be cont’d)

4. Submitting of a
4 wks
Verification of
qualification

request to participate

5. Selection of
2 days
candidates

6. Preparing 6. Preparing
2 wks
Reducing the number of

for interviews for interviews

candidates

7. Conducting of Participation in
2 wks
interviews interviews

8. Selection of Part 1 day

tenderers 2

Figure 1: Part 1 of 2. Selection of actors for project alliance.

22
 PHASE OWNER CANDIDATE / TENDERER TIME

9. Delivery of Part
1 3 days
call for tenders

10. Submitting of
6 wks
Part I of tender

11. Preparing for 11. Preparing for

2 wks
selection workshops selection workshops
best tenderer
Selection of

12. Conducting a Participation in

2 wks
selection workshop a selection workshop
Selection of service provider (cont’d)

13. Specification of
3 wks
call for tenders

14. Submitting of
4 wks
Part II of tender

15. Selection of most

3 wks
advantageous alternative
Confirmation of

16. Contract negotiations 4 wks

selection

17. Entry into an alliance contract 1 day

Development phase: construction design, setting of target cost, etc.

[The development phase is followed by the construction phase (collaborative
implementation) and the warranty period (partners share liability)]

Figure 1: Part 2 of 2. Selection of actors for project alliance.

23
 Table 3. Suggested content of letter of invitation in a road project.

Introduction of call for tenders Review of documents appended to call

for tenders
Key content of call for tenders
Draft of alliance contract
Interaction during tender preparation and
contact person • Suggested alliance structure
• Correspondence and additions • Foundation of alliance
• Document management • Key features of alliance contract
Tender submission – negotiating mechanism and conditions
for changing contract during validity
• Confidentiality
• Key commercial conditions
• Structure of written proposals
Conditions of alliance contract
Acceptability of tender
• Roads and structures to be built
Delivery of tender to owner
• Health-and-Safety File
• Dating and validity
• Documentation procedures
• Signatures, identity
Required content of Part I • Implementation and timing

• Information presented at workshops • Ownership of tenders

Required content of Part II • Conflicts of interest

Tender processing in general • Disclaimer

• Overview of processing • Scope of alliance work

• Owner’s processing and management • Payment bases (benefit sharing and

teams rewarding method)

• Selection schedule Tender forms

• Evaluation team’s functions • Processing Phase I (Part I)

Tender processing, Phase I • Processing Phase II (Part II)

• Selection criteria Project-specific product requirements

• Tender evaluation principles Design material

Specification of call for tenders • Road plan

Tender processing, Phase II • Material to complement road plan

• Evaluation of specifications – Interest groups

• Tender price calculation – Flora and fauna

Rejection of tenderer – Cultural heritage

Rejection of tenders – Air quality and noise

Procurement decision Construction project’s operational and quality

plan model
Publicity of tender information
Cost estimate for construction project
Contract review and birth of contract
• Itemised project cost estimate
Tender compensation (complements cost confidence levels
and cumulative cost curve)
• Compensation of tenderers’ costs

24
15. Selection of most advantageous alternative. The owner completes the evaluation
of received tenders as to qualitative factors: suggested organisation, project man-
agement procedures and implementation solutions are considered along with evalua-
tion of workshop performance (Table 7). The most advantageous tender from the
overall economic viewpoint is determined based on qualitative evaluations, calcu-
lated tender prices (see Ch. 4.2) and preset weighting of criteria. The tenderer hav-
ing submitted the most advantageous offer is selected for negotiations and a related
official procurement decision is made.

Confirmation of selection

16. Contract negotiations. Negotiations with the tenderer having submitted the eco-
nomically most advantageous tender are launched to specify contract details.

17. Entry into an alliance contract. The owner and tenderer (various companies of the
consortium) enter into an alliance contract which stipulates the conditions for the
implementation of the project with the exception of target cost. It is fixed only after
the development phase (see Ch. 4.3). The calculated tender price sets the upper tar-
get cost limit which (or actually its later revised equivalent) becomes the target cost
unless a lower target cost can be produced during the development phase subsequent
to the signing of the contract.

3.2 Selection criteria

Different phases of the selection process for the implementer of the alliance contract use
different criteria: at first minimum criteria concerning candidates are applied, followed
by elimination (or shortlisting) criteria, and lastly tender evaluation criteria (Table 4).19
The meeting of minimum criteria (A) is evaluated on the basis of the request to partici-
pate, and that of elimination criteria (B) on both the request to participate and inter-
views. Tender evaluation has two phases. First, Part I of the written tender (C1–C3),
submitted before the workshops are conducted, and the workshop performance of the
tenderer’s project group (C4) are assessed. After the workshops, Part II of the tender
including price data (C5) is submitted as well as other information required by the
specification of the call for tenders. The criteria are examined in detail by phases below.

19
A call for tenders must present to the tenderer the requirements for tender contents (name and key con-
tents of document and minimum requirements) and in connection with comparison criteria how tender
contents are evaluated (what in the document is assessed). The criteria presented in this chapter that raise
up theme areas are merely suggestive and need to be concretised for practical procurement situations.

25
 Table 4. Selection criteria for service providers in project alliance.

Selection phase > Verification of Elimination of Selection of

qualification candidates consortium

Request to

Request to

workshops
Candidate
participate

participate

Interviews

Parts 1&2
Basis of evaluation >

Selection
Tender,
Selection criteria

A. Minimum criteria
A1. Financial capacity of companies ●
A2. Legal obligations ●
A3. Sector and alliance competence ●
B. Elimination criteria
B1. Competence and technical capacity ● ●
B2. Proof of successful operations ● ●
B3. Project organisation and cooperation ● ●
C. Evaluation of tender
C1. Organisation and principles of cooperation (Part I)
• Alliance organisation ● ●
• Project management and operating principles ● ●
C2. Project management procedures (Part I)
• Management of project quality and env. issues ● ●
• Safety management ● ●
• Risk management ● ●
C3. Implementation solutions and costs (Part I)
• Technical approach to project implementation ● ●
• Budget critique ● ●
C4. Workshop activity (not part of tenders)
• Commitment, attitude and cooperation of team ●
C5. Calculated tender price (Part II) ●

Although both phases of selection focus on the evaluation of the competence of actors,
the general principle is that each selection criterion is used only in one phase20 of the
selection process and the elimination-phase evaluations and corresponding scores of
candidates are not considered as such at the tender evaluation phase.

20
Courts have intervened in cases where clear enough distinction has not been made between reducing the
number of candidates and tender evaluation as concerns suitability criteria. Thus, qualitative criteria must
evolve between these phases from evaluating qualifications toward evaluation of project-specific procedures
although in the case of project alliance evaluation during both phases focuses on quite similar issues.

26
Verification of qualification

Application of minimum criteria ensures that candidates have the basic qualifications for
successful implementation of the construction project in question. Minimum requirements
include, for instance, that candidates have a transparent financial monitoring system suit-
able for cooperation as well as the required experience from design management and or-
ganising and implementing of projects involving design. Table 5 shows the requirements
of minimum criteria and the proof required by the owner of meeting them. Candidates
that meet the minimum requirements qualify and are invited to interviews organised by
the owner. Candidates that fall short of the minimum requirements are rejected.

Table 5. Requirements of minimum criteria and required proofs.

REQUIREMENT PROOF

A1. Financial capacity of companies

• Creditworthiness • Free-form statement from bank on
tenderer’s creditworthiness
• Capital adequacy • Financial statements (last 2–3 years)
• Sufficient turnover in relation to scope of • Financial statements (last 2–3 years)
project (euro-denominated requirement)

A2. Legal obligations

• Entered in trade, prepayment, employer • Extracts from registers or RALA certificate
and VAT registers (see: Rakentamisen... 2008)
• Has paid tax obligations and employees’ • Certificates or corresponding schedules
social security and pension contributions of payment and statements
• The obligatory (and discretionary) grounds • (Proof from candidate is not required)
for exclusion of the Public Procurement Act
are not met (see: Laki... 2007).
• General accepted terms of employment • Proof of collective agreement or key
terms of employment applied to work

A3. Sector and alliance competence

• Suitable sector competence (Design-Build • References and/or RALA certificate
projects)
• Quality assurance system verified by a • Certificate of system conforming to a
third party certain standard, acceptance of RALA
procedures or equivalent
• Transparent financial monitoring system • Description of used financial monitoring
suited for cooperation system
• Candidate has experience from sufficiently • Project size (€m), number, time (last 5
large projects and ones involving design years), projects involving design, coop-
and design management eration with owner

27
Reducing the number of candidates

Candidates meeting the minimum requirements are ranked according to their merits,
initially on the basis of the requests to participate they submitted to the owner. Candi-
dates are also invited to interviews intended to clarify things already expressed in writ-
ing in the request to participate. On the basis of the interviews and the request to par-
ticipate, the three best candidates are selected for the next round. These candidates re-
ceive the project’s call-for-tenders material.

The criteria used at this stage are the candidates’ competence and technical capacity,
proof of successful projects and planned project organisation. The corresponding targets
of evaluation and proofs required by the owner are listed in Table 6.

Table 6. Targets of elimination criteria and required proofs.

TARGET PROOF

B1. Competence and technical capacity

• Technical capacity • Management of special techniques,
project management programmes,
practices
• Competent personnel • Training, qualifications and special
skills of personnel
B2. Proof of successful operations
• Successful projects in key target areas • References from the viewpoint of key
(costs, schedule, structures, safety, environ- target areas and possible public rec-
ment, quality, traffic control) ognitions
• Successful development solutions and imple- • Descriptions of development work
mented innovations (processes, management, arrangements and resulting solutions
technical solutions, finance) and practical applications and bene-
fits derived from the solutions
• Best practices in risk management • Description of risk management prac-
tices and possible concrete lessons
learned from projects
• Client relationship management (owner, • Feedback on cooperation, user feed-
interest groups) back, written statements, assess-
ments, feedback (e.g. from Propal
system; see Rakentamisen... 2008)
B3. Project organisation and cooperation
• Forming of project organisation • View of alliance process, project
organisation and its operations
and their underlying principles
• Suggested key persons • Appointed key persons: project and
design manager and other key project
personnel (names, experience; CVs)

28
Selection of best tenderer

Evaluation of offers divides into two phases. The issues of the qualitative Part I (Table
7, Sections C1–C3) and workshop performance (Section C4) are evaluated first. At this
phase, emphasis is on the suggested organisation and operating culture, project man-
agement procedures and implementation solutions and costs. After the selection work-
shop, the second part of the written tender, which contains the issues of Part I of the
tender dealt with in the workshop and updated to the extent necessary, as well as Part II
of the tender, that is, certain price data (Section C5), are submitted for calculating a ten-
der price (cf. Ch. 4.2). The candidate that submits the most advantageous tender from
the overall economic point of view is selected for negotiations.21, 22 Finally, Table 8
ponders the consideration of the team viewpoint in the selection of the project alliance
implementer and related workshops as well as in implementation.

Table 7: Part 1 of 2. Targets of tender evaluation and required proofs.

TARGET PROOF

C1. Organisation and principles of cooperation

Alliance organisation
• Organisation and its key support functions • Organisation chart
• Suggestions for holders of key roles • Appointed experts and process
(e.g. project manager, design team manager, owners, their use of time and
persons in charge of parts of projects, project substitution arrangements
cost management and client relationships)
• Resource availability survey
(incl. starting times)
Project management and operating principles
• Project-specific operational plans and procedures • Description of personnel
management and activity
• Principles of collaborative procedures
• Description of team forming,
• Principles of orientation and alliance training and development of cooperation
subcontracting and orientation procedures

21
According to the general guidelines for government procurement, price should carry a weight of at least
35–40 % when using relative weighting of criteria. Yet, in the case of service procurement, price may
exceptionally also be given a weight of less than 35 %. (Hytönen & Lehtomäki 2007)
22
The joint view of participating experts and practical actors is that price should generally carry a weight
of no more than 20–30 % in project alliance. This is because better overall economy is pursued by putting
together the best possible team of versatile know-how already at the stage when the implementation solu-
tion still can be influenced and improved. It also makes for more profound evaluation of qualitative fac-
tors than is the norm with other procurement methods. Know-how and cooperation are emphasised and
must carry much weight. That is also necessary because as implementers are selected for the project in an
early design stage, pricing also involves considerable uncertainty. (It must be noted that weighting as such
is not a very good predictor of the outcome of selection since the formation of the final system is also
influenced by e.g. the scoring of price and quality scales, etc.)

