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Federal Acquisition Regulation Appliedto Alliancing Contract Practices

Travis R. Johnson, P.E.1; Peter Feng, Ph.D., P.E., M.ASCE2;William Sitzabee, Ph.D., P.E.3; and Mark Jernigan4

Abstract: The U.S. federal construction sector led the development of partnering as a project-delivery method and continues to use it asstandard practice. Alliancing has since emerged as an evolution of the partnering method and offers substantial advantages over partnering,but it also poses more difficulties with federal acquisition regulations. This research aims to determine if an alliancing contract can beeffectively utilized in federal construction and, if so, to create a framework under which federal agencies can utilize the advantages of alliancecontracts within existing regulations. A commercially available standard form alliancing contract was selected for analysis against the FederalAcquisition Regulation. Key practices that characterize the alliancing method were identified. Utilizing a panel of federal contracting experts,qualitative data were gathered to analyze which of these key practices do or do not comply with federal regulations, why certain practicesdo not comply, and how those practices could achieve compliance. The results show that most alliancing key practices can be utilized ina federal construction project. Although other practices cannot be used effectively under current regulations, these limitations do not sig-nificantly hinder the use of a comprehensive and effective federal alliancing contract. DOI: 10.1061/(ASCE)CO.1943-7862.0000592.© 2013 American Society of Civil Engineers.

CE Database subject headings: Contract management; Contracts; Construction management; Military engineering; Federalgovernment.

Author keywords: Contract management; Federal project policy; Contracts; Construction management; Government; Militaryengineering.

Introduction and Background

The U.S. Army Corps of Engineers took a leading role in thedevelopment and implementation of partnering in the 1980s, firstusing partnering in the Portland, Oregon (Gerard 1995; Naoum2003), and Mobile, Alabama districts (Sanders and Moore 1992).The Corps inaugural partnering project was the construction of theOliver Lock and Dam, which began in 1988 with a partneringagreement between the Corps Mobile District and the constructioncontractor FRU-CON (Schroer 1994).

The foundation of partnering is the partnering agreement, a non-contractual but formally structured charter tying each party to act inthe best interest of the project and the project team (Weston andGibson 1993). It utilizes tools such as regular meetings, partneringworkshops, team building exercises, declarations of common ob-jectives, and dispute resolution mechanisms to encourage harmo-nious working relationships and shared goals. Partnering proved tobe a genuine success. A study of Corps construction projects by

Weston and Gibson (1993) compared 16 partnering projects to28 nonpartnering projects. The study found that partnering projectsachieved much better performance, averaging an improvement of40–80% over nonpartnered projects in the aspects of cost change,change order cost, claims costs, and duration change. The Corpsquickly embraced the philosophy of partnering and made it a stan-dard way of doing business (Schroer 1994).

Partnering has allowed many federal project teams to developbetter relationships, trust, and commitment, but it is only the firststep in the right direction. Although this process does deliver mutualbenefits, it lacks the definitive incentives required to elevate collec-tive interests above those of the individual. Partnering establishesmutual goals butlacks binding methods of enforcing or incentivizingthem. Gains and losses are still allocated independently, not jointly.Although their goals may overlap in some areas, parties are ulti-mately rewarded for acting in their own interest.

To address this issue, the government of Hong Kong uses anexpanded form of partnering that includes incentivization agree-ments, and the United Kingdom and Australia use collaborativealliance contracts as a standard practice in public sector construc-tion with great success (Chan et al. 2010; NEC 2010; Departmentof Treasury and Finance 2009; Sakal 2005).

