Alliance Procurement: Promises, Truths, and Behaviours

Abstract

Alliancing is a contractual structure created to overcome some of the adversarial postures caused by traditional contracts, requiring all parties to subscribe to a 'no-blame' culture. This type of relationship contract often promises benefits that are uncommon in traditional forms of contracting. The purpose of this paper is to discuss the culture, behaviour, benefits, promises, and lesser known truths about alliance contracts, drawing on a combination of hands-on professional experience and over a decade of research in both Australia and the United States. The paper offers practical help to those considering alliancing as a framework for the procurement of major projects.

Full text

Alliance Procurement: Promises, Truths, and Behaviours
PAQS & ICEC World Congress 2018
Alexia A. Nalewaik1 and Anthony J. Mills2
1 American University, School of Professional and Extended Studies, Washington DC, USA
Email: nalewaik@american.edu
2 Chair of Construction Management
School of Architecture and Building, Deakin University, Australia
Email: Anthony.mills@deakin.edu.au
Abstract
Alliancing is a contractual structure created to overcome some of the adversarial postures
caused by traditional contracts, requiring all parties to subscribe to a ‘no-blame’ culture. This
type of relationship contract often promises benefits that are uncommon in traditional forms
of contracting. The purpose of this paper is to discuss the culture, behaviour, benefits,
promises, and lesser known truths about alliance contracts, drawing on a combination of
hands-on professional experience and over a decade of research in both Australia and the
United States. The paper offers practical help to those considering alliancing as a framework
for the procurement of major projects.
Keywords: Alliance contracts, trust, culture, guanxi
Introduction
Alliance contracting is a type of procurement that integrates relationship components into
the contractual documents. A project alliance can be considered both a project delivery
method and a contractual device. The project alliance concept was developed and introduced
on North Sea offshore oil and gas projects in the early 1990’s. It improves upon the earlier
concept of project partnering, in that it offers protection to signatories via a legally
enforceable contract (Chen et al., 2012). Alliances “are characterized by joint member sharing
of all project risks in a no-disputes and no-blame environment where unanimous decision-
making takes place” (Lloyd-Walker, B., Mills, A., & Walker, D., 2014), thus endeavouring to
improve upon the perceived norm of adversarial relationships in construction (Mills, Devery,
and Nalewaik, 2016).
Alliancing requires an integrated and collaborative approach, intended to achieve goals,
innovation, and efficiencies through a long-term relationship in which risk and reward are
shared. A pool of contractors is often pre-qualified as part of preparation for future projects,
meaning a long-term alliance can greatly reduce procurement time and facilitate early
contractor involvement. Terms of the agreement typically include an open-book relationship
in which all information is shared, and a non-adversarial, best-for-project stance.