29
 Table 7: Part 2 of 2. Targets of tender evaluation and required proofs.

C2. Project management procedures

Management of project quality and environmental issues
• Goals and procedures of total quality management • Description of total quality man-
agement procedures and control
systems
• Goals and procedures of environmental manage- • Description of environmental
ment management procedures and
control systems
Safety management
• Goals and procedures of safety management • Description of safety manage-
ment procedures and control
systems
• Overall safety, safety planning
and training
Risk management
• Goals and procedures of risk management • Description of risk management
procedures and control systems
• Tentative risk analysis, critical
points of project, risk factors
C3. Implementation solutions and costs
Technical approach to project implementation
• Technical implementation of project and tentative • Value adding solutions and inno-
innovation possibilities vative ideas suggested for the
project
• Project’s production solutions and arrangements
and tentative innovation possibilities
Budget critique
• View of project’s cost level and range, biggest • Critical, comprehensive evalua-
uncertainties and ways of managing cost risks tion of owner’s cost estimate
• Key means and solutions for lowering overall costs • Suggestions for improving eco-
in project implementation nomic efficiency of project
C4. Workshop activity
Commitment, attitude and cooperation of team
• Commitment to membership in alliance team • Proof of successful workshop
performance (management,
• Innovative approach and know-how cooperation, utilisation of know-
• Capacity for problem solving how, outcome)
• Management and leadership skills and know-how
C5. Calculated tender price
• Unit and total cost factors defined
separately in call for tenders as
specified by owner

30
 Table 8. Team viewpoint in selection and execution of project alliance.

The basic idea of project alliance is to bring to- Since implementer selection is largely based on key
gether the required knowledge at an early stage and persons and their competence, a substitution ar-
to emphasise trust, commitment to goals and close rangement like this is in contradiction with the
cooperation between the partners. Its realisation alliance spirit. Acceptance of substitutes should,
requires examining e.g. the following factors re- therefore, be based on interviews and workshop-
lated to projects: type testing of capacity for cooperation. The time
when the key personnel is committed “perma-
Key persons. The key persons play a significant
nently” should be agreed in the same connection.
role in the implementation and definition of the
procedures of an alliance project. Openness, leader- Facilitator. An expert on team or organisational
ship and innovativeness are desirable properties. activity, a facilitator, can be used to promote team
Naturally, their competence must also meet the formation and evaluate workshop performance. As
project’s needs. The owner must appoint its project an outsider, the expert can evaluate the team’s
representative early enough for the tenderers to be functioning differently than the owner’s representa-
able to take it into account when preparing their tives who participate in the work or project control
request to participate and/or tender. or other members of the selection group. The ex-
pert’s assessments form, however, only a part of the
Selection workshops. The aim of the alliance pro-
overall evaluation of performance in selection. The
ject implementers selection process is to find the
expert must be well versed in the goals and future
best possible implementer team. Thus, it is essential
challenges of the alliance team.
to find actors who are competent professionals,
whose competencies complement each other, and Evaluation group. The owner’s evaluation group
who are capable of working together. A good end is a key actor in the selection process. The group
result requires that communication between them is must be put together early enough, and it must
open, direct and confidential. Thus, evaluation of internalise the objectives and content of the alli-
the team’s cooperation on the basis of workshop ance. The group should have experience from
collaborations is also emphasised in selection. evaluating and using qualitative selection criteria. It
is essential that the group has clear operating prin-
Start time. Tenderers suggest certain employees
ciples and sufficiently versatile competence. Use of
for key persons of the alliance project during the
external competent members should also be consid-
selection process. In practice, tenderers often have
ered. Members must enjoy the confidence of com-
difficulties in making the appointed persons avail-
peting teams which increases the companies’ moti-
able for an alliance project starting at a certain time.
vation to compete thereby improving the results of
Thus, it has been suggested that key persons be
the project.
given a partially flexible start time that would allow
better utilisation of the persons considered most Incontestability. An alliance emphasises joint
suitable in alliance projects. responsibility and avoidance of disputes. Besides
making the actors seek cooperation, it also likely
Time of competition. Designers and contractors
improves the information flow within the project.
operate in markets where they constantly compete
Defective or erroneous information is no longer a
for several projects. Permanent commitment of key
reason for contesting an issue, but all information is
persons to projects may be difficult since there are
utilised. Incontestability is based on trust, not on a
generally a few lost projects for each won one, and
legally binding contract.
the resourcing of each project has to be planned.
Thus, owners should avoid as far as possible invit- Alliance team. The alliance organisation should
ing competitive tenders on other projects to coin- strive to use common symbols to create and main-
cide with alliance projects. tain a team spirit. The logos of partner companies
should not be visible to distinguish them from one
Substitution arrangements. In situations where a
another as they do their work. The team is to oper-
flexible start time is not sensible, arrangements
ate under the name and symbols of the alliance.
must be made for providing substitutes. Tenderers
Team formation and activity is also supported by
appoint substitutes in connection with suggesting
common space arrangements. Moreover, in many
certain key persons. The owner decides separately
collaborative projects the bases for decision making
in each case whether to accept a substitute.
are created e.g. by defining how long issues may
remain unsolved on each organisation level.

31
4. Cost planning

This chapter focuses on the preparation of a cost estimate and its role at various phases
of the alliance project. It attends to the inclusion of uncertainty in the estimate and cal-
culation of the tender price as well as development-phase cost planning and its signifi-
cance in fixing the payment basis.

4.1 Project planning by owner

The owner has done project preparations for a long while before procurement is
launched, and there is a legally valid transport infrastructure plan23 for the project as
well as a tentative cost estimate for the project decision and an order-authorisation ap-
plication based on it. Since project alliance is typically applied to projects including
much uncertainty, it is highly recommendable to (following the procedure illustrated in
more detail in Figure 2)

• prepare a total cost estimate by simulation which systematically considers the inter-
nal uncertainty of different cost items in estimating overall risk and outputs overall
project-level risk in graphic form24, and

• seek order authorisation for an overall risk level that considers project features and
whose corresponding cost level has a sufficient probability of not being exceeded in
implementation – that probability could justifiably be, for instance, 90 %.25

The owner’s cost estimate data are to be available to candidates so that

• the material complementing the procurement notice presents the owner’s view on total
project costs and the uncertainty related to them (e.g. based on the cumulative cost
curve/function) and the order authorisation (and possible so-called maximum price)

• the material appended to the call for tenders includes the owner’s itemised cost es-
timate in its entirety for all companies selected as tenderers (in the earlier elimina-
tion phase) that need it to prepare their own tender (budget critique, pricing).

23
In practice it is a road, rail or street plan. This plan level is related to local detailed planning and defines
the precise location of the transport infrastructure but does not as such serve the implementation of con-
struction. Factors directly affecting land owners and other interested parties are decided on this level.
24
Simulation based on random numbers is also known as the Monte Carlo method.
25
This so-called P90 level has been used in at least a few projects (VicRoads 2005; 2006) as well as to
make project decisions and describe the estimated cost level of projects in the call for tenders.

32
Cost probability distributions are approximated by some distribution which, at its sim-
plest, may be e.g. a triangular distribution. There, each item of the cost estimate is
determined based on three values: the optimistic (Min), the most probable (Mode) and
the pessimistic (Max). The probability of the cost falling between the extreme values is
assumed to be 100 % meaning that the area of the forming triangle is 1.00. There may
be hundreds of cost items, but the illustration here uses just two (I and II; Figs. A and B).

A Item I B Item II

Min Mode Max Min Mode Max

A cumulative cost function can be calculated for each triangular distribution to describe
the cumulative probability of staying under a certain cost level (Figs. C and D for items I
and II). The value of the function at cost level Max is 1. By generating a random number
(MC) between 0 and 1 inclusive, one can use the cumulative cost function to determine
the cost of the item corresponding to that random number.

C 1 D 1

MCIi
MCIIi
Cost Ii Cost IIi

0 0
Min Mode Max Min Mode Max

By summing up the costs of all cost items E Total costi =

based on random numbers, a single total cost Ii + cost IIi +…+ cost Ni
cost estimate (E) is produced.

By repeating the process numerous F

times (>1000) using random numbers,
a total cost distribution is produced
(Fig. F) due to the different cost
combinations of cost items.
100%
The cumulative cost function (G) of the Selected
total cost probability distribution illustrates G confidence
the uncertainty related to costs. The level
percentage depicts the probability of 50%
staying under the corresponding cost level. Target cost
The key factors in decision making are:
- slope of the function (esp. in the middle) 0
- cost level corresponding to 50 % Total cost
- probability (median)
- mean of the distribution (not pictured), which in the case of positively skewed distribu-
tions of cost items (cf. Fig. A) is larger than the median of the overall distribution.

Figure 2. Principles of distribution and simulation based cost estimation.

33
The procedure is intended to reduce the input required of companies in the selection
phase since

• in the elimination phase, when competition is based on competence, attention of many

candidate companies is not yet unnecessarily focused on itemised cost estimates, and

• in the tender preparation phase prepared material and the items and calculation struc-
tures and other background information used for it are at the disposal of the companies.

The cost estimate becomes more accurate later during the process as the tender price is
calculated (Ch. 4.2) and, finally, the target cost is determined (Ch. 4.3). These two cost
levels form the basis of the alliance’s payment basis system when cost-overrun and
-underrun allotment percentages are known.26 The allotments intended to be used in the
project should be fixed to avoid surprises and announced already in the complementary
material of the procurement notice in relation to the two conceptual cost levels (cf. Ch.
4.4) to rid selection of an excessive amount of variables that complicate comparison.

4.2 Calculated tender price

The selection of the implementer of project alliance is based on the most economically
advantageous tender27, that is, both tender price and the qualitative evaluation are con-
sidered in selection. However, the price is not tendered as a total price since it is not
practical to bring design to the level where a binding total price could be determined
with sufficient accuracy. Thus, this so-called tender price28 is calculated on the basis of
project scope-related data and estimates and binding unit prices provided by tenderers
and shares of overhead. The procedure proceeds mainly as follows (cf. Figure 3):

• As the procurement process starts, the owner has a transport infrastructure plan that
describes the project and a corresponding tentative bill of quantities. The quantities
involve uncertainty, but even though they get more accurate as design proceeds, the
changes are so minor that they have no real impact on unit prices. Tenderers submit
unit prices for selected items in the owner’s bill of quantities which allows deter-
mining the structural-element and work-type costs of each tenderer by multiplying
unit prices by quantities.

26
The final allotments of companies also depend on the success of the project in qualitative profit areas
which are, however, not dealt with in this chapter focusing on costs (see Ch. 5).
27
Cf. Public Procurement Act (Laki... 2007; also: Directive 2004).
28
The cost level is referred to as a tender price although the tenderer has not literally committed to all
items used to calculate it. The cost level is calculated to allow comparison, but e.g. “reference/comparison
price” has assumed another meaning in Finnish procurement practice.

34
• In the typical transport infrastructure project a relatively small share of the cost
items accounts for the bulk of the costs – paraphrasing an old saying: 20 % of the
items can be responsible for 80 % of the costs. Thus, in order to make the work load
of tenderers reasonable, it is appropriate to focus on that key 20 % of the items in
tender planning and competitive tendering, for which binding unit prices are re-
quested. In selection, the remaining items are assumed to be equal for all tenderers.

• The costs of design and site administration are estimated as the product of the per-
son-hours of work and the hourly rates provided by tenderers. The preliminary
amounts of person-hours of work required by, for instance, different competence
classes (charge classes) and design disciplines are estimated by the owner. Tender-
ers comment on the estimates in workshops, after which the owner should fix the es-
timated amount of work to be used in tender price calculation. Then, tenderers sub-
mit their own binding bases of charging as part of their tender.

• The so-called other joint site costs are divided into a fixed and a time-bound compo-
nent, so that the fixed component includes one-off cost items not related to time of
need (utilities, start-up, dismantling, etc.) also as concerns certain some time-bound
items. The fixed component is generally an item estimated jointly for all competi-
tors. Thus, the tender includes only certain monthly prices that can be converted into
tender price components on the basis of site-phase durations common to all which
are determined in workshops the same way as person-hours of work estimates.

• Construction projects often include components that the owner will implement later as
separate procurements, which means that they are not part of the alliance contract, but
the alliance actually has the responsibility of coordinating the works (e.g. road project
telematics and railway safety systems). That means costs to the alliance and, there-
fore, the owner must define the items already in connection with implementer selec-
tion, for instance, by announcing that it is prepared to spend a certain amount accord-
ing to a plan to be made later (item: other structural elements and reservations).

• Companies’ overheads, such as costs of central administration, risk reserves and

margin are not included in the above mentioned direct costs. Therefore, tenders must
also include binding overhead rates which are used in calculating the overall tender
price and, in the case of the selected consortium, also in implementation. Overhead
rates are provided separately for design and construction. The rates for construction
may differ in the case of the actual contract and separate procurements.29

29
If necessary, a similar procedure can be agreed for design as concerns known works of special design-
ers/sub-consultants although the issue has not been separately brought up here (in Figure 3).

35
The structure of the tender price calculation is illustrated in Figure 3 where each boxed
section specifies the previous upper-level concept. Italicised (green) cost items are bind-
ing prices30 offered by tenderers on condition that the later total price calculated using
them and the quantity and scope data of designs that become more accurate also bind
the tenderers. The items in bold (brown) are tentative estimates common to all deter-
mined, for instance, on the basis of selection workshops’ suggestions. Bold italic text
(blue) denotes tentative tender-phase quantity data calculated on the basis of the
owner’s designs which are also common to all tenderers.

Table 9 presents the grounds for using the built calculation model. The calculated tender
price is considered in implementer selection as explained in more detail in Chapter 3.2.
The time of fixing the price level and possible indexation principle must, naturally, be
defined before tenders are submitted (cf. Ch. 4.5).

4.3 Target cost determination

The idea of an alliance-type project process is to bring the actors together to develop the
project way before the design solutions and cost targets and corresponding payment
bases are fixed finally. It is also assumed that design and implementation solutions im-
prove as a consequence of the cooperation and that a reasonable target cost is below the
earlier tender price – or more accurately – its revised equivalent.

The revised cost estimate is made on the basis of development-phase designs and it is,
again, natural to use the simulation method, that takes into account uncertainty, already
applied by the owner in budget planning (see Ch. 4.1). As design proceeds and solutions
become more concrete, it can be assumed that total cost distribution and the correspond-
ing cumulative cost curve mainly fall within a narrower range. That also facilitates set-
ting a reasonable target cost. The following statements can be made regarding the nature
and tightness of the target cost:

• The target cost must correspond to the best level of the industry and be challenging
since already at that level the service provider’s reward is higher than normal due to
the used payment mechanism which means that pricing should not be based on a
similar price level as, for example, when offering fixed-price contracts.

30
During the development of the system, it was pondered whether tenders should be made on the basis of
unit costs or input costs as concerns structural-element and work-type costs. Input costs could be assumed
to be a sensible choice when design is in progress and it may be difficult to commit to reasonable unit
costs. On the other hand, input costs derive partly from e.g. collective agreements which makes competi-
tion questionable. An at least as important factor is that the input prices of machinery are not known, and
the tender inviter cannot even know what type of equipment each tenderer plans to use to do its work.
There are also such big differences between the input structures of various projects that there would be no
certainty that the calculation would forecast the project’s total prices with sufficient accuracy. Therefore,
the calculated tender price is based on using the unit prices of the structures provided by tenderers.