Project alliancing differs from project partnering in that it isboth a relationship management system and a project-delivery sys-tem (Chan et al. 2010). Where partnering encourages closer rela-tionships and shared goals, alliancing mandates them. Traditionalcontracting and partnering allocate responsibilities and risk to indi-vidual parties that severally incur consequences for success or fail-ure of the project. In alliancing, all the parties either benefit togetheror not at all; parties consent to their level of contribution and riskand jointly incur rewards or losses (Walker et al. 2002). Table 1illustrates the similarities and differences between partnering and

1Capt, USAF, 820th RED HORSE Squadron, Nellis AFB, NV 89191(corresponding author). E-mail: travis.johnson3@nellis.af.mil

2Lt Col, USAF, Air Force Institute of Technology, Wright PattersonAFB, OH 45433. E-mail: peter.feng@afit.edu

3Lt Col, USAF, Air Force Institute of Technology, Wright PattersonAFB, OH 45433. E-mail: william.siztabee@afit.edu

4Instructor, The Civil Engineer School, Air Force Institute of Technol-ogy, Wright Patterson AFB, OH 45433. E-mail: mark.jernigan@afit.edu

Note. This manuscript was submitted on October 24, 2011; approved onJuly 24, 2012; published online on July 27, 2012. Discussion period openuntil October 1, 2013; separate discussions must be submitted for indivi-dual papers. This paper is part of the Journal of Construction Engineeringand Management, Vol. 139, No. 5, May 1, 2013. © ASCE, ISSN 0733-9364/2013/5-480-487/$25.00.

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alliancing. Both methods share many objectives; but partneringpursues these objectives in parallel with the project contract,whereas alliancing makes them an integral part of the contract.

The U.S. private sector has recently created a promising adap-tation of the alliancing concept: Integrated Project Delivery (IPD).IPD contracts were pioneered in 2005 with the Integrated Form ofAgreement, developed by Will Lichtig for Sutter Health (Post2010). Introducing specific contractually binding requirements forequitable relationships, risk sharing, and dispute resolution, IPDoffers significant opportunities for a highly collaborative and suc-cessful construction project. The IPD method has also becomeextremely accessible with the commercial publication of standardform contracts by ConsensusDOCS and the American Institute ofArchitects (AIA). These boilerplate contracts provide a solid base-line for project parties, allowing them to complete a comprehensivecontract by simply filling in the details of their particular project.

Although the use of IPD in construction is still in an early stage,AIA has analyzed case studies of six projects from 2004 to 2009that implemented IPD practices. AIA claims a successful proofof concept, with every project meeting or exceeding expectationswith respect to budget, schedule, design quality, and sustainability(AIA 2010a).

Although alliancing offers many advantages and is becomingcommon in the private sector, the traditional partnering methodcontinues to be the standard practice of the Corps of Engineers andother federal agencies (U.S. Army Corps of Engineers 2010). Thepotential benefits of IPD combined with its ease of accessibilitymake it the most logical vehicle for a federal alliancing contract.However, the primary challenge of implementing an IPD contractin federal construction is stringent regulation of the acquisition pro-cess. The purpose of this research is to determine if an IPD contractcan effectively be utilized in federal construction and, if so, to cre-ate a framework under which federal organizations can take advan-tage of the benefits of IPD. This article will introduce leadingstandard form IPD single-project construction contracts, identifyand explain the specific key practices, and evaluate these key prac-tices against the requirements of the governing federal regulations.

Federal Acquisition Regulation

The Federal Acquisition Regulation (FAR) is published as Chapter1 of Title 48 of the Code of Federal Regulations and is the body oflaws that govern the U.S. Federal Government’s procurement pro-cess, regulating the acquisition of supplies and services with appro-priated funds. It became effective on April 1, 1984, and is issuedunder the joint authorities of the Administrator of General Services,the Secretary of Defense, and the Administrator for the National

Aeronautics and Space Administration, under the broad policyguidelines of the Administrator, Office of Federal ProcurementPolicy, Office of Management and Budget (FAR 2005).

Encompassing more than 2,000 pages, the FAR consists of 53parts organized in 8 subchapters. The major objectives of the docu-ment are assurance of fair and competitive source selection, elimi-nation of conflicts of interest or corruption, standardization ofcontract methods and management, and compliance with adminis-trative, financial, labor, and environmental laws.

