A few months ago, John Hughes-D’Aeth, partner at Berwin Leighton Paisner, considered the introduction of the new standard form FAC-1 Framework Alliance Contract (FAC-1).
In this month’s article, we hear from Professor David Mosey, Director of the Centre of Construction Law and Dispute Resolution at King’s College London, who led the drafting of FAC-1 contract. Professor Mosey provides insight into the use of framework alliance contracts and highlights how FAC-1 can contribute to successful frameworks and projects.
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Frameworks and alliance contracts
Framework contracts are entered into with one or more suppliers in order to establish the terms governing project contracts (sometimes called ‘call-offs’) awarded over an agreed period. The importance of integrated and collaborative frameworks was underlined in a 2016 report of the Local Government Association (LGA) and the National Association of Construction Frameworks (NACF):
‘Both the LGA and NACF believe and support the position that significant savings, benefits and other efficiencies in construction can be achieved by effective frameworks through the longer term arrangements, non- adversarial relationships, common incentives, integrated teams and objective assessment of performance associated with such frameworks. Continued pressures on public sector finances means that achieving such benefits and efficiencies will be vital.’
Alliancing contracts are designed to enable participants to cooperate on a project or programme of work. The Infrastructure Client Group Alliancing Code of Practice 2015 defines an alliance as ‘a collaborative and integrated team brought together from across the supply chain. The team share a set of common goals aligned with customer and client outcomes and work under common incentives.’
A copy of the Alliancing Code of Practice is available here.
Framework procurement models are more developed in the UK than in most other jurisdictions. Good frameworks have used alliancing and related systems to enable major cost savings and other improved economic and social value, but nearly all the best framework contracts have been developed for individual clients and/or projects, and are bespoke and confidential. The FAC-1 Framework Alliance Contract (‘FAC-1’) contains processes drawn from a range of successful bespoke frameworks, and combines these with the collaborative features of an alliance contract.
Common problems with frameworks
Unsuccessful framework contracts may in reality be no more than arm’s length approved lists, with performance measures unrelated to the activities that are most likely to ensure their success. Some employers just say ‘Look, I’m giving you all this work, so off you go and improve performance. I’ll see you back in the boardroom in a year’s time – and any team that has not achieved the minimum amount of KPI points will be fired’.
There are major problems with this approach. Firstly, it does not make clear whether or not the employer is actually awarding the amount of work that the framework originally envisaged or making adjustments for any shortfall. If framework contractors and other providers are not fully briefed on potential changes to predicted scope, they may invest in unprofitable resources and then be driven to cut corners elsewhere in order to avoid overall losses. They will also quickly lose faith in the credibility of their client and may become cynical in the way they work, concentrating on self-preservation rather than collaborative working.
This is the most common response whenever I have asked industry audiences where their frameworks go wrong. Yet the industry fully understands how financial and other factors affect the available pipeline of work, and can work around these factors if given a clear lead. Greater clarity and openness in the processes underpinning a framework contract will help to build stronger working relationships and will enable the parties to meet each other’s expectations.
The new FAC-1 Framework Alliance Contract
The new FAC-1 is the first standard form to combine the workflow of a framework with the relationships, values and processes created by an alliance. It was developed by King’s College London through extensive industry consultation and published by the Association of Consultant Architects in June 2016. It is endorsed by Constructing Excellence and the Construction Industry Council.
FAC-1 sets out:
- a multi-party structure of ‘Alliance Members’ including the ‘Client’, the ‘Alliance Manager’ and any combination of selected consultants/ contractors/ suppliers/ providers, with the facility to add ‘Additional Alliance Members’ (clause 1.11 and Appendix 2)
- why the framework alliance is being created, stating agreed ‘Objectives, Success Measures, Targets and Incentives’ (clause 2 and Schedule 1)
- how work will be awarded to alliance members, under a ‘Direct Award Procedure’ and/or ‘Competitive Award Procedure’ and under early standard form ‘Orders’ (clauses 4, 5 and 7, Schedule 4 and Appendix 3)
- flexibility to use FAC-1 with ‘Template Project Documents’ that include any one or more forms of project contract such as FIDIC, JCT2016, NEC3 or PPC2000 (clause 5.3 and Schedule 5)
- what the alliance members will do to seek ‘Improved Value’, working together through ‘Supply Chain Collaboration’ and other agreed ‘Alliance Activities’ in accordance with an agreed ‘Timetable’ (clause 6 and Schedule 2)
- how the alliance members will manage risks and avoid disputes using a shared ‘Risk Register’, joint ‘Core Group’ governance and alternative dispute resolution (clauses 9 and 14 and Schedule 3)
- flexibility to include particular ‘Legal Requirements’ and ‘Special Terms’ (clauses 13.4 and 13.5 and Schedule 6)
Further guidance on the use of FAC-1 is available here.