36
DESIGN COSTS

Design labour costs

+ Charge class 1: estimated no. of hrs [h] x hourly rate [€/h]

+ ….
+ Charge class n: estimated no. of hrs [h] x hourly rate [€/h]

× Designer’s overhead factor [1 + overhead %]

+ CONSTRUCTION COSTS

Basic element of site costs (own labour + normal subcontracting)

Breakdown of costs by structural elements and/or work types

Priced bill of quantities for key items

+ Structural element 1: amount [units] x unit price [€/unit]

+ ...
+ Structural element n: amount [units] x unit price [€/unit]

+ Total cost estimate for other items

+ Joint site costs

Site administration costs

+ Charge class 1: estimated no. of hrs [h] x hourly rate [€/h]

+ ….
+ Charge class n: estimated no. of hrs [h] x hourly rate [€/h]

+ Other joint site costs

Time-bound costs

+ Cost item 1: time required [mos] x monthly price [€/mo]

+ ...
+ Cost item n: time required [mos] x monthly price [€/mo]

+ Fixed non-time-bound costs

× Contractor’s overhead factor for “own labour” [1 + overhead %]

+ Other structural elements and reservations
× Contractor’s overhead factor for “separate procurements” [1 + overhead %]

Figure 3. Structure of tender price calculation.

37
 Table 9. Grounds for using calculated tender price as a basis of selection.

Significance of early selection An attempt is made to meet this challenge by bas-

ing the calculated tender price on both given, ulti-
According to definition, project alliance is a pro-
mately owner-defined cost estimate items and
ject delivery method based on a contract between
tenderers unit cost and overhead data – only the
all the key actors of a project which they imple-
necessary price formation elements are fixed while
ment through a joint project organisation sharing
the project scope has not yet been fully estab-
the risks. Its aim is to integrate know-how and
lished.
increase cooperation for the benefit of the project.
On the other hand, these price elements only de-
The present view is that innovations are born at the
fine a certain maximum price for the project; the
interfaces of different types of expertise while
target cost will be determined later as design pro-
systemic innovations significant for the whole
gresses. It is also essential that there are genuine
require general expertise that, in practice, can only
incentives for lowering the target cost even after
be acquired by integrating different types of exper-
signing the contract when the tender is not as-
tise.
sumed to be absolutely “tight”. The varying defini-
Although the goal of integrating expertise as such tion of cost overrun and underrun allotment per-
does not imply the time of starting cooperation, it centages (use of the so-called two-price system)
is clear that cooperation that begins early enough makes that possible.
with respect to design creates the best possibilities
Detailed justifications
for utilising the partners’ expertise in seeking bet-
ter than conventional solutions. Basing the calculated tender price partly on cost
items common to all, estimated for selection, is
Necessity of competition
justified to facilitate tendering in a project that
Competitive tendering has been generally recog- involves uncertainty and where the risk reserves
nised as a good method of ensuring the economy included in tenders would otherwise be significant.
of a service and increasing innovativeness when
For instance certain total worked hours in design
they are used as selection criteria. In the case of a
and site administration are estimated for the calcu-
major public procurement, it is also the statutory
lation of tender price also to avoid competition on
method of implementing a procurement. While
total price and thereby on undermanning of the
either price or overall economic advantage are
project as well as direct and uncritical use of con-
generally the selection criteria, it is clear that only
ventional design solutions. Such competition
the latter comes into question when selecting ac-
would be highly dangerous in a project involving a
tors early in the project.
lot of uncertainty where design is incomplete, and
In assessing overall economic advantageousness, the express aim is to invest and reserve resources
the price of an alternative must be considered in for cooperation in order to reach the special objec-
addition to related quality factors. An estimate tives of the project.
based on the best existing view on project scope
On the other hand, in project alliance which em-
and service features must be acceptable as the
phasises cooperation and development orientation,
price. That price is assumed to be a sufficiently
implementer selection is based on estimated ad-
accurate estimate of the actual price if it is based
vantageousness which stresses organisational fac-
primarily on elements binding on the competitors
tors. The tenderers capacity for developing the
which determine the final price as the scope of the
project carries much weight in selection. Proving
project becomes more accurate as it moves ahead.
and evaluating that is a challenging and time-
Integration of views consuming task. To focus attention on the ideation
and development of possible new solutions, an
It is a known fact that as a project proceeds, the attempt is made to keep the pricing procedure
chance of influencing its features and costs de-
light.
creases while the certainty of costs increases. Inte-
gration of relatively early implementer selection Disclosure and use of overhead rates is also part of
and competition involving price elements is thus a the solution that flexibly takes into account the
sort of compromise between these views, espe- price, person-hour and scope data that get more
cially if tendering is kept “light”: it should be pos- accurate and change as the project moves on.
sible to determine costs relatively dependably, but
the intention is not to have tenderers do the design.

38
• When using a procedure that considers uncertainty, the target cost level should nor-
mally be set between the median (P50) and the mean cost.31 If that is found too
risky, it is obvious that the parties aim to fix the target level too early, and that de-
sign to lower risks should be continued.

• In connection with setting the target cost, the parties are to specify in writing their
common view on what changes the target cost and what is normal revision and de-
velopment of designs which has no effect on the target cost. The starting point are
the tentative guidelines prepared already at the procurement phase (see Ch. 4.5).

The other elements of the straightforward payment basis solution are also to be defined
during the alliance development phase. The allotment percentages of cost overruns and
underruns disclosed by the owner already as part of the competition programme data as
well as the revised tender price and effects of qualitative profit areas on payments be-
long to them:

• Tender price is revised to match the current designs. Calculations are based on unit
and hourly rates and overhead rates presented by actors already in their tenders, and
only quantity data and estimates common to all tenderers are updated as to design
changes and owner’s work. Development of implementation solutions must not af-
fect the values used in calculations. The result is a so-called revised tender price.

• Target levels of qualitative profit areas are defined and corresponding indicators
developed.32 The mechanisms by which results are tied to the payment basis solu-
tion are decided at the same time – whether jointly or separately and to which sums.
The mutual weighting of different profit areas in calculating total value is to be de-
fined in joint systems. Solutions are to be developed in the spirit of the principles
suggested by the owner in the call for tenders.

Table 10 strives to outline the structure and connections between different cost-estimate
levels and phases, especially the grounds for revising the tender price.33

31
When using a payment basis solution where target cost overruns and underruns are shared 50/50 be-
tween the owner and the companies (without utilising in the definition model the so-called revised tender
price which, if underrun, brings a reward and affects allotment ratios), it is recommended to choose a
target cost level between the median (P50) and mean cost (Ross 2006). The two-price level based system
developed as part of this work differs from the presented one, but the prerequisites for evaluating possible
deviating recommendations did not exist at this phase of model development.
32
Qualitative profit areas are dealt with in general in Chapter 5.
33
The table only deals with the principles of calculating items. The structure of the calculation is ex-
plained in Figure 3. The item “other structural elements and reservations” is not dealt with here either: it
is a cost item disclosed by the owner which may become more accurate by the target-cost phase or may
remain a reservation.

39
 Table 10: Part 1 of 2. Cost and price estimates at different phases.

Cost item Tender price Revised Target cost

(calculated) tender price estimate

OWNER
A. Owner’s direct alliance costs
Owner’s alliance Differences in content The owner’s alliance Same as previous
tasks (i.e. tasks per- of tasks between costs that became
(Item is included in
formed by owner for competing consortia more accurate in the
target cost estimate
alliance organisation are generally neither development phase
to the extent that it
included in target significant nor fore- are considered, and
increases the tender
costs) seeable; thus they are said item is included
price during its revi-
not considered in the in the revised tender
sion phase)
comparison of tenders price along with ser-
(they can be, if nec- vice providers revised
essary) cost items
DESIGNER
B. Designer’s overhead
Companies’ over- Tender discloses Same as previous Same as previous
head, risk and margin percentage of design
costs (Item C) that is
Securities and liability
added to cost esti-
insurance
mate
Company and/or cen-
tral administration
C. Direct cost of design
Design salaries incl. Direct cost of design Direct cost of design *) Direct cost of de-
social security costs is calculated using the is calculated using sign is calculated
(indirect employee work load estimate a revised work load using a work load
costs) common to all and estimate that consid- estimate that consid-
(charge class-based) ers changes in de- ers changes in de-
hourly rates provided signs (scope, etc.) signs (scope, etc.)
separately by each and hourly rates of and development
tenderer tender (new and better
ideas) and hourly
rates of tender
CONTRACTOR
D. Contractor’s overhead
Companies’ over- Tender discloses Same as previous Same as previous
head, risk and margin percentage of the
sum of costs of items
Securities and liability
E, F and G that is
insurance
added to cost esti-
Company and office mate
management
Costs of central ad-
ministration’s mana-
gerial and project staff

40
 Table 10: Part 2 of 2. Cost and price estimates at different phases .

Cost item Tender price Revised Target cost

(calculated) tender price estimate

E. Site administration costs

Site management and Total cost of site ad- Total cost of site ad- *) Total cost of site
administration tasks, ministration is calcu- ministration is calcu- administration is cal-
measurements lated using work load lated using a revised culated using a work
estimate common to work load estimate load estimate that
all and (charge class- that considers considers changes in
based) hourly rates changes in designs designs (scope, etc.)
provided separately (scope, etc.) and and development
by each tenderer hourly rates of tender (new and better
ideas) and hourly
rates of tender
F. Other joint site costs
Site office costs, elec- Time-bound costs are Time-bound costs are *) Time-bound costs
trification, telecom- calculated using dura- calculated using du- are calculated using
munications tions common to all rations that consider durations that con-
and monthly costs changes in designs sider changes in de-
Storage, small
provided by each (scope. etc.) and signs (scope, etc.)
equipment
tenderer separately monthly costs of the and development
Site work safety and tender (new and better
The fixed component
work-safety equip- ideas) and monthly
is considered an es- The fixed component:
ment, insurances costs of the tender
timated item of the a revised item that
Notification, traffic same size for all considers the current *) The fixed compo-
control during con- competitors situation nent: as in rest of
struction target cost calculation
G. Structural element and work type costs
Costs of performing The bulk of the work The bulk of the work *) Total work costs are
work costs is calculated costs is calculated calculated using esti-
using the estimated using the estimated mated quantity that
Work machinery and
quantity of structural quantity that consid- considers changes in
equipment
elements common to ers the fact that de- designs (scope, etc.)
Subcontracts entered all of the road plan and signs become more and development
into and services unit costs provided by accurate (scope, etc.) (new and better
acquired for the pro- tenderers and unit costs of the ideas) and unit costs
ject tender of the tender
The remainder is con-
sidered an estimated The remainder is a
item of the same size revised item that con-
for all competitors siders the current
situation

*) In practice, the estimate is made merely on the basis of the designs and plans created dur-
ing the development phase and the current cost assumption. Tender prices as such are not
analysed, but limit values within which total costs should stay can be derived from them.

41
4.4 Fixing of payment bases

The development phase of the alliance ends with the fixing of the target cost. That con-
cretises the payment basis solution, and the allotments of service providers get explicitly
defined at all cost-performance levels. For one, the solution is based on the so-called
revised tender price, target cost and allotment percentages.34 Moreover, payment is
influenced by the revision of the “basic amount” of the allotment defined here on the
basis of costs according the performances of profit areas, but the revision is not dealt
with here. The reader is just referred to the examples of Chapter 5.

The basic assumption is that target cost is lower than the revised tender price.35 If that is
not the case, or the difference compared to the cost level of the project is marginal, the
actors may agree that the basic target cost underrun and overrun allotment percentages
are valid: in the case of the owner and service providers 50/50. On the other hand, if the
target cost is essentially lower than the revised tender price, that at least justifies adopt-
ing the following solution (Figure 4):

• Sixty per cent of the difference between the tender and target cost is reserved for
service providers. The share is large in order to spur the actors to seek economical
solutions (and a “tight” target cost) already at the development phase. Then the
chance to influence project costs is greater than during the implementation phase
when relatively little development potential exists as solutions are largely fixed.

• When realised cost exceeds target cost, service providers bear 70 % of the cost over-
run. The share is intentionally bigger than the benefit derived from a tight target cost
(said 60 % of the difference) to make service providers genuinely responsible for the
appropriate size of the target cost instead of just setting an overly optimistic target to
increase profit.

• Service providers’ share of a target cost underrun is 50 % according to the original

allotment ratio. Although their share of the overrun is greater, their share of the un-
derrun should not be changed in order to keep to the model based on shared risk. A
smaller (< 60 %) share of an underrun is also necessary to emphasise development-
phase design: that makes lowering of target cost the primary means of increasing
bonus potential.

34
In addition to conditions defined by these, other conditions can also be agreed case-specifically. In
some instance it may be justified to agree that companies are compensated for so-called direct costs also
when the payment basis solution would otherwise limit their payment. A so-called maximum price can
also be agreed for payments – costs above it are not compensated (with the exception of design changes).
35
More cost-effective solutions are developed as design proceeds while designs/plans that become more
accurate decrease risk reserves. Thus, it is justified to assume that the target cost generally is lower than
the revised tender price. On the other hand, the target cost cannot exceed the revised tender price, either.
The latter is the price at which the tenderer has undertaken to implement the project (considering the
payment mechanism) which becomes the target cost unless preconditions for a lower target exist.

42
 Allotment models Target cost resulting from Realised cost corre-
known to actors development phase is sponding to the target
(alternative single- recorded in contract; cost calculation is
and two-price models) tender price is revised computed after
Tender prices deter- Used allotment model is project’s completion
mined by selection; chosen (two-price model Companies’ allot-
recorded in contract in the example) ments are calculated

Complemented contract
TENDER DEVELOPMENT IMPLEMENTATION
PHASE Alliance contract PHASE PHASE

Evolution of Construction
Tentative plans
plans proper

Tender price Target cost Realised cost

Tender price (complemented contract: Revised tender price)

INPUT DATA / EXAMPLES 60 %

Realised cost,
Cost levels case A
- Tender price: €120 mn
- Target cost: €100 mn
- Realised cost A: €110 mn Target 70 %
- Realised cost B: €90 mn cost 50 %

Company shares agreed as bases of allotment (pictured)

- Tender price underrun: 60 % (development phase) Realised cost,
- Target cost overrun: 70 % case B
- Target cost underrun: 50 %

EXAMPLE CALCULATION 1: Realised cost A

- Bonus effect: 60 % * [€120 mn (tender price) – €100 mn (target cost)] –

70 % * [€110 mn (realised cost) – €100 mn (target cost)] = €5 mn

- Payment to companies: €110 mn (realised cost) + €5 mn (bonus effect) = €115 mn

EXAMPLE CALCULATION 2: Realised cost B

- Bonus effect: 60 % * [€120 mn (tender price) – €100 mn (target cost)] +

50 % * [€100 mn (target cost) – €90 mn (realised cost)] = €17 mn

- Payment to companies: €90 mn (realised cost) + €17 mn (bonus effect) = €107 mn

Figure 4. Cost engineering and its evolution into a payment basis system.