Contracts

There are currently two major commercially available boilerplateIPD contracts: ConsensusDOCS 300 and AIA Document C191(2009). ConsensusDOCS describes itself as “a coalition of associ-ations representing diverse interests in the construction industrythat collaboratively develops and promotes standard form construc-tion contract documents that advance the construction process”(ConsensusDOCS 2010). The organization counts 32 associationsas part of their coalition, the most notable of which is the Associ-ated General Contractors of America (AGC). ConsensusDOCS 300Standard Form of Tri-Party Agreement for Collaborative ProjectDelivery, first published in September 2007, is touted as the signa-ture document of their catalog and the first standard constructioncontract to address IPD (Perlberg 2009).

The American Institute of Architects first began publishingconstruction contracts in 1888 and currently publishes more than120 contracts and administrative forms for the construction indus-try (AIA 2010b). AIA publishes three series of IPD documents,differentiated by how the parties contract with each other.Published in November 2009, AIA Document C191 (2009) Stan-dard Form Multi-Party Agreement for Integrated Project Delivery,like ConsensusDOCS 300, is a three-party agreement between theowner, designer, and constructor. This document represents themiddle ground of AIA’s IPD contracts. Of AIA’s other IPD offer-ings, one contracts the owner to each of the other parties separatelyand the other coalesces the three parties into a Limited LiabilityCorporation.

Key Practices

IPD aims to create a contractual environment fundamentally differ-ent than that of a traditional or partnering agreement contract.However, when looking at specific contractually enforceable differ-ences, ConsensusDOCS 300 and AIA C191 use five basic methods:(1) joint decision making; (2) shared risk; (3) budget development

Table 1. Partnering versus Alliancing

Objective Partnering Alliancing

Organization Partnering agreement/charter (noncontractual) Project contractRelationships Trust and relationship development Joint decision making

Team building Project management team: Unanimous decisionsCommunication protocols Executive oversight team: Unanimous decisionsStakeholder commitment Dispute resolution procedures (contractual)Decision processes

Dispute resolution procedures (non-contractual)Risk Division of liability Shared liability

Fault-based claims Waiver of consequential damagesPerformance Set mutual goals (noncontractual) Contractual profit sharing

Performance measures Contractual loss sharingContinuous improvement Performance incentives

Continuous improvement

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and management; (4) pain/gain sharing and incentives; and (5) dis-pute resolution.

Joint Decision Making

Ensuring all parties are involved in decision making is essential to acollaborative project. Both contracts use an explicit joint decision-making process as the cornerstone of the contract. They employtwo managing bodies to execute a project: an executive teamand a project team. Each team is composed of a three-member corerepresenting the principal parties of the owner, designer, and con-structor with allowances for the addition of other interested partieswhen necessary. The executive team provides senior oversight anddecision making, whereas the project team provides day-to-daymanagement. These teams are designed to make decisions in thebest interest of the project as a whole and not each member’sown interest. To that end, the teams make decisions by unanimity(AIA) or consensus (ConsensusDOCS requires consensus for theexecutive team, but does not specifically designate a decision pro-cess for the project team). If agreement cannot be reached betweenthe three core members, the owner reserves the right to make a uni-lateral determination. The other parties may dispute the owner’sdecision through the dispute resolution provisions of the contract.

Shared Risk

Provisions for sharing project risks and waiving claims are anotherimportant element of the IPD contracts. When implemented, theshared risk clauses waive the majority of claims except in casesof negligence, breach of contract, or when insurance proceedsare available for the claim. Contractually shared risk forces the par-ties to act as a single team, removing the organizational barriersrequired of fault-based claim environments. It creates an atmos-phere in which all parties are either going to win together or losetogether.

Budget Development and Management

IPD projects use a progressive approach to developing project costestimates. A not-to-exceed amount may be written into the originalcontract, but it represents an initial planning budget instead of atarget cost. From this initial budget, the designer and constructordevelop preliminary cost models. These cost models are regularlyupdated as the design phase progresses through specified mile-stones. When the project design is sufficiently complete, the partiesagree to a target cost for the project that is not adjusted except in thecase of a material change of work, differing site conditions, or com-pensable delay. This target is the cost utilized as a basis for paymentto and cost/profit sharing with the designer and constructor.