How can FAC-1 contribute to successful frameworks?
Savings in procurement
FAC-1 should reduce significantly the cost and time spent by clients and bidders in drafting and reading bespoke documents. The FAC-1 provisions follow closely the Ministry of Justice multi-party framework alliances which achieved:
- ‘Solid governance structure through a Strategic Core Group comprising representatives from the Ministry of Justice and the Alliance suppliers’
- ‘Standardised suite of processes and contract templates… used to ensure consistency and ease of use’
- ‘Early engagement of the supply chain… encouraged by the two stage approach’
- ‘Reduced procurement costs estimated at £10 million, reduced burden on industry tendering of around £30 million and procurement risk mitigation of about £2 million’.
For more on this, see the Final Report to Government by the Procurement/Lean Client Task Group (available here).
FAC-1 states whether or not the client offers any exclusivity or minimum value of work (clauses 5.6 and 5.7) and sets out the procedures that lead to award of work (Schedule 4). Under its multi-party structure the alliance members have a shared system of open performance measurement and rewards in their agreed ‘Objectives, Success Measures, Targets and Incentives’. This reflects recognition in the Infrastructure Client Group Alliancing Code of Practice that ‘A horizontal agreement between the respective partners capture(s) the principles within the commercial model, particularly those that jointly incentivise performance and create collaboration.’
It is critical to create a system for management of risks under a framework contract. The FAC-1 risk register in Schedule 3 is kept up to date by the alliance manager, for approval by the core group of agreed individuals (clause 9.4). The core group also acts as a forum through which alliance members can raise issues with the client and with each other in order to resolve problems before they become disputes (clauses 1.6, 1.7 and 15.1).
In assessing risks it is important for contractors and other providers to understand how objectives and success measures affect the future award of work. FAC-1 provides clarity (in Schedule 1 and clause 14.2) as to which targets are so important that a failure to meet them will require urgent action and may ultimately determine whether a framework appointment may be terminated. It also includes an early warning system (clause 1.8) enabling notification to the core group of the reasons behind any issues or obstacles that are encountered.
Collaboration and improving value
Another major problem arises if a framework contract does not create the conditions most likely to achieve the results that the client wants. The failure of a framework is a client failure too, and re-procurement creates huge costs for the client and the bidders. Therefore, it is worth building into a framework contract the commitment of all parties to implement specific activities designed to improve value.
FAC-1 does this by providing for agreed alliance activities in order to achieve improved value (clause 6), linked to agreed deadlines under the timetable set out in Schedule 2. These activities include the ‘Supply Chain Collaboration’ system for the joint review and improvement of tier 2/3 supply chain relationships.
Surrey County Council used supply chain collaboration on its ‘Project Horizon’ alliance (a highways maintenance trial project, which also used Two Stage Open Book procurement). For further information see the Procurement Trial Project Case Study Report and the related guidance.
The Cabinet Office case study recorded how contractual systems equivalent to those in FAC-1 helped achieve:
- agreement of 15% post tender cost savings
- improved whole life value, including agreement of a ten year warranty for material and pavement design
- improved quality control through joint risk assessments and integrated team agreement of appropriate surface treatments and monitoring work on site
- improved apprentice commitments
- lean programming of individual tasks leading to time savings
- innovation through collaborative working, for example to increase recycling and reduce landfill.
The first user of the published FAC-1 form was Futures Housing Group who used the contract to appoint and integrate a total of 23 contractors. They report that ‘every contractor has welcomed the new Framework Alliance Contract, its plain language and sequential approach to each stage making it easy to understand’. Futures Housing Group also report that procurement under FAC-1 has achieved cost savings of 9.3% against their previous framework. News updates regarding the use of FAC-1 are available here.