43
Allotment percentages can naturally differ slightly from those presented, but the mutual
order of magnitude of the figures is essential when aiming to achieve the desired incen-
tive effect. It is also not appropriate to increase company allotments, in order to adhere
sufficiently to the risk sharing principle of project alliance.

Figure 5 illustrates the functioning of the payment basis solution with the two cost limit
values (so-called two-price model) using the allotments based on the above percentages.
In the example, the consortium has been selected on the basis of a price that becomes, as
revised at the end of the development phase, the revised tender price of 100. The three
examples presented as alternatives illustrate the impact of the magnitude (and tightness)
of the target cost on payments to companies at different cost-performance levels (exclud-
ing the impact of quality factors): target-cost levels 96, 92 and 88. Thus, by a lower target
cost level companies increase their bonus potential at the performance level in question
and better ones, but correspondingly take upon themselves a larger share of cost overruns.
Quite large bonuses are justified since they are based on an already competed price.

Table 11, again, explains how the total share of payments to companies is divided between
them. In that connection it is essential to recognise the significance of the designer for the
success of the project. Otherwise, all the reasoning does not lead to unambiguous truths.

105

100

95

90
80 85 90 95 100 105

Figure 5. Payments to companies at various target-cost levels.

44
 Table 11. Determination of consortium companies’ allotments.

To determine the service payments earned by alli- should the actors see fit, more could be invested in
ance companies, their combined share vis-à-vis the design than earlier planned, and higher costs of
owner is calculated first on the basis of the realised design in the case of a problem project would not
total cost and the bonus effect of qualitative profit mean failed design that needs to be “punished”.
areas. Only then is the joint share of the companies The benefit or bonus to the actor is not propor-
divided between them. tional to the party’s own performance level – that
is what the alliance in principle wants to avoid.
The realisation of the project’s goals does not
affect the mutual shares of the companies but al- Then again, the model can be seen as similar to
lotment can be made on other bases; it can be traditional procurement methods since the bonus
made e.g. on the basis of a company’s share of the setting is locked before implementation which may
companies’ joint project costs or a derivative of it. also be against the spirit of alliancing. A better
Moreover, maximum shares can be limited. alternative might be to calculate allotments on the
basis of partners’ realised costs. They represent
Definition of basic allotments
input in the project, and it is only logical to think
In Australia the relative shares of realised over- that the partners contribute to the success of the
heads have been used to calculate allotments (Ross project in proportion to their input. The changes in
2006). Yet, it should be noted that Australian and execution will thus be considered in the allotments.
Finnish cost accounting practices probably differ,
The model may be open to criticism in that it al-
which makes comparison of the shares of over-
lows companies to “adjust” their own costs in their
heads impossible. On the other hand, overheads
favour. Yet, since design and construction are
are derivatives of direct costs, which is why total
primarily implemented at different times, only the
costs yield nearly the same result although with
contractor would have that possibility. On the
different factors and revisions.
other hand, the contractor’s larger allotment makes
Use of overhead shares might be justified by the such manoeuvring unprofitable.
fact that the model outlined in this work allows
Revision and limitation of allotments
defining different overhead rates for the designer
and the contractor depending on whether self- The general view is that the designer’s impact on
implementation or separate procurements is at project costs is greater than its share of the busi-
issue. However, even this procedure does not nec- ness. Australian projects have sometimes endeav-
essarily make the actors work for the good of the oured to revise the designer’s allotment by apply-
project, but might lead to inflexible project imple- ing a factor of e.g. 1.5 in relation to savings (Ross
mentation as to division of tasks. On the other 2006) although the calculation procedure based on
hand, the problem is probably mainly theoretical as overheads would appear as such to make its share
the owner basically defines the content of the con- twice that of its share of the business. With the
tract. allocation model based on business share even
bigger factors than the presented one can, there-
An alternative basis for defining the allotments of
fore, be justified. A corresponding factor has not
companies is the monetary value of their business
generally been applied to cost overruns.
as a proportion of the companies’ joint business in
the alliance project in question, which is used here. On the other hand, the risk bearing capacity of
Then we are speaking of a typical share of about 5 consultants is limited, and it may be impossible to
% for the designer with the remaining 95 % going get designers to join in the alliance arrangements
to the contractor. unless their share of cost overruns is limited, in
addition to a certain percentage, to e.g. a maximum
Consideration of realised costs in allotment
monetary amount. The general conditions of con-
Another essential question is whether the allot- tract (RT 13-10574 1995) already limit the de-
ments of companies are determined on the basis of signer’s liability for its errors or negligence to a
the shares of the target cost calculation or whether maximum of the total reward of the contracting
corresponding realised costs are used in allotment. party. At least the same, or even a clearly lower
restriction clause, can be applied here.
If allotments are fixed already during target cost
definition, and realised costs no longer affect them,
the model emphasises the sharing of risks – e.g.

45
4.5 Implementation and warranty phases

Project alliance is a procurement method based on joint development and risk sharing
which means that minor design changes or changes in quantities do not give cause to
change the target cost as easily as, for instance, in the case of traditional lump-sum pro-
curement methods. Yet, the target cost sum is to be adjusted to take into account signifi-
cant design changes. Changes in scope of designs can be distinguished from regular
development, for instance, according to the principles of Table 12.

Another group possible requiring adjustment of target cost consists of such (positive and
negative) risks whose realisation the alliance cannot influence or be reasonably expected
to be prepared for. They should usually include a change in input costs – generally a cost
increase. The target cost can be tied to the Cost Index of Civil Engineering Works on cer-
tain conditions. Timber, steel, concrete and bitumen are such major cost items of transport
infrastructure projects that separate indexation of their price changes may be necessary
although different sources of procurement sometimes follow indices poorly.

The price of major cost items can also be indexed in relation to “realised and planned
cost”, but then the procurement principles must be pre-specified in the plan in order to
preserve the implementing organisation’s incentive for efficient activity. Fuels are a
major cost item in geographically spread transport infrastructure projects and as such a
possible target of indexation on the basis of parameters.

Indexation must be explicit in all instances unless cost increases are assumed to be con-
sidered entirely in tenders and/or target costs. This procedure would transfer more risk
than intended to service providers and would require further planning and risk reserves.
Consequently, it is unlikely to be the preferred procedure in project alliance. A sudden
economic swing might kill the developed incentive solutions.

Otherwise, the implementation-phase cost engineering of an alliance project follows

traditional procedures – although complemented by the principle of openness and joint
decision making. On completion of the project, payments are adjusted according to the
payment basis used. Since the alliance partners remain collectively responsible for any
possible deficiencies and quality defects, there is reason to agree on the portion of the
payments to be set aside as a warranty guarantee for the owner. Only after the end of
warranty period are the payments adjusted finally. Then, any possible costs of warranty
work are considered costs of the project alliance.

46
 Table 12. Treatment of deviations and adjustment of target price.36

Collective risk sharing levels of the principles that define the existence of
a possible deviation.
The partners bear collectively all risks related to
the carrying out of a project of the agreed scope The following process has been successfully used
and content based on the alliance contract inde- to create a common understanding of what is a
pendent of whether: change that affects target price and what is devel-
opment of solutions within project alliance:
• said risks can be controlled by the partners, or
• The groups compile a list of possible un-
• whether they could reasonably have been planned events in implementation: e.g. 30–
expected to be predicted. 40 items.
Collective bearing of risks does not, however,
• Each group member presents his/her view
extend to risks itemised in the contract which have
on whether the event is a “deviation”.
been specifically agreed to be borne by the owner.
• The results are compiled on a single sheet
Alliance-related risks are allocated between the
and the uniformity and differences between
partners on the basis of a results-based payment
views are illustrated.
basis model. That means that many situations
which would be considered deviations in a tradi- • The partners conduct a workshop that takes
tional contract are not deviations in project alliance a clear stand on each item which produces
– just part of overall project implementation. The the “preliminary guidelines”.
tender and to some extent also the target cost esti-
mate must include risk reserves in keeping with the • The guidelines are used to calculate the tar-
presumption of this comprehensive risk. get price (which risks are to be included and
which compensated separately as they are
Deviations realised).
In connection with an alliance, deviation refers to a • A revision workshop is held before fixing
situation where the partners at the alliance’s man- the target price which produces the “final
agement-group level agree that the target cost or guidelines”.
other factors affecting contract payments should be
changed. When a direct cost item (work perform- Practical considerations
ance, procurement) is adjusted, the same change is The guideline for deviations is not assumed to be
automatically made to the target price when apply- part of the alliance contract but is an informal and
ing percent-based compensation of overheads. suggestive guideline for participants. In practice,
Cases treated as deviations include e.g. ones where the project’s management group makes its change-
the owner wishes to interpretation recommendation, and the manage-
ment group its related decision based on the guide-
• include major additional works in the im- line. The guideline also serves as a means of com-
plementation which have not been consid- municating the interpretation to newcomers as
ered part of alliance works or eliminate personnel is rotated.
some planned works, or
It should also be noted that the guidelines are as-
• alter some basic design parameters or op- sumed to change as design proceeds. Know-how
erational requirements of the project. increases during the alliance development phase
In such instances, a mechanism that adjusts the which should be reflected in change interpretation
target cost and qualitative goals up or down is guidelines.
needed despite the fact that direct costs are in prin- A factually similar procedure should be utilised
ciple always compensated whether the special since the preparation of the call for tenders, and
conditions constitute a deviation or not. especially as part of selection-phase workshops, to
Identification of deviations determine the existence of a joint tentative inter-
pretation.
It is essential that the partners form a uniform view
on the alliance and project management group-

36
Modified from Ross (2006).

47
5. Payments to service providers

This chapter describes how incentive payment bases can be created for the alliance
project’s service providers. It looks at the use of both realised cost-performance level
and qualitative goals as a payment basis. Typical qualitative goals of transport infra-
structure projects are also dealt with on a general level.

5.1 Qualitative goals and their measurement

The owner sets various goals for the project. In addition to producing a well performing
and high quality transport infrastructure facility, the owner may place emphasis on, for
instance, the minimisation of construction-period disturbances and good safety as well
as quick completion of the facility. These goals are to be attained at a reasonable cost.
Promotion of the goals often makes it sensible to tie their realisation to the payment
basis solution of project alliance, which also makes them part of the objectives of prof-
itable business activity. Goals, their weighting, and especially the measurement proce-
dures are, however, largely project-specific solution which is one reason why they are
dealt with here only on a general level. The following profit areas should typically be
considered in selecting the incentive solutions for transport infrastructure projects:37

Traffic arrangements. Incentive arrangements may also be used to try and minimise
disturbance to the local traffic network’s users and to allow maximal use of the transport
infrastructure solutions during construction by closing only those sections or services
that must be closed in each case. The significance of traffic control is more marked es-
pecially at repair and urban sites where work often has to be done while the construction
site or part of it is in use.

• The suggestive criteria are disturbances to traffic flow or within traffic control sys-
tems, especially unplanned disturbances and accidents within the project’s sphere of
influence, lane closures and diversion of traffic to alternate routes, rush-hour traffic
flow and minimal increase in travel time.

Environmental impacts. Environmental factors are receiving increasing emphasis

which is why the disturbance from transport infrastructure projects to the environment,

37
In addition to the presented ones, construction projects use at least evaluation of operations by
owner/expert and corresponding client feedback (from owner or user) based payment bases (Lahdenperä
& Koppinen 2003). Good procedures are assumed to lead to a favourable end result which is why the
procedure is used especially when the owner bears the risks, but the actor’s influence on the success of
the project is great. The procedure is not naturally adaptable to alliancing e.g. because the owner’s repre-
sentatives are part of the implementing organisation whose efficiency is improved by integrating goals
and resources. The same applies to the use of a client-satisfaction indicator by the owner. Some applica-
tions may be possible in the case of user clients.

48
third parties and existing structures should be minimised. The environmental viewpoint
stresses generation of less waste and avoidance of the spreading of harmful substances
as well as pleasantness of the surroundings.

• The suggestive criteria are economic use of soil and earth materials, reusability and
reuse of structures, energy economy and minimal use of machines, logistics that
minimise transportation, disturbance to existing structures and nature, nuisance to
surroundings of work site (noise, vibration, dirt, confusion, traffic). The basis of
evaluation are the amount, scope and duration of nuisance events.

Safety. Construction is an accident prone sector where the direct and indirect costs of
accidents are significant. Although they, as well as intangible disturbance, are difficult
to measure accurately, safety issues often deservedly receive special attention as a result
of the valuations of society and individuals.

• The suggestive criteria are numbers/frequencies of different types of accidents, lost

person-hours of work, caused material damage (reactive criteria); tidiness and order-
liness of the site and observation of safety instructions (proactive criteria). Monitor-
ing of accidents is easy and objective, but study of work methods and conditions
improves safety more.

Time. Incentives are most commonly used to reach cost or schedule goals. They are
commonly used partly because the attainment of goals is easy to identify, but savings to
society in travel time, vehicle and accident costs, etc. and the freeing of owner’s re-
sources are also key factors. However, in rail projects adherence to schedule receives
emphasis when new seasonal timetables are introduced.

• The criteria are completion time, maybe complemented by intermediate goals. Al-
ternately, accurate and up-to-date schedule projection and adherence to intermediate
goals may also be a criterion (minimisation of risk of delay). A unit of time has a
certain value in the case of a quick-completion incentive. Achievement of interme-
diate goals adds value when security is sought, but it is only realised if the project is
completed on time.

Product quality. Project implementation always involves the possibility of producing

qualitatively varying results which is why product quality can also be an incentive.
Quality may be a benefit to the owner from the viewpoint of life cycle economy, by
lightening the owner’s project administration or by creating added value for the users of
the transport infrastructure solution to be built.

• The suggestive criteria are, for instance, the conformity of the result with the qual-
ity-level descriptions of standards and the performance and feature values of the
time of completion. In more subjective procedures the workability of solutions, the

49
 length of the list of defects discovered in inspections and the time it takes to correct
the defects, as well as deviations from the quality system and, especially, missing
deviation reports may come into question. Undelayed and flawless introduction of
the telematic solution is also an appropriate challenge.