This method of budget development takes advantage of in-creasing certainty in construction cost estimates as the project

is designed. As Fig. 1 demonstrates, a fixed price design and con-struction contract must decide on a final price early in the processwhen cost estimates contain many unknowns and are highly var-iable. In contrast, a contract that allows revisions to cost estimatescan decide on a target cost when those costs are much more certain.

Pain/Gain Sharing and Incentives

The next technique further enforces a win–win (or lose–lose)atmosphere by integrating the project rewards (or losses). Whenproject costs are less than the target cost, a gain sharing agreementdistributes the savings among the parties according to predeter-mined percentages. In the other case, when project costs exceedthe target cost, pain sharing distributes the losses among the parties.Pain sharing agreements often limit the designer’s and constructor’slosses to their overhead and profit, limiting their financial risk ofjoining a project.

The contracts also allow for the designer and constructor to earnincentive payments for meeting performance benchmarks. Theseplans can offer payments during the project for meeting certaingoals, providing financial incentives earlier and/or in excess ofthe savings shared at the end of the project. The details of theincentive plans are left to the project parties to decide at the begin-ning of the project as a contract amendment. Incentives can bebased on noncost goals such as safety and quality but are fundedthrough project savings, so they also depend on superior costperformance.

Dispute Resolution

One of the keys of the IPD contracts is the utilization of establisheddispute resolution procedures, preagreed as a binding clause of thecontract at its formation. They use a three-step dispute resolutionprocedure. A dispute that cannot be resolved between the directlyinvolved parties is first submitted to the joint executive team forresolution. If the executive team is unable to resolve the issue, athird-party will mediate an agreement between the project partic-ipants. If an acceptable settlement is still not agreed upon at thispoint, the binding resolution process is used. The preferred optionis binding arbitration through a preestablished method, such as theConstruction Industry Arbitration Rules of the American Arbitra-tion Association. If binding arbitration is selected, the three partiesagree to abide by it in lieu of litigation. Both contracts also offertraditional litigation for binding resolution if parties decline toagree to arbitration at the beginning of the project.

Selecting a Contract to Review

The contract to be reviewed in this study was chosen through theChoosing by Advantages (CBA) decision-making system. The cen-tral principles of CBA are that decision makers must use sounddecision-making methods, decisions must be based on the impor-tance of advantages, and decisions must be anchored to the relevantfacts (Suhr 1999). To choose between the two alternatives, theattributes of each key practice were compared between contractsand the advantages identified. Each key practice was scoredequally. Utilizing a decision table (Table 2), ConsensusDOCS300 scores the most advantages and was selected for analysis.

Methodology

An embedded single case study design was selected for this re-search, which is composed of a single case and multiple units of

Fig. 1. Cone of uncertainty (adapted from Gannon 2011)

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analysis (Yin 2009). This type of study is appropriate to test ahypothesis with a clear set of propositions as well as clear circum-stances within which they are believed to be true. The FAR pro-vides explicit circumstances under which to test if the specifickey practices of ConsensusDOCS 300 can be utilized in federalconstruction.

The ConsensusDOCS 300 contract is divided into 25 Articles,seven of which are used to implement the key IPD practices. Thisstudy extracted the articles of the contract dealing with each alli-ance practice. Each key practice was used as a unit of analysis for

review by a panel of three U.S. Air Force contracting officers,each with extensive experience in construction contracting. Eachreviewer received a copy of the contract and a short form that speci-fied the articles they were to review and the central clauses of eacharticle. The reviewers were asked to answer the following questionsfor each article of the contract:• Do the terms of the contract meet the Federal Acquisition

Regulations?• If so, are there any sections of the FAR that address the issue?• If not, what specific section(s) of the FAR does not allow certain

contract conditions?• Do you see any potential alterations to the contract conditions

that would bring them in line with the FAR?The Delphi method was utilized for data collection; after re-

viewing each article the members of the panel were provided witha summary of the entire panel’s response to an article and allowedto revise or clarify their inputs. A summary of the notable findingscan be found in Table 3, indicating findings that impede or facilitatepossible implementation under federal regulations. When research-ing the reviewers’ findings, the authors discovered some additionalfindings, which are included in the table. This paper’s analysis wasdeveloped from a combination of the reviewers’ findings and in-terpretations, the authors’ own research and interpretations, andrespondent validation performed during data collection and aftercompletion of early drafts.