Preconditions to Successful Alliances
A literature review was conducted to understand the balance between culture and control
mechanisms in alliance contracts. One of the precondidtions to success is what is known as a
“Best-for-Project” approach, where all participants in the alliance agree to make decisions
and adopt behaviours that is to the benefit of the project and not the individual participant.
Contractual governance is used to reduce the risk of opportunism and ethical vulnerability,
incentivizing best-for-project behaviour in contractual partners. Governance in alliance
contracts exists in two forms: formal, and informal control. Formal control appears as
prescribed, written rules that shape processes and reward desirable performance (Das and
Teng, 2001). These rules define what behaviours and costs are allowed and not allowed,
codify decision-making mechanisms, and establish the calculations for sharing risk and reward
(Faems et al., 2008). Informal control appears in the “establishment of organizational norms,
values, culture, and the internalization of goals to encourage desirable behaviour and
outcome” (Das and Teng, 2001). Other terminology used to describe informal control include
clan control, psychological contracts, and normative control.
There is some evidence that informal control may have a greater influence on alliance partner
behaviour in a long-term commitment than formal control (Lee and Cavusgil, 2006). Because
alliance contracts are a relational type of agreement, there is “greater interdependence both
between the parties and between the parties and others interested in the transaction” (Zhang
and Ahtonen, 2015) than with traditional contracts. Relational agreements are characterized
by elements of trust, familiarity, mutual respect, and an “implicit psychological contract [of]
… loyalty and obligation beyond the bounds of a written contract” (Kwok, James, and Tsui,
2013).
Success of alliances may be positively related to the geographical, cultural, and environmental
similarity of the project alliance participants” (Zhao, Y., Feng, Y., Li, C., 2018). This is a
challenge in alliance contracts in construction, as the industry has long been characterized as
fragmented, with “a plurality of different organizations with different goals, cultures, and
professional skills” (Guo, S., Lu, P., Song, Y., 2013). Dissimilarities between social actors can
negatively affect the quality of interactions in a partnership and thus hinder the complex
integration and transformation of disparate pools of tacit know-how into value creation
(Sarkar et al., 2001).
Information asymmetry and agent opportunism are not uncommon in construction projects
(Guo, S., Lu, P., Song, Y., 2013), which has typically led to over-reliance on explicit contractual
control to reduce partner risk. This is particularly true when new project partners arrive with
ingrained combative habits and behaviours, which can be difficult to overcome and may lead
to culture shock (Reed and Loosemore, 2012). When contractors are unaccustomed to an
alliance contracting arrangement, they “…may import behaviours from traditional and design-
build types of arrangement with which they are more familiar” (Laan, Voordijk, & Dewulf,
2011). Participants such as these “don’t devote sufficient time, energy, and resources to
cultivate trust” (Guo, S., Lu, P., Song, Y., 2013), all of which are needed to build and maintain
the necessary relationships for successful alliances.

Allianced partners need to adopt new values, attitudes, and behaviours, and have a flexible
approach to the situation (Reed and Loosemore, 2012), in order to improve the chances of
alliance success. However, there are specific elements of the alliance contracts mentioned
above are worth discussing further, in the context of normative behaviour, in particular the
concepts of trust and the power of relationships
Trust
Trust, in the context of alliances, has been defined as “one’s expectations, assumptions, or
beliefs about the likelihood that another’s future actions will be beneficial, favourable, or at
least not detrimental to one’s interest” (Robinson, S., 1996). It is very much a definition based
in reality, in a world where opportunism and competition are pervasive. Das & Rahman (2010)
define partner opportunism as “… behavior by a partner firm that is motivated to pursue its
self-interest with deceit to achieve gains at the expense of the other alliance members.” Trust
is an important element in the success of alliances, an emotional bond that manifests as a
willingness to share information (Kwok, James, and Tsui, 2013), and avoid behaving in an
opportunistic manner that takes advantage of partner weaknesses. The ultimate objective is
to work together to maintain the partnership, and reap the benefits thereof as a team, and
not as an individual.
Such a high level of trust is not easily created, however, a history of personal interactions is
very important to relational bonding (Tai, S., Sun, C., and Zhang, S., 2016), and the level of
trust between contractual parties increases over time (Guo, S., Lu, P., Song, Y., 2013). Some
of this bonding may be achieved by investing time and money in adopting the relationship
contract, including group activities such as coaching, team bonding exercises and workshops
(Ling et al, 2014), but it must also be maintained and nourished. Through the process of
socializing, ongoing interaction, and co-location, “members [of the alliance] become more
committed to the organization, and shared views serve to influence strongly the behaviour of
the members” (Das and Teng, 2001).
A no-blame culture is one in which members of the alliance project team do not fear
consequences when contributing to discussions and identifying issues. In such a culture, open
communication, honesty, process improvements, and shared knowledge lead to innovation
and efficiencies. Diversity of perspectives and the challenging of assumptions are key to a no-
blame culture, “a safe haven for robust respectful debate” (Lloyd-Walker, B., Mills, A., &
Walker, D., 2014). Such things are less achievable in an environment that discourages
speaking up and taking risks, where failure is unacceptable. A no-blame culture contributes
significantly to increased partner trust.
In an alliance contract, there are many opportunities for the sharing of research, knowledge,
and skills between alliance partners, once trust has been established. This is known as partner
learning. There is evidence that “partner learning reduces scepticism and paranoia” (Schilke,
O., and Lumineau, F., 2016), thus helping to build and maintain a strong relationship. Other
outcomes include effective communication, goal alignment, cooperation, and the
“development of routinized interactions and shared language” (Schilke, O., and Lumineau, F.,
2016); in other words, trust and shared information contribute to a strong team culture and
behavioural norms.