Relations with interest groups. More openness is expected of public activity and pro-
jects than earlier, for instance, to improve citizens’ possibilities of influencing things
and to meet the needs of transport infrastructure service users. Transport infrastructure
projects are also large in scope, involving many stakeholders, where efficient coopera-
tion supports a functioning process.

• The suggestive criteria are the functioning of communication, media monitoring and
the volume and nature of news reporting, response time to service requests, com-
plaints and contacts, recognitions awarded to the project and its actors, feedback
from the transport infrastructure service user survey as well as feedback from the
project’s and other local interest groups. The indicators may identify administrative,
operational and user interest groups separately.

Goals are to be concretised into measurable indicators, so that they can be integrated
into the payment basis solution. At times, it may be difficult to find indicators without
deviating from the primary goal. Then, instead of objective measurement, one should
consider relying on expert assessment, for instance, according to Table 13. However,
concrete and objective indicators are always preferable.

5.2 Quality measurements as part of payment basis

In project alliance, the outcome of project-specifically selected qualitative profit areas
generally affects also the size of the compensations paid to companies as already stated
several times. The following can be said about the inclusion of qualitative factors and
outcome monitoring in general:

• The grounds for rewarding an excellent performance level is that its attainment
brings the owner real (economic) benefit and/or it is part of the owner’s societal
responsibility. When considering what level of performance is worthy of being
rewarded, the level should be set high enough even if the participants do not
necessarily know how it can be attained. According to definition, the goals can-
not even be excellent if the actors know beforehand how the can be attained.

• The owner may have planned some indicators and the rewarding system already
when procurement starts. Alternately, the owner may just state the basic target
levels for various profit areas in the competition programme (see Table 14).
Then, it is natural to ask suggestions for indicators for these profit areas from
candidates, who have passed the elimination stage, to be discussed and developed

50
 Table 13. Expert assessment of quality as part of payment basis.

Measurement of quality is often difficult. In many • The project’s actors participated and assisted
cases development of systems measuring a given in evaluations by collecting and editing out-
property is laborious. On the other hand, it is not come data while technical experts monitored
certain either that developed systems always serve the hard indicators. Part of the meters were
the realisation of the owner’s project-specific goals traditional measurement-based solutions.
– measurable features and the owner’s perception
of realisation of goals do not necessarily coincide. • Quality factors were assessed in the middle
Thus, it may at times be necessary to measure the of implementation, on completion, and a year
outcome by an expert assessment. after the hand-over of the building. In the last
phase the ease of operation and maintenance
A demanding Australian building construction pro- were evaluated and feedback was requested
ject used a so-called evaluation panel. The project from visitors to the building.
was implemented as a project alliance, and at its
launching the actors were convinced that project The experiences from the use of the evaluation
quality would be measured with the objective me- panel were mainly good although improvements
ters to be developed. The project and the procedure were also suggested (Keniger & Walker 2003):
planned for its implementation were as follows • The evaluation stressed indicators that meas-
(Keniger & Walker 2003): ure technical quality of work and perceived
• It was an architecturally unique project, de- quality; less weight was given to evaluation
manding from the construction engineering of the process and procedures. Based on their
viewpoint, that was also intended to become experience, the panel would have laid even
a national monument after its completion. more emphasis on said quality factors.
Thus, project alliance was the natural pro- • The evaluation panel’s mode of operation
curement method, and the aim was to secure was proactive. It ideated the possibilities of
the quality of the outcome by incentives. producing quality in a positive manner and
• The owner defined ten key profit areas in the did not just criticise reactively the work
call for tenders with the intention that they be done. The work of the panel promoted qual-
developed into the alliance’s quality indica- ity-driven project implementation.
tors. As the project proceeded, six of them • Indicators were adjusted still during the pro-
evolved into measured or assessed quality ject which was seen as proof of a coopera-
criteria that affected the reward. tion-, development- and quality-driven cul-
• Benchmarking was to be used to assess qual- ture that utilised external expertise. In fact,
ity while comparison levels were to be defined the system was regarded more as total quality
by the alliance itself. This was believed to management than a mere incentive.
guide the actors to quality-driven thinking and Although the experiences from the evaluation
to create a sense of ownership of the processes panel were favourable, one should keep in mind
and indicators perceived to be important. that it was a building construction project, and
Yet, as the project was launched, building of so- quite unique as such. It is not certain that similar
called hard, objective indicators was found partly procedures are applicable to a transport infrastruc-
infeasible ture project.

• An evaluation panel of three members that Transport infrastructure projects are more techni-
could utilise external expertise was selected cal by nature, i.e. they include fewer value-laden
to assess quality. The members were an ar- elements than building construction projects. Func-
chitect/professor, an expert on activities of tionality is quite unambiguous, and impression is
the facility and a management consultant not as weighty a quality factor. Thus, an evaluation
with the necessary experience. panel is hardly the primary solution for transport
infrastructure projects where hard indicators
• Scoring made on site after thorough immer- should be used if possible. Yet, the presented pro-
sion in the issues, based in a certain way on cedure may generate added value in some projects,
expertise and insight, became practice. The especially the use of external experts.
indicators were further modified and adjusted
as the project proceeded.

51
 Table 14. Example of the presentation of project alliance’s goals in call for tenders.38

Key profit area Minimum conditions of satisfaction Game-breaking performance

Safety • none of the actors gets hurt [not part of reward system]
during construction
• no members of the public get
hurt because of construction
Quality • quality of work satisfies • outstanding level of workman-
[owner’s] standard specification ship achieved
or equivalent
• target cost and whole of life • realised cost and whole of life
costs are demonstrated to rep- costs demonstrated to represent
resent good value for money outstanding value for money
Schedule • project completed by [date] • project completed by [date]
Traffic operations During construction
• no unplanned impact on traffic • improved traffic flow
flow due to works
• average travel times are main- • improved average travel times
tained during off-peak period during off-peak period
• current average travel times are • improved average travel times
not exceeded during [event] during [event]
After construction
• average travel times through • average travel times through
interchange improved 25 % interchange improved by 50 %
Public transportation
• improved travel time reliability • significantly improved travel time
for [buses] and taxis after con- reliability for [buses] and taxis
struction
Interest group • good relations with key stake- • outstanding relations with key
relations holders, including [list] stakeholders, including [list]
• proactive engagement with util-
ity service owners/operators
Environment and • site is aesthetically pleasing
aesthetics during [event]
• no reportable environmental in-
cidents
• hard and soft landscaping meet • industry awards for landscaping
benchmark [reference road] and architectural features
Legacy of project • [owner] gains an increased ca- • [owner] gains a significantly in-
pability to deliver major capital creased capability to deliver
projects major capital projects

38
VicRoads (2005) – slightly modified.

52
 • in selection workshops. The indicators are finalised in cooperation during the
development phase of the alliance.

• Performance indicators are monitored where possible, for instance, on a monthly

basis during the project (unless the indicator only shows the outcome after the
project is completed). The final outcome can be the mean of measurements or its
cumulative value (e.g. recognition rewards). The factors measured during the
project are communicated to the participants in real time. It should be noted that
the indicators have named “owners” shown in the organisation charts.

5.3 Overall view of payment bases

The payment basis solution of project alliance gets quite multidimensional. There are
many reasons for that. First, the intention is to underline also the status of other factors
than cost objectives by integrating them into the payment basis solution. On the other
hand, the dominant guiding effect of costs is limited by sharing the cost risk. The third
influencing factor is the guiding effect of the tender price while the incentive solutions
are used to make service providers invest especially in joint development-phase design.

Thus, the payment basis system builds on the previously defined (revised) tender price
and target cost. They are sort of fixed points (cf. Ch. 4.4) used as bases for determining
various allotment percentages and payment bases in alliance projects. Generally the
payment basis model evolves gradually, for instance, into a model of the type analysed
in Figure 6 (model definition, calculation of compensations):

• The target cost of the project is determined by adding up the direct costs of vari-
ous key partners and the companies’ overheads. Overheads include the normal
reward and are calculated as a percentage of direct costs by company (separate
procurements as an independent item; see Ch. 4.2) as stated by the selected ser-
vice providers in their tenders. The target cost also includes the costs of the
owner’s resources allocated for the alliance.

• Target cost overruns (losses) or underruns (savings) are allocated basically so

that the owner’s share is 50 % and the combined share of companies is 50 % in
both cases. This principle may be followed unless the target cost is successfully
lowered clearly below the revised tender price during the development phase. In
the shown example target cost is below tender price and the parties adopt the al-
lotment model tied to these two cost levels.

53
 • In this so-called goal-oriented payment basis model of two cost levels (two-price
model), the allotment percentages vary at different cost-performance levels (for
more details see Ch. 4.4) with the target cost as the limit value (in addition to a
possible maximum price; not in the example). The calculation of the final total
compensation is affected by the alliance’s success in the qualitative profit areas
in addition to cost performance provided that inclusion of these factors as pay-
ment bases has been separately agreed.

• Qualitative profit areas are provided with indicators whose performance level val-
ues are linked to certain point values (e.g. linearly from −100 to +100) or directly
to monetary items.39 With the scoring method, the total qualitative outcome is of-
ten calculated as a weighted average of the performance of different profit areas40,
and monetary equivalents are defined for total scores. In the example, the profit
areas of safety and quality inspections are taken into consideration this way.

• Completion time is an example of a quality factor for which it is sensible to de-

fine a direct monetary value based on how early or late completion is compared
to the planned basic goal. This was the case also in the illustrated payment basis
example. The bases in road projects are, for instance, travel time, accident and
vehicle costs due to a delay. The scoring method may adapt more naturally to
several other quality goals.

• The allotments between companies form in proportion to their realised business

shares (i.e. the estimated shares used as a basis of the target cost are not used).
Total costs are calculated on the basis of realised direct costs and overhead rates
(original ones given in the tender). The allotments can be revised by different
factors, and it is often natural to do so (see Table 11), although it was not done
in the example.

A general assessment and views on the use of multiform incentive payment bases are
presented in Table 15.

39
Ross (2006) presents as an alternate solution a procedure where the performance level of qualitative profit
areas affects the allotment percentages of cost overruns and underruns. Such a procedure was not considered
a first priority here, for instance, for the reason that the value added of quality is independent of the cost-
performance level, whereas in a procedure that affects the percentages, the incentive effect is negated as to
qualitative goals when costs are close to the target cost. Another reason was the strive for a simple solution,
especially with this payment basis model tied to two cost limit values, where percentages vary anyway.
40
Other methods can also be used such as paying a bonus on the basis of the outcome of the relatively
weakest quality factor, or by following a certain order so that a payment based on lower criteria is never
higher than one based on a more important performance criterion (Lahdenperä & Koppinen 2004). How-
ever, the weighted point procedure is recommended in most cases because it is widely known and rewards
all performance measures defined as value added.

54
 1. A joint target cost estimate of the partners based on current 2. At the end of
designs is prepared during the development phase the joint develop-
ment phase, the
Direct costs Overheads Total tender price is
Partner also revised to
T€ Rate T€ T€/co. %/co.
correspond to
Owner 1,000 -- -- -- -- the more accu-
Contractor 95,000 20 % 19,000 114,000 95 % rate scope data:
Designer 3,000 100 % 3,000 6,000 5% in the example
the price is
Yhteensä 99,000 22,000 120,000 100 % TEUR 131,000

3. The sum of direct costs and indirect 4. Target cost is TEUR 10,000 less
overheads is the target cost: in the than tender price which brings the
example TEUR 99,000 + TEUR 22,000 = estimated bonus of the companies
TEUR 121,000 (60 %) to TEUR 6,000 (see Item 18)
Payment to companies

Tender price
w/o quality adjustment

5. Introduction of the goal-oriented

Target allotment model brings the compa-
cost nies’ share of a target cost overrun
to 70 % and of an underrun to 50 %
Overheads

Direct costs 6. Allotment is applied at all cost-

overrun levels, and payment of
Costs + reward direct costs is not guaranteed

7. A measurement method and point equivalents are defined for the profit areas; here
the relationship is linear and the level consistent with the goal corresponds to 0 points

Item Qualitative profit area Indicator Point equivalents Weight

-100 … 0 ... +100
Item 1 Safety inspections Index 60 80 100 50 %
Quality inspections Index 60 80 100 50 %
Item 2 Completion time Time +2 mos. 0 -2 mos. 100 %

8. Indicators of the joint system 9. The payment basis effect of a qualitative

are fixed to the same point range outcome is based e.g. on a scoring system
(thus total points can range from where the overall effect of an item is calculated
-100 to +100); the system may as the weighted average of the point equivalents
also have several levels and be of several indicators (Item 1), or the outcome as
hierarchical in structure such affects the allotment (Item 2)

Payment basis effect of Item 1 ±100 points ±1 MEUR 10. The effect is
qualitative profit areas: Item 2 ±2 mos. ±2 MEUR linear

Figure 6: Part 1 of 2. Payment basis example: definition of payment basis.

55
11. Costs are monitored 12. Shares of overhead are fixed in the cost
according to the cost estimate estimate and used in monitoring; direct cost vary

Direct costs Overheads Total

Partner 13. Allotments
T€ Rate T€ T€/co. %/co. between
companies
Owner 1,000 -- -- -- -- are based
Contractor 100,000 20 % 20,000 120,000 96 % on shares of
Designer 2,500 100 % 2,500 5,000 4% realised total
costs (cf. Item 1)
Total 103,500 22,500 125,000 100 %

14. The sum of realised direct costs 15. The realised total cost (Item 14) is
and calculated indirect costs is the compared to the target cost (Item 3; not to
realised total cost of the project tender price): in the example the target
(e.g. TEUR 126,000) cost is exceeded by TEUR 5,000

Difference between realised cost and target: T€ 126,000 – T€ 121,000 = + T€ 5,000

16. The payment basis effect of qualitative profit areas is calculated on the basis of their
outcome (the schedule is independent; others are integrated using equal weights)

Item Qualitative profit area Outcome Av. Effect on reward

Item 1 Safety inspections 85 90 (90-80)/(100-80) * 1 M€ = 500 T€

Quality inspections 95

Item 2 Completion time -1 mo. (-1 mo.)/(-2 mos.) * 2 M€ = 1,000 T€

Total 1,500 T€
17. Combined effect of qualitative profit areas

Adjustment of payment in 18. Input data for calculation from Items 4, 15 and 17
relation to total costs:
6,000 T€ (definition of t.c.) – 70 %*5,000 T€ (t.c. overrun) + 1,500 T€ (quality) = 4,000 T€

19. Company-specific payment adjust- 20. The owner has also other project-
ment is determined on the basis of com- related costs that are not targeted at
pany share calculated in Item 13 and the the alliance and are consequently
total payment adjustments of Item 18 excluded from this example calculation

Payment adjustment Payment

Total Partner Total cost Share Total Partner [TEUR]
payments
to alliance Contractor 120,000 96 % * 4,000 = 3,840 123,840
partners Designer 5,000 4% * 4,000 = 160 5,160

Alliance-related costs of owner’s own activity [TEUR] 1,000

Total cost to owner considering bonuses [TEUR] 130,000

Figure 6: Part 2 of 2. Payment basis example: calculation of actual payment.