Tri-Party Agreement (Article 1)

Article 1 is not necessarily an IPD key practice, but is an im-portant facet of the contract that should be analyzed. It arrangesthree distinct parties into a single contract. This is unusual inthe federal sector, where typical construction contracts use eithera single contract between the owner and a design-build contrac-tor or two separate contracts between the owner/designer and

Table 2. CBA Decision Table

Key practice Advantage

Joint decisionmaking

Advantage AIA C191: Management processesand teams are more clearly defined.(20 points) More defined processes decreaselikelihood of conflict due to ambiguity.

Shared risk Advantage ConsensusDOCS 300: Providestraditional liability option.(20 points) Provides additional options tocontracting parties.

Budget developmentand management

Advantage ConsensusDOCS 300: Detailedmilestone cost models. Target cost set aftercomplete design.(20 points) Flexibility for cost changes duringdesign. More accurate target cost without need foramendments.

Pain/gain sharing Advantage ConsensusDOCS 300: Flexible painsharing methods.(20 points) Allows parties to accept greater risk/reward if desired.

Dispute resolution (TIE) Advantage: Nonbinding mediation beforebinding arbitration.(0 points) No significant difference.

Score ConsensusDOCS 300: 60 AIA C191–2009: 20

Table 3. Impediments and Facilitators to Federal Implementation of ConsensusDOCS 300

Article Impediments Facilitators

Tri-party agreement Article 1 I-1. No precedent for binding tri-party contract (33) F-1. Similar to design-build method (36.6)I-2. Competitive selection (6.101, 36.6) F-2. Possible use of associate contractor agreement

(Air Force IG5317.9500)I-3. Possible organizational conflict of interest (9.5)

Management group Article 4 I-1. 4.6 contracting officer approval required fordecisions (1.601)

F-1. 4.1, 4.6 parallels existing contractor/governmentrelationship precedentsF-2. 4.1, 4.6 mutual agreement policy (33.204)F-3. 4.6 owner’s final determination allows forcontracting officer approval (1.601)

Shared risk Article 3 I-1. 3.8.2.1, 3.8.3 limitations on hazardousindemnification authority (50.102-1d)

F-1. 3.8.2.1, 3.8.3 limitations on indemnificationapply to unusually hazardous only (50.102-1d)

I-2. 3.8.2.1-3 claims cannot be limited in some cases(11.5, 52.211-12, 33, 52.246-12)

F-2. 3.8.2.2 FAR equitable adjustments (52.211-18,52.236-2, 52.242-17, 52.243-1, 52.249-2)

I-3. 3.8.3 damages under certain conditions(52.249-10)

Budget, compensationincentives, and risk sharingArticles 8-11

I-1. 8.1.1 restriction on contract types (16.102a,b) F-1. 8.1, 8.3, 11.4, 11.5 adaptable to FAR contracttypes (16.403-1, 16.403-2)

I-2. 8.1.1 lack of price competition (6.101, 16.104a) F-2. 11.2, 11.3 FAR incentive programs (16.402)I-3. 8.1, 8.3, 11.4, 11.5 limitations on incentivecontracts (16.401a,d)

Dispute resolution Article 23 I-1. 23.3-5 alternative dispute resolution must bevoluntary (33.214.2)

F-1. 23.2 mutual agreement policy (33.204)

I-2. 23.5 strict limits on binding arbitration(33.214.4g)

F-2. 23.3-5 precedence for alternative disputeresolution (33.214, 33.210)F-3. 23.3-4 neutral party resolution (33.214d)

Note: First clause number (e.g., 4.6) identifies ConsensusDOCS 300 clause number affected (Article 1 is a single clause). Parentheses indicate FAR sectionreferenced (or other reference if indicated).