Once trust is established in a relationship, the parties become motivated to maintain it.
Alliance partners are incentivized to address risks cooperatively, instead of shifting risk to
each other, as “the potential costs of putting their relationship in danger really outweigh any
short-term advantages of opportunistic behaviour” (Laan, Voordijk, & Dewulf, 2011).
The Power of Relationships
Strong long-term contractual and interpersonal relationships have many benefits to the
parties involved, beyond just profit and competitive advantage through continuous
improvement. Not the least of these additional benefits is a shared culture of understandings
and values (Zhang and Ahtonen, 2015). Other characteristics are mutual respect, a
“willingness to help each other in difficult times” (Kwok, James, and Tsui, 2013), and a “high
level of mutual goodwill” (Zhao, Y., Feng, Y., Li, C., 2018).
This element of goodwill is especially important during the project, as conflict is inevitable.
“Conflict is a key characteristic of interorganizational alliances, since these alliances tend to
contain the seeds of behavioral contradictions (cooperation vs. competition), temporal
contradictions (short term vs. long term), and structural contradictions (rigidity vs. flexibility)”
(Schilke, O., and Lumineau, F., 2016). In alliances, both formal and informal control
mechanisms enable the contracting parties to find satisfactory private solutions to resolve
contractual disputes (Zhang and Ahtonen, 2015) without damage to reputation (Kwok, James,
and Tsui, 2013), while enhancing efficiency and accountability (Chan et al, 2008). This both
reduces transaction costs by avoiding litigation, and increases trust, credibility, and
commitment (Zhang and Ahtonen, 2015). Most importantly, conflict resolution mechanisms
maintain harmony and dignity and help to further build the relationship between parties. A
recent study in Hong Kong indicated 43.8% of alliance projects studied achieved a dispute-
free record, and another 40% of projects achieved a lower than average incidence of disputes
and claims (Chan et al, 2008).
Maintaining long term relationships also helps to contribute to a positive reputation for both
organizations. Reputation is another type of informal control in alliance contracts. “Because
reputation signals trustworthiness, companies have an intrinsic desire to maintain their good
reputation” (Zhang and Ahtonen, 2015). Formal contractual enforcement may result in loss
of trust and reputation, thus good behaviour is incentivized in cultures that place a high value
on reputation.
Case Studies: Illustrations from Practice
The case study approach allows real-world inspection of theory. Over the past decade, the
authors have studied both large and small construction programs structured as alliances. The
capital programs discussed below include infrastructure, water treatment, and grade level rail
crossing projects in Victoria (Australia), and gas utilities projects in California (United States
of America). Content analysis of project records and semi-structured interviews were used to
capture alliance members’ perspectives and experiences.