56
 Table 15. Evaluation of possibilities and risks related to incentive payment bases.41

The aim of making the qualitative outcomes of a • Incentive systems stress the importance of
project payment bases for service providers is to the quality of products and services. The
harmonise the goals of service providers with valuation of quality work increases, and in-
those of the owner. The uniqueness of projects and novations make operation more effective.
use situations is, however, a challenge. That is why Due to multiplier effects, innovations further
the features and functioning of incentive systems the development of the entire sector over the
vary. The same naturally applies to any possible long term.
advantages and drawbacks of the systems which
on a general level are the following: Challenges and risks

Benefits and opportunities • Contract preparation requires greater applica-

tion than traditional contracts. Also, the work
• Incentives allow better alignment of the con- that goes into tender preparation may in-
tracting parties’ goals to serve the interests of crease while tender comparison may require
the overall project (internalisation, motiva- more work from the owner than usually.
tion). They ensure also that the project goals
dealt with in the beginning are not forgotten • Project monitoring and performance meas-
as the process moves ahead. urement may increase the work load (while
perhaps reducing the need of other monitor-
• Service providers may favour owners who ing). The problem accentuates when the sys-
apply incentive systems. Thereby they give tem gets more complicated in pursuit of objec-
preference to their projects e.g. when decid- tivity; it may be difficult to find indicators.
ing about the allocation of their best staff
among different projects. • Especially incentive criteria based on subjec-
tive evaluations may create a credibility
• Incentives can be used to channel project problem and conflict situations. Their antici-
risks to the party in key position to influence pation may sometimes drive up quoted prices
their realisation the most. The allotments and due to the risk to the expected reward feared
reward expectations of partners can be made by the actors.
to adhere to the division of liability in the
contract. • For incentives to be effective and meet the
many goals of a customary project, a larger
• Sharing of risks and rewards makes coopera- number of incentive elements are needed.
tion more effective and increases communi- Proper prioritisation of criteria and manage-
cation and mutual trust. Successful creation ment of their mutual interaction may, how-
of team spirit and an emphasis on the ever, prove difficult.
owner’s goals motivate also the owner to
promote the success of other parties. • “Deception” based on artificial systems that
over-emphasise own interest may sometimes
• Incentives lead to a good work performance be a threat. Wrongly weighted bonus terms
in a project. In problem situations they direct can also lure one to compromise a certain
energies from looking for culprits to solving performance element to improve the outcome
problems. Accusations are useless when all of another and to increase the bonus.
either benefit or suffer from the common
outcome. Although linkage of qualitative factors to the pro-
ject payment basis system is basically justified, the
• More effective operation allows the parties to suitability of the solution must be considered sepa-
improve their competitiveness, profitability rately for each project. The presentation is in-
and returns. A satisfied owner is an excellent tended as a general check list for the design of
reference for a service provider when tender- incentive systems. It does not provide detailed
ing for future projects and competing for answers but emphasises the main principles re-
them on the basis of competence. vealed by an extensive survey.

41
Modified from Lahdenperä & Koppinen 2004.

57
6. Administration and decision making

This chapter presents an organisation formed by its members that is suitable for project
alliance. It examines the make-up and job description of different organs of the organi-
sation. It also ponders the division of tasks, subcontracts, special tasks of the owner and
outlines the principles of the alliance contract.

6.1 Organisational structure

All the key project partners are to be represented in the alliance organisation: at least the
owner, general contractor and designer. More than one actor may perform said roles. Large
projects call for many types of know-how and many resources which means that the alli-
ance agreement naturally includes more that one designer and/or contractor. Alternatively,
the companies performing the same role may start a joint venture that is one alliance part-
ner. Moreover, since project alliance is primarily suited for projects involving much uncer-
tainty, the project in question is often likely a joint project of several owner organisations.
In their case, the owner organisations should also be represented in the alliance.

Based on the above, it is clear that the organisation is always project-specific and the alli-
ance’s administrative structure can only be outlined on a general level as in Figure 7.42
The alliance organisation consists of the alliance management group, the project man-
agement group and rest of the project organisation. The alliance gets its key resources
form the contracting partners: the companies and the owner. The figure also depicts the
participation of the top management of the partners in decision making in the hopefully
very few instances where the alliance organisation is unable to come to an agreement
about how to solve matters. The actual organs of the organisation are made up as follows:

• The Alliance Management Group (AMG) generally includes 1–2 representatives of

each partner. The group meets regularly, for instance, once a month. The alliance pro-
ject manager acts as presenter at meetings but does not participate in decision making.
The group strives for a consensus, but the members are also committed to abide by a
majority decision, if necessary. Each contracting party has one vote independent of
the number of representatives. A quorum requires the presence of one representative
of each party. At least minutes on decisions made at each meeting are taken. Group
members are expected to have leadership skills, experience and authority as well as
vision. They must also be committed to the alliance. The ability to see things from the

42
The model corresponds in principle to both the administrative structure used by the sector actors in-
volved in the development project in joint ventures and the one used in Australian project alliance (Ross
2006; groups named differently).

58
 viewpoint of others is also a desirable characteristic while members have the permis-
sion and obligation to project the views of their own organisation.

• The Project Management Group (PMG) is made up of the managers of various

sectors of the alliance; at least one representing each contracting partner. The group
meets regularly once a week or fortnight and is chaired by the alliance project man-
ager. Group members manage the design, construction, etc. work of their area of re-
sponsibility and work full-time for the project. The make-up of the group may
change as implementation proceeds and the focuses of work change. In its decisions,
the group should strive for unanimity, but the project manager is authorised to make
decisions and take the project forward, even if consensus is not reached. However,
the project manager must report major differences to the Alliance Management
Group. The interest of the project guides activities, and achievement of consensus is
promoted by the fact that the partners are authorised to pursue the interest of the
project and forget the viewpoint of the background organisation.

• The Project Organisation members are appointed to serve the best interests of the
project. No double roles or systems are allowed. The task of the Project Organisa-
tion is to execute the project, and each member has a clear responsibility for certain
project sections and tasks. The Project Organisation operates under the Project Man-
agement Group (members), and its structure is largely dependent on the features of
the project. It is an advantage if the members know each other beforehand. How-
ever, the precondition for smooth cooperation is that cliques or factions do not form
within the organisation. Thus, it is essential that the project group is considered a
single team that seeks the best of the project.

The alliance organisation communicates officially with owners and companies via the
management group. In matters of less official nature, it also communicates directly with
the project group.

6.2 Practical division of tasks

The alliance organisation evolves, and its tasks become more specific during project
preparation, tender preparation, workshops and, finally, contract negotiations. The re-
lated role of the owner and use of sub-consultants are worth looking into on the level of
main principles:

• Use of sub-consultants may be appropriate in carrying out some alliance tasks. For
instance, it is natural to employ an external consultant for quality management and as-
surance and communications. It should also be possible to include a legal consultant

59
 and a construction-period financial auditor43 in the alliance make-up, if necessary. It is
suggested that all parties employ the services of their own lawyers before the signing
of the contract. After the founding of the alliance, an independent lawyer or one ac-
cepted by all parties is used. The same should apply to the financial auditor.

• The owner’s special tasks are to be distinguished clearly from the obligations of
the alliance. The owner may give itself one-sided authority to decide issues related
to, for instance, official tasks and obligations and functional requirements relating to
the transport infrastructure solution, design parameters or their range of application.
The owner may also retain decision making power in relation to urgent measures
needed to protect the environment or to discontinue alliance works. The owner side
defines already in the call for tenders the tasks it intends to perform itself, or for
which it alone is responsible. Besides them, the owner also performs alliance tasks.

• The owner’s participation in the alliance organisation should basically involve use
of own staff so that the participants have the necessary financing and decision-making
authority. Should, for instance, owner’s consultants participate in the work, they must
work in close cooperation with the owner and have sufficient authority. Moreover,
consultants must be bound to the project for its duration based on contract incentives
similar to those of other service providers. Such an arrangement may come into ques-
tion with the Project Management Group.44 On the other hand, the Alliance Manage-
ment Group must always include a member of the owner’s organisation.

The owner must set clear goals for the alliance and communicate the organisational
boundary conditions and plans according to which it intends to implement the project.
Table 16 provides an imaginary example of the key competencies needed in an alliance
organisation and the probable parties that assume liability for them in a transport infra-
structure project (view of practical actors). The division of tasks between the owner and
the alliance is provided already in the call for tenders.

43
In the suggested approach there is no need for the owner to hire an external consultant to conduct
benchmarking for cost estimation at the selection and development phase as in the Australian approach
(cf. Ross 2006). This is because the candidates compete also on the basis of tender price components, and
incentives have been developed for the payment basis model to lower the target cost during the develop-
ment phase.
44
Although the goals of intensifying cooperation and integrating know-how do emphasise the active
involvement of the owner’s personnel, the ongoing renewal of owner organisations and the general ten-
dency toward outsourcing pose a challenge to the building of alliance organisations of this type.

60
Owner organisation Management of owner Company
Clear goals and and companies organisations
expectations Top decision-making Clear goals and
Best resources organ in relation to expectations
(staff, etc.) differences of view Best resources
Order defined in contract (staff, etc.)
authorisations Supports alliance

Communication Communication
Liability Liability

Alliance Management Group (AMG)

Creates team spirit and operational vision and maintains them
Creates principles of organisation and sets goals for project organisation
Approves alliance and operational and cost goals
Evaluates and accepts alliance’s action plan and procedures
Appoints and authorises alliance’s project manager
Appoints and accepts members of PMG
Assists in the maintenance of interest group relationships
Seeks out best resources of participating organisations
Monitors outcome and corrects direction as necessary
Defines and solves differences in views between participants

Tasking Communication Liability

Project Management Group (PMG)

Responsible for delivery of agreed structure/system
Approves and authorises rest of project organisation
Manages project implementation on operative level
Provides effective (work) supervision for rest of project organisation
Monitors, forecasts and reports on implementation to AMG
Undertakes necessary corrective measures

Project Organisation
Responsible for practical implementation and achieving of result
Has a clear scope of liability by actors with respect to outcome
Made up of actors appointed with interest of project in mind
Operates as a united team forgetting the views of the background organisations

Figure 7. Alliance organisation and tasks of its different components.

61
Table 16. Key competencies required in an alliance and the natural responsible parties.

Competency / function Owner (* Alliance Possible

partners sub-
consultants
(
**

Land acquisition and access to site x

Permit issues x
Design parameters, functional requirements x
Contacts with other parties (municipalities, etc.) x x x
Communication and PR x x x
Various design tasks (incl. acquisition of input data) x
Various tasks of construction x
Construction-period traffic arrangements x
Project management, monitoring and reporting x
Evaluation (e.g. financial) x x
Design management and coordination x
Environmental issues (accidents, environmental impacts) x x
Noise protection x
Work safety x
Subcontracts x
Warranty period measures x
Quality management x x

*) In the call for tenders the owner defines those tasks that it intends to implement outside the
alliance and/or in which it retains full power of decision
**) Tasks typically suitable for alliance’s sub-consultant (limited external assignment) that, how-
ever, become specified only as a result of the tender and implementation process

6.3 Contractual issues

The administrative model of project alliance must also be defined as part of a legally
binding contract which lists, for example, the expectations, rights and obligations of the
contracting parties. The alliance contract differs significantly from the so far used Fin-
nish contract solutions in that there the owner and the key service providers are now co-

62
producers of a structure and bear jointly the bulk of the project risks.45 Thus, the alli-
ance contract must in deviation from traditional approaches describe, for instance:46

• the management mode and method of administration, corresponding systems and

rules and the method of making key decisions as well as the documentation practice

• the strive for good cooperation and resolution of conflicts through the internal or-
gans of the alliance organisation

• the principles according to which construction-period deviations that affect set tar-
get-cost level are evaluated

• liabilities that are joint and ones that only a single party is responsible for, as well as
the consequences of negligence47

• the principle and solutions of open cost accounting common to all parties as well as
the principles of other common information and management systems, and

• details of the owner’s payment liability at different cost levels and with different
outcomes of qualitative profit areas.

Here we are dealing with an uncustomary joint contract between several parties.48 There
is also good reason to ask in this connection whether the contract should be written in
the first person plural to emphasise the fact that the liabilities are for the most part
common. Naturally, the alliance contract should be worded so that the strive for consen-
sus decisions is not in contradiction with the legal obligations of some member. Espe-
cially the legal authority and freedom of action of a public owner must not be endan-
gered in the alliance contract.

The alliance is unlikely to change the traditional practice of furnishing security, that is,
the companies of the alliance consortium will each lodge their own security as usual.

45
Current contracts are largely based on the same known general terms of contract independent of the
used procurement method. It is likely that the sharing of risks in project alliance will change many tradi-
tional terms so that e.g. the General conditions for consulting (RT 13-10574 1995) and building contracts
(RT 16-10660 1998) apply to project alliance only partially.
46
The list is not a comprehensive description of the differences between project alliance and traditional
contractual usage. When drawing up the contract, the parties must, in principle, go through all the con-
tractual issues in light of the new situation, which this listing certainly does not do (securities, insurances,
confidentiality, liabilities for negligence, intellectual property rights (IPR), damage to third parties, dis-
continuation of work, bankruptcy issues, payment arrangements, etc.).
47
Although many of the project solutions are decided jointly, the contractor engages the subcontractors
which means that the subcontracted work is not public procurement as referred to in law.
48
The statement refers primarily to the content of the contract and does not fully exclude the possibility
that the contractual entity might be based partly e.g. on contentually interlinked bilateral agreements.

63
7. Applications and prerequisites for use

This chapter takes us towards the putting into use of project alliance. The challenge is
approached primarily from the viewpoint of an owner that is considering alliancing.
Means of evaluating the suitability of projects for execution as project alliance are pre-
sented, and the capabilities required of the owner for a successful alliance are listed.

7.1 Applications and use situations

According to the definition given at the beginning of this publication, the basic idea of
project alliance is that its key actors share the project risks. This is made concrete by in-
centive payment bases that spur good performance. When rewards are tied to the success
of the overall project, not just the outcome of each actor’s own task field, the operational
model brings the actors into close cooperation. Integration of different types of know-how
for the promotion of common goals creates the actual force that is believed to make the
alliance capable of generating added value in comparison to many other procurement
methods. All-out success of cooperation does, however, require that the actors can base
their cooperation on good mutual trust, commitment and active exchange of information.

Based on the above, the outcomes of most projects could naturally be expected to im-
prove by the introduction of project alliance where risks are shared. Yet, that is not nec-
essarily the case since there are projects that involve relatively little risk and where clear
goals can be defined for each party separately. Then, risks are borne by the party that
can influence their realisation, risk reserves are small, and competitive tendering makes
the project economical. There the benefits of an alliance may not offset the costs of cre-
ating a heavy joint organisation.

Thus, it is evident that project alliance is first and foremost a procurement method for
projects that involve a lot of challenges and uncertainty. The challenges make integration
of competencies profitable. Uncertainty, and the incompleteness of design during the se-
lection of partners, mean that the project has development potential. And that potential
can now be exploited through cooperation. Thus, the appropriateness of project alliance
must be assessed, for instance, on the basis of the uniqueness of a project and its inherent
uncertainty. Taking that into account, Table 1749 presents various factors that may favour
or be against use of project alliance. The more conditions of the table apply to the project,
and the more fully these factors are realised in the decision-making situation in question
considering differences of degree, the more likely project alliance is to work.

49
Developed on the basis of sources ACA (1999); Scott (2001); Ross (2006); Turner and Simister (2001).

64
 Table 17: Part 1 of 2. Evaluation of suitability of project alliance.

# Decision factor Alliance is unsuitable Alliance is suitable

Owner’s attitude and readinesses

1. Owner organisation’s
attitude toward risk
According to owner’s risk
strategy, it is a risk avoider ↔ Owner is capable of assess-
ing project risks and allocat-
that seeks to transfer all ing them appropriately in
risks of implementation to each case
the other parties
2. Owner’s knowledge of
the building process
Owner is a “one-off” client,
has bought projects based ↔ Owner knows building prac-
tices and can bring added
on integrated services or value to collaborative im-
through a consultant; little plementation through own
knowledge of the process active input
3. Continuity and devel- Owner is satisfied with pre-
opment-orientedness of vailing practices and sector ↔ Owner feels the need to
develop sector and technol-
owner’s operations actors’ independent devel- ogy; active development of
opment and sees no need to sector is also in owner’s
promote development long-term interest
4. Situation with personnel Resources of owner’s or-
resources ganisation are limited and ↔ Owner has competent
personnel able to provide
the aim is to minimise par- a larger than normal input
ticipation in actual imple- to project implementation
mentation of projects
Project’s goals and governing factors
5. Importance of quick
project completion
Project’s completion time
is of relatively small impor- ↔ As quick completion and
handover of facility as pos-
tance, assuming that the sible are especially impor-
project is implemented tant in the project in ques-
roughly on normal schedule tion
6. Importance of setting
fixed price for project
An implementation price
competed as low as possi- ↔ Owner can be flexible with
price and bear cost risk to
ble and fixed early is a key some extent if finds it to be
governing factor in project’s in its interest
decision making
7. Goals of project and the The qualitative goals of the
challenge they present project are traditional and ↔ The project involves many
important and challenging
can be met by convention- goals, and it is not certain
ally used solutions how they can be reached
8. Goals of project and The goals and possibilities
their unambiguousness of the project are highly ↔ Definition of solutions to the
goals of the project is prob-
ambiguous, and the owner lematic, but the vision and
is not yet able to communi- target level of the project
cate them unambiguously to are communicable to others
others
9. Number of revisions
expected to designs
Project requirements and
solutions have been defined ↔ Project requirements and
solutions cannot be consid-
for overall project, and its ered final and changes are
details and no changes in expected during implemen-
them are expected tation

65
 Table 17: Part 2 of 2. Evaluation of suitability of project alliance.

# Decision factor Alliance is unsuitable Alliance is suitable

Project properties and risks

10. Size and scope of
building project
Project is quite small as an
investment, and the major ↔ Project is a relatively big
investment, and the major
effort required by the heavy effort required by the coop-
cooperation process ap- eration process appears
pears unprofitable profitable
11. Project’s linkages to
existing infrastructure
Project is an independent
new investment without ↔ Project will be implemented
in built environment and has
major linkages and bound- many critical interfaces with
ary conditions in relation to operational systems
existing/functioning network
12. Project’s interest
groups
Project has no interest
groups causing uncertainty ↔ Project’s interest group
relations involve great un-
that should be specifically certainty, and interaction
considered in implementa- during project is likely to
tion be active
13. Project’s sensitivity to
cultural and environ-
No factors of uncertainty
related to project are in ↔ Uncertainties exist in project
environment that, if realised,
mental factors sight, and/or their impact on will impact on project solu-
project would be negligible tions and progress of im-
plementation
14. Technology utilised in
project
Project will utilise known and
established technology that ↔ New technology will be
tested for the first time in
involves hardly any devel- project, or is intended to be
opment possibilities or fac- developed during project
tors of uncertainty implementation
15. Nature of project-
related risks
Risks related to project can
be defined accurately and ↔ Risks related to project are
multidimensional and hard
can be completely managed to define and can appar-
by some project partner ently only be managed col-
lectively
Readinesses and resources of service providers
16. Availability of sector
actors with suitable
Sector actors do not have
good experiences and proof ↔ Sector actors have good
experiences and proof of
experience of cooperative implementa- cooperative implementation
tion and/or are not eager for and are eager for project
project alliance alliance
17. Resources needed to
implement the project
Project requires special
know-how and puts actors ↔ A few contractors and de-
signers can naturally as-
of narrow expertise in a sume overall responsibility
critical position without the for implementing the works
will to bear overall risk of the project
18. Availability of potential
service providers
[Several sector actors mas-
ter used technology equally, ↔ The project will rely on the
technology of a certain or
and the suitability of the certain few companies
alliance depends on other adapting it to the project’s
factors] special requirements

66
7.2 Readinesses and prerequisites

Defining the situations where project alliance should be used is not unambiguous. Al-
though its use might appear justified based on the previous chapter, it may be necessary
to ensure the existence of certain readinesses before making a final decision. There
might also be reason to ponder these issues when the owner plans and prepares a project
that has already been decided to be implemented as an alliance project. At least the fol-
lowing factors are worth pondering:50

Conditions related to goals and competence

• The owner is capable of evaluating the various aspects of project risks and bear or
allocate risks case-specifically, always in the most appropriate way.
• The owner wants out-of-the-ordinary, better than usual solutions for which the
owner does not have distinct suggestions.
• The owner is constantly engaged in construction and guided also by long-term goals
– general development of the sector is also in its interest.
• The owner knows the practices of construction and has process know-how that inte-
grated with the services providers’ know-how most likely generates added value.
• The owner considers the different qualitative dimensions of projects as important
enough added values to be ready to pay for their realisation.

Conditions related to ground rules of the activity

• The owner understands well what project alliance is, its ground rules and process,
and what it requires of the owner.
• The owner is willing to accept that due to the limited risk of service providers, the
owner must bear some of the risk of an unsuccessful project and cooperation.
• The owner is willing to accept an operational model intended to keep others from
criticising those that cause problems and from seeking compensation from them.
• The owner organisation accepts that the price is not fixed as cooperation or con-
struction begins, but only after construction (the warranty period) is over.
• The owner feels that selection emphasising quality and subsequent definition of tar-
get cost are not a threat to its legal and economic integrity (as a public actor).

50
The list has been compiled and modified mainly from Ross (2006; 2003a) with a few supplements.

67
Conditions related to project preparation

• The owner has both the desire and the readiness to invest in demanding implemen-
ter-selection and team building and creation of the team’s culture of cooperation.
• Assessed project risks are so significant that they would be reflected as high risk
premiums (reserves) if transferred to service providers.
• The owner has conducted a detailed risk assessment on the project including prepa-
ration of a probability-based estimate of the project’s costs.
• Thorough assessment of project risks indicates that project-related uncertainty is
real, not related e.g. to defective design.
• The owner’s view is that surprises and design changes with target-level and cost
effects are to be expected as the project moves forward.

Conditions related to resources

• The upper management of the owner is committed to supporting alliance-type im-

plementation, and the culture of cooperation can be built on their leadership.
• The owner is able to appoint experienced, competent and alliance-spirited represen-
tatives to the various management groups of the alliance organisation.
• The owner has competent personnel that can also participate in the practical imple-
mentation of the project with a larger than traditional input as required.
• Commitment of the owner’s representatives in the alliance organisation to imple-
menting the alliance project does not disturb owner’s other operations.
• The owner can find competent and experienced members for the evaluation panel
that enjoy the confidence of sector actors and have sufficient time for the selection.

7.3 Summary

The competitive project alliance presented in this publication has been developed in
close cooperation with a wide expert network of practical actors. The view brought forth
by the actors is that the competitive project alliance model created as a result of this
work is suitable for the implementation of demanding transport infrastructure projects
and appropriate for the Finnish operating environment including the legal praxis con-
cerning public procurement. The potential benefits are believed to be large enough to
make the significant investment required by its introduction worthwhile. Thus, the de-
velopment continues, and the publication provides the foundation for preparing and
launching the first projects to be implemented as project alliances.

68
The basic principles of an alliance should also be kept in mind as projects proceed in
addition to the initial investment. Table 18 can be of assistance there. It is intended as a
memo of the critical success factors of project alliance when considering the practicality
of procedures and possible needs of revision as a project progresses. The factors listed
in the table, some perhaps slightly clichéd, have been reworked from the factors identi-
fied as a project’s success factors and lessons learned – they have not been condensed
from views presented earlier in the publication.

Table 18: Part 1 of 2. Alliance’s success factors.51

Attitude and commitment

• Project’s advantage. Alliance team members must (have the possibility to) follow the
”best of the project” principle in all project-related decision making.
• Unprejudiced decision making. The actors must be ready to test and adopt new tech-
nology and new solutions to promote excellent results.
• Commitment of parties. The owner and service providers must commit themselves to
the project including upper management and alliance management group members.
• Confidence building. The actors are to purposefully promote the building of active col-
laborative relationships and creation of mutual trust.
• Atmosphere of openness. The relationships between alliance partners are to be based
on openness and confidentiality in all operations and exchange of information.
Selection and organising
• Selection of execution team. Effort must be put into the selection of the alliance team in
order to maximise the competence and performance of the team for attaining set goals.
• Quality as basis of selection. In implementer selection competence criteria, generally
quality factors, must be emphasised over price.
• Earlier experience from collaboration. Actors with clear proof of successful cooperation
in earlier projects should primarily be selected as alliance partners.
• Qualities of personnel. Persons selected for the organisation should be team players as
well as unprejudiced and creative thinkers.
Integration and cooperation
• Participation of facilitator. An impartial expert focusing on the development of coopera-
tion and observation of alliance principles is to be engaged at a sufficiently early stage.
• Joint alliance office. The alliance organisation should be a united team whose formation
and activities are supported, for instance, by common space arrangements.
• Unity of organisation. The alliance team must display unity and operate under the name
and logo of the alliance abandoning member organisations’ logos.
• Continuity of participation. Actors representing different competencies are to stay in-
volved for the length of the project to be able to meet the goals in the best possible way.
• Informing owners. Owners are to be kept informed about all project issues so they can
make decisions that support project implementation and promote its goals.

51
Summarised from: Jefferies et al. (2006); CRC (2004); Jefferies et al. (2000); Kumaraswamy et al. (2005).
The summary considers neither the price formation mechanism created in this study nor its impacts.

69
 Table 18: Part 2 of 2. Alliance’s success factors.

Goals and monitoring

• Setting of goals. The actors are to set such sufficiently challenging goals for the alliance
that they cannot have precise information on how they can be attained.
• Phasing of management by objectives. The project is to be phased to serve the moni-
toring of realisation and setting and updating of new demanding objectives.
• Key profit areas. The team must ensure that project-specific profit areas and indicators
that guide and motivate the teams to reach set goals are defined.
• Impact of goals. The parties’ common interpretation of goals, and the guiding influence
of goals must be ensured through risk sharing and incentive arrangements.
• Awareness of goals. It must be ensured that people at all levels of the project organisa-
tion are fully aware of the goal and special objectives of the project.
Costs and payments
• Accuracy of budgeting. The owner must prepare the budget carefully before the project
is launched since it guides thinking and sets expectations for the target cost.
• Definition of target cost. The owner must be involved in the definition of the target cost
to avoid it being interpreted as a tender or an opening of discussion.
• Evaluation of target cost. The owner should make use of benchmarking of costs so that
a low implementation costs is not sought at the expense of quality and life-cycle goals.
• Workability of the incentive system. The actors must agree to a payment mechanism
that is reasonably symmetric (profit/loss) and fair to all parties.
Project management and decisions
• Joint management system. The alliance partners are to have a single joint project man-
agement system for dissemination of information and facilitating management.
• Evaluation of design. External expert evaluation of design is a proven method of ensur-
ing the realisation of the value-for-money goal.
• Workability of quality assurance. External quality assurance as well as monitoring and
evaluation of performance indicators are indispensable in ensuring good governance.
• Evaluation of performance. The alliance must conduct continuous performance meas-
urement/benchmarking to allow identifying success areas and targets of improvement.
• Purposefulness of the owner. The owner must show leadership in order to ensure that
proposals intended as design changes generate added value without weakening quality.
Workshops and seminars
• Design workshops. Service providers wishing to join the alliance must conduct work-
shops for building a team and creating team spirit already before the owner’s workshops.
• Selection-phase workshops. The owner must conduct exhaustive workshops with all
tenderers in order to create a functioning basis for good cooperation.
• Value-management workshops. The actors must conduct joint value-management and
problem-solving workshops in order to attain the intended economic efficiency.
• Personnel seminars. The project is to hold repeated alliance seminars for site personnel
in order to include them in the cooperation procedure.