Trust
It is worth noting that trust did not just spontaneously occur on the alliance projects in the
study. Victoria water treatment project leaders took care to emphasize that trust was built
over time, and made easier by selecting team members whose personality was a good fit with
others on the alliance (Mills, Devery, and Nalewaik, 2016). This suggests, in part, that some
behavior can be learned, but that much of the team member behavior was culturally innate
and thus highly sought after. Once the right staff members were selected, project leadership
organized relationship coaching, team building, and other efforts at forming a connection and
learning to listen, team members came together to align expectations, form a cohesive unit,
and create a framework of trust. As the project director commented, the efforts expended to
establish trust ultimately resulted in an environment where “it was very clear we’re all pulling
in the same direction” (Mills, Devery, and Nalewaik, 2016).
Similar to the Hong Kong study by Chan et al mentioned above, interviewees in the Victorian
infrastructure alliance stated alliance contracting minimized the number of claims and
disputes (Mills, Devery, and Nalewaik, 2016), and instead engaged alliance partners to resolve
issues amicably. Even where there were cost implications for the individual firms, the alliance
partners worked together to make best-for-project decisions (Mills, Devery, and Nalewaik,
2016).
Interviewees indicated that trust resulted in a number of new behaviors, which greatly
enhanced the relationship between both parties. These new behaviors included (Mills,
Devery, and Nalewaik, 2016):
§ A reduction in the inclination to monitor each others’ actions
§ Less need for formal contractual and procedural controls
§ A more congenial atmosphere, without inequality
§ Higher levels of accountability
This was also true on the California gas pipeline upgrade projects, where it was seen that the
alliance project team was more likely to rely on the spirit of the alliance and the strength of
relationships than the strict wording of the contract (Nalewaik et al, 2015). Although the
Owner’s top management tended to rely heavily on contracts and audit to monitor contractor
performance, that was accepted as a natural tendency for an organization that was
implementing an alliance for the first time. The true nature of the alliance was seen in the
field and in project management, where managing for reasonability and collaboration with
others became normalized behavior (Nalewaik et al, 2015).
The Power of Relationships
On both the Victoria infrastructure projects and the rail crossing projects, interviewees stated
the relationships extended not just at the organizational level but also to personal friendships
(Mills, Devery, and Nalewaik, 2016). Indeed, the organizational relationship was strengthened
by relationships between top-level stakeholders. Although arguments did occur between

individuals, which could have put the inter-organizational relationships at risk, the arguments
were most often resolved without damage.
The Victoria water treatment projects also had similar benefits, and interviewees commented
that communication and availability of data were markedly easier than on non-alliance
projects, due to the duration of the relationship (Mills, Devery, and Nalewaik, 2016).
Organizational growth was a very tangible benefit; contractors in the alliance were able to
use the tools, experience, and knowledge to build their businesses, obtain necessary
certifications, and attract new clients (Mills, Devery, and Nalewaik, 2016).
On the California gas projects, the contractors were keen to be assigned to future projects,
and thus were especially motivated to foster and nurture the alliance relationship (Nalewaik
et al, 2015). In this particular capital program, there were multiple contractors signed to
alliance contracts, all with the same owner. Unilaterally, the contractors and owner
experienced a number of benefits from the long-term relationship, including (Nalewaik et al,
2015):
§ The ability to collect historical cost data in a consistent format
§ Open communication
§ Streamlined processes
§ Reduction in safety incidents, due to long-term field personnel
§ Better quality of field-installed construction work, due to long-term field personnel
§ A collegial, co-located project office
§ More consistent leadership, due to long-term construction and project management
staff
§ Better project outcomes due to early contractor involvement
Conclusion
All the case studies indicated that high levels of trust helped to reduce conflict in the alliance,
and enabled team members to create an environment where alliance partners were willing
and even eager to explore future projects and a more long-term relationship.
Despite the diversity of projects studied, the advantages of a long-term relationship were
clear on all the case studies. The companies and team member individuals alike benefited
from a more stress-free environment, with lower turnover of staff, and the ability to openly
share tools, knowledge, and data. These benefits extended to the quality of the construction
project itself, resulting in a win for all parties involved.
Although a formal contract is necessary on construction projects, the case studies and
literature review both indicate that informal control is a strong requirement for alliance
success. Whether it is called clan control, cohesive culture, or a psychological contract, trust
and the high levels of familiarity and respect created by long-term relationships help to create
strong inter-organizational and interpersonal bonds that engender loyalty and a sense of
obligation to each other. Building trust and the relationship, however, requires commitment

and a significant level of effort and investment in team-building, along with the careful
selection of staff members who will be a good fit for the blended alliance team.
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