70
References
ACA. 1999. Relationship contracting. Optimising project Outcomes. Australian Con-
tractors Association (ACA), North Sydney.

ACEA. 2005. Alliance contracting. ACEA Discussion Paper, Nov 05. The Association
of Consulting Engineers Australia (ACEA), Sydney.

Clifton, C. & Duffield, C. 2006. Improved PFI/PPP service outcomes through the inte-
gration of Alliance principles. International Journal of Project Management 24(7), pp.
573–586.

CRC. 2004. Motorway alliance drives performance improvement. The BRITE Project:
Innovation case study No 3. Cooperative Research Centre for Construction Innovation
CRC, Brisbane.

Davis, J. & Cowan, B. 2008. Competitive alliances: just a client driven VFM approach?
Southern Pacific Alliance Network, Milton.

Department of Public Works. 2008a. Procurement strategy and contract selection. Capi-
tal works management framework. Queensland Government, Brisbane.

Department of Public Works. 2008b. Relational procurement options – alliance and early
contractor involvement contract [version July 08]. Queensland Government, Brisbane.

Directive 2004/18/EC of the European Parliament and of the Council. 2004. Official
Journal of the European Union L 134/114 (30.4.2004).

Evans & Peck. 2003. Port of Brisbane Motorway Alliance – Alliance learning experi-
ences. Queensland Department of Main Roads.

Greenham, P. 2007. Alliancing. A glimpse of the real world view. Minter Ellison, Mel-
bourne.

Halman, J. & Braks, B. 1999. Project alliancing in the offshore industry. International
Journal of Project Management, 17(2), pp. 71–76.

Hytönen, T. & Lehtomäki, L. 2007. Valtion hankintakäsikirja 2007 [Handbook on Gov-

ernment Procurement 2007]. Julkaisuja 6/2007 [Publications 6/2007]. Valtiovarainmin-
isteriö [Ministry of Finance], Helsinki. (in Finnish)

Jefferies, M., Brewer, G., Rowlinson, S., Cheung, F. & Satchell, A. 2006. Project alli-
ances in the Australian construction industry: A case study of a water treatment project.
In: McDermott, P. & Khalfan, M. (eds.) Symposium on sustainability and value through
construction procurement, CIB W92, Salford, 29 Nov – 2 Dec 2006. Pp. 274–284.

71
Jefferies, M., Gameson, R. and Chen, S. 2000. Project alliance – factors for success. In:
Serpell, A. (ed.) Information and Communication in Construction Procurement. CIB
W92 Procurement System Symposium, Santiago, Chile, April 24.–27. Department of
Construction Engineering and Management, Pontificia Universidad Católica de Chile,
Santiago, Chile. CIB Publication 249. Pp. 313–328.

Keniger, M. & Walker, D. 2003. Developing a quality culture – Project alliancing ver-
sus business-as-usual (Chapter 8). In: Walker, D. & Hampson, K. (eds.) Procurement
strategies. A relationship-based approach. Blackwell Science, Oxford.

Knott, T. 1996. No business as usual: An extraordinary North Sea result. The British
Petroleum Company, London.

Koppinen, T. & Lahdenperä, P. 2004. The current and future performance of road pro-
ject delivery methods. Espoo: VTT Publications 549. 115 p.

KPMG. 1998. Project alliances in the construction industry. Sydney, NSW Department
of Public Works & Services.

Kumaraswamy, M., Ling, F., Rahman, M. & Phng, S. 2005. Constructing relationally inte-
grated teams. Journal of Construction Engineering and management, 131(10), 1076–1086.

Lahdenperä, P. 2001. Design-Build Procedures. Introduction, illustration and compari-

son of U.S. modes. Espoo: VTT Publications 452. 175 p.

Lahdenperä, P. & Koppinen, T. 2003. Kannustavat maksuperusteet rakennushankkees-

sa. Osa 1. Kansainvälinen kartoitus [Incentive payment bases for a construction project.
Part 1. International state-of-the-art review]. Espoo: VTT Tiedotteita – Research Notes
2191. 140 p. (in Finnish)

Lahdenperä, P. & Koppinen, T. 2004. Kannustavat maksuperusteet rakennushankkees-

sa. Osa 2. Laadittu kehysjärjestelmä [Incentive payment bases for a construction project.
Part 2. Developed framework system]. Espoo: VTT Tiedotteita – Research Notes 2244.
100 p. (in Finnish)

Lahdenperä, P. & Sulankivi, K. 2001. Monikriteerinen toteuttajan valinta rakennus-

hankkeessa. Kansainvälinen kartoitus ja menetelmäperusta [Multi-criteria selection of a
building project's implementers. International state of the art and methodological base]
Espoo: VTT Julkaisuja 855. 236 p. (in Finnish)

Laki julkisista hankinnoista 30.3.2007/348 [Act on Public Contracts (348/2007]. 2007.

Edita, Helsinki. (in Finnish; unofficial translation in English)

Lin, M. 2005. GGP allinace value-for-money. Wellington, Transit New Zealand.

72
Manchester Business School. 2009. Study on voluntary arrangements for collaboration
in construction (Part 1 & Part 2). Manchester Business School, Manchester.

Manley, K. 2002. Partnering and alliancing on road projects in Australia and interna-
tionally. Road and Transport Research, 11(3), pp. 46–60.

Nyström, J. 2005. The definition of partnering as a Wittgenstein family-resemblance

concept. Construction management and Economics, 23(5), pp. 473–481.

Olds, R. 2002. Port Road Motorway alliance – A consultant’s perspective. IRF/ARF

Asia Pacific Roads Conference and Exhibition, 2002 Sydney, Australia. 10 p.

Pohjonen, M. 2007. Julkisten rakennushankintojen kilpailuttamisopas [Guide for com-

petitive tendering in public procurement]. Rakennusteollisuuden Kustannus RTK, Hel-
sinki. (in Finnish)

Rakentamisen Laatu RALA [Construction Quality Association RALA]. 2008.

http://www.rala.fi/ (in Finnish, introduction in English)

Ross, J. 2003a. Introduction to project alliancing (on engineering and construction pro-
jects). Project Control International (PCI), Sydney.

Ross, J. 2003b. Project alliancing – a strategy for avoiding and overcoming adversity.
In: World Project Management Week, 24–28 March, 2003, Gold Coast, Australia.

Ross, J. 2004. Making sure a project alliance delivers on its promise. In: IQPC Alliance
Contracting Conference, 26–27 October, 2004, Melbourne, Australia.

Ross, J. 2006. Project alliancing. Practitioners’ guide. The Department of Treasury and
Finance, State of Victoria, Melbourne.

Ross, J. 2008. Price competition in the alliance selection process. 9 reasons why I favour
the single DCT approach – a personal perspective. Pre-reading for Infrastructure Delivery
alliance Forum, Perth, 9 April, 2008. Main Roads Western Australia, East Perth.

RT 13-10574 en. 1995. General conditions for consulting, KSE 1995. Building Informa-
tion, Helsinki.

RT 16-10660 en. 1998. General conditions for building contracts, YSE 1998 document.
Building Information, Helsinki.

Sakal, M. 2005. Project alliancing: A relational contracting mechanism for dynamic

projects. Lean Construction Journal, 2(1), pp 67–79.

73
Scott, B. 2001. Partnering in Europe. Incentive based alliancing for projects. Thomas
Telford, London.

Skinner, D. & Neale, M. 2003. Leveraging Contracting models that will maximise value
for money. IGPC Alliance Contracting Conference, 2003, Brisbane, Queensland, Aus-
tralia. 13 p.

Steele, G. 2002. Alliancing for motorways – flavour of the month or here for the long
haul? IRF/ARF Asia Pacific Roads Conference & Exhibition. Sydney, Australia, 2002.

Tanner, V. 1998. Quality makes the grade at Chiba. Design-Build, January 1998.

Thomsen, C. 2006. Project delivery processes. 3D/I, Houston.

Thorpe, D. & Dugdale, G. 2004. Use of alliance contracting for delivering local gov-
ernment engineering projects. Paper presented at: Clients driving innovation interna-
tional conference, 13–14 March, 2004, Gold Coast. Cooperative Research Centre (CRC)
for Construction Innovation, Brisbane. 12 s.

Turner, J. and Simister, S. 2001. Project contract management and a theory of organiza-
tion. International Journal of Project Management, 19(8), pp. 457–464.

VicRoads. 2005. Request for Proposals. Tullamarine – Calder Interchange Project. Con-
tract No. 6212. VicRoads, Kew, VIC.

VicRoads. 2006. Request for Proposal. Middleborough Road Rail Separation Project.
Contract No. 6530. VicRoads, Mitcham, VIC.

Walker, D. & Hampson, K. 2003a. Enterprise networks, partnering and alliancing

(Chapter 3). In: Walker, D. & Hampson, K. (eds.) Procurement strategies. A relation-
ship-based approach. Blackwell Science, Oxford.

Walker, D. & Hampson, K. 2003b. (eds.) Procurement strategies. A relationship-based

approach. Blackwell Science, Oxford.

Walker, D., Hampson, K. & Peters, R. 2002. Project alliancing vs project partnering: a
case study of the Australian National museum project. Supply Chain Management, 7(2),
pp. 83–91.

Wandoo B offshore oil platform. 1997. Leighton Contractors and/or Ove Arup.

Yeung, J., Chan, A. & Chan, D. 2007. The definition of alliancing in construction as a
Wittgenstein family-resemblance concept. International Journal of Project Management,
25, pp. 219–231.

74
 Series title, number and
report code of publication

VTT Research Notes 2472

VTT–TIED–2472
Author(s)
Pertti Lahdenperä
Title
Project alliance. The competitive single target-cost approach
Abstract
This publication reports on the development work focusing on the procedures of a procurement method
for a construction project that integrates early, competitive implementer selection and sharing of risks
between the parties. An approach where the key parties bear the risk jointly and service providers are
rewarded based on the success of the overall project, encourages the actors to consider each other’s views
and to cooperate effectively. The integration of know-how creates a basis for innovation and excellent
performance – especially in the case of projects that involve a great deal of uncertainty.
The procurement (or project delivery) method in question is project alliance where competitive
selection is integrated with collaborative and early selection of service providers from the viewpoint of
design in a novel way. The publication describes an operational model where selection takes place
through elimination of candidates and a subsequent two-phase tendering process: the qualitative tender
precedes the workshops that are part of evaluation, followed by submission of tender price data. The price
is made up of unit prices and overhead rates while price and scope assessments common to all competitors
are used selectively for comparison calculations.
In the developed operational model selected service providers, designers and builders, develop the
project and its designs in cooperation with the owner before the actual target cost is set. The revised tender
price and target cost together with the predetermined allocations of cost overruns and underruns determine
the rewards of service providers at different performance levels. The idea is to spur actors to invest
especially in the pre-implementation development phase which is also promoted by the project’s incentive
system. An attempt should also be made to incorporate into the system the impact of the realisation of the
key qualitative target areas.
Other issues the publication deals with include the features of project alliance, its potential advantages
and drawbacks, assessment of the suitability of alliancing and prerequisites for using it as well as the
administrative structure of the organisation formed by the partners. The so-called competitive single
target-cost project alliance presented has been developed in close cooperation with a wide expert network
of practical actors. Their view is that the project alliance approach produced as a result of the work is a
suitable and useful for the implementation of demanding transport infrastructure projects, road and rail-
way projects, which were the primary application.
ISBN
978-951-38-7295-3 (URL: http://www.vtt.fi/publications/index.jsp)
Series title and ISSN Project number
VTT Tiedotteita – Research Notes 8388
1455-0865 (URL: http://www.vtt.fi/publications/index.jsp)
Date Language Pages
May 2009 English 74 p.
Name of project Commissioned by
Innovation promoting competition Tiehallinto, Ratahallintokeskus, Destia Oy,
Lemminkäinen Infra Oy, Skanska Infra Oy,
YIT Rakennus Oy, Infra ry, Ramboll Fin-
land Oy, Sito Oy, WSP Finland Oy
Keywords Publisher
project alliance, alliance contracting, integrated project VTT
delivery, procurement systems, cooperation, incentive P.O.Box 1000, FI-02044 VTT, Finland
contract, target cost contracting, construction project Phone internat. +358 20 722 4404
Fax +358 20 722 4374
 VTT CREATES BUSINESS FROM TECHNOLOGY
T echnology and market foresight • Strategic research • Product and service development • IPR and licensing
• Assessments, testing, inspection, certification • Technology and innovation management • Technology partnership
VTT RESEARCH NOTES 2472

• • • VTT RESEARCH NOTES 2471 PROJECT ALLIANCE. THE COMPETITIVE SINGLE TARGET-COST APPROACH
A project alliance is a project procurement method based on the sharing of risks
between the key partners. The publication describes a new model of project allian-
ce that integrates selection of service providers on the basis of price and quality
factors, that takes place early in the process in relation to design, with later
definition of target cost. Tender price and target price are key elements of the
payment basis solution, but the realisation of the project’s qualitative goals also has
an impact on the payments to service providers.
Besides the selection of the design-construction team and the project’s payment
basis solution, the publication also deals with the features and potential advan-
tages and drawbacks of project alliance and evaluates its suitability and the pre-
conditions for its use and the administrative structure of the joint organisation
formed by the partners. Cooperation and incentiveness are key constituents of the
model.

Pertti Lahdenperä

Project alliance
The competitive single
target-cost approach

ISBN 978-951-38-7295-3 (URL: http://www.vtt.fi/publications/index.jsp)

ISSN 1455-0865 (URL: http://www.vtt.fi/publications/index.jsp)