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owner/constructor. However, there is a precedent of contractsrequiring joint participation of prime contractors in the accom-plishment of a requirement. Air Force Informational Guidance5317.9500 outlines Associate Contractor Agreements (ACA) thatoutline “the basis of sharing information, data, technical knowl-edge, expertise, and/or resources essential : : : to meet the termsof the contract” (Department of the Air Force 2006). This kindof agreement is similar to the way ConsensusDOCS 300 outlinesthe responsibilities and interactions between parties, and it couldbe argued that an alliance contract is just an extension of this idea.However, ACAs are not contracts and do not obligate the parties inthe same way a contract does. Arranging an alliance contract as anACA would encounter many of the same difficulties as partneringagreements; without contractually binding provisions, parties areultimately rewarded for acting in their own interest and not theinterest of the project.

A primary limitation in organizing a three-party contract is theneed to provide for full and open competition in the selection oftwo separate contractors as required by FAR 6.101. Because ofthe requirement for competition, the designer and the construc-tor would have to be selected by a separate solicitation and sourceselection processes. In addition, FAR 36.601-3 outlines distinctsolicitation and source selection procedures to be used forarchitect/engineer (A/E) services. Another limitation is potentialconflicts of interest between contractors that enter the contractas separate entities but may have previous shared relationshipsor financial interests. Because the contract depends on collaborativeprinciple and joint decision making, this could put the owner at anunfair negotiating position against a united front (perhaps a mootpoint when considering the owner’s final decision power). Accord-ing to FAR 9.5, the contracting officer must identify and mitigateconflicts of interest. All of these issues are resolvable but signifi-cantly complicate the solicitation and selection process. This couldnoticeably slow the project lead time, especially in the case of aprotest of award.

A possible solution for these issues is to rearrange the contract toa design-build arrangement, in which the designer and constructoroperate as a joint venture. This would change some of the collabo-rative principles of the contract, such as reducing three-party jointdecision making to a two-party arrangement. Each member of thejoint venture would have to depend on a shared representative.However, certain practices such as dispute resolution, shared risk,and incentives would still meet their original intent. Pain/gain shar-ing could still operate as an effective incentive tool, only requiringthe joint venture to internally agree on the share percentage be-tween designer and constructor. Although an IPD design-build con-tract would require adept management between the designer andconstructor, it likely provides the best arrangement for a federalalliancing contract.

Joint Decision Making (Article 4)

ConsensusDOCS 300 uses a project team known as the collabora-tive project delivery (CPD) team for day-to-day project manage-ment. The CPD team’s decision process is not expressly outlinedin the contract, deferring the settlement of disputes to the executiveteam. The executive team, known as the management group, isassigned the responsibilities of making joint decisions on issuesbeyond the scope of day-to-day management or in cases of disputeswithin the CPD team. The management group and its decisionprocess are defined in clauses 4.1 and 4.6. It is comprised of anauthorized representative of the owner, designer, and constructor.The management group is to “act in the best interest of the Project

as a whole without consideration to each member’s own interest.”Each decision is to be made, to the greatest extent possible, by con-sensus. When consensus cannot be reached “the Owner shall makea determination in the best interest of the Project as a whole subjectto the dispute resolution process in Article 23” (ConsensusDOCS2007).

Several reviewers cited existing precedents for very similar de-cision processes in federal defense contracts. In particular, onereviewer expressed that this arrangement operates very similarlyto the collaborative project management implemented in Air ForceCenter for Engineering and the Environment (AFCEE) design-build contracts. The FAR also directly supports joint decision mak-ing. FAR 33.204 outlines that the “Government’s policy is to try toresolve all contractual issues in controversy by mutual agreement atthe contracting officer’s level.”

In regard to contract decisions made by the management group,the authority to enact contract actions is limited solely to con-tracting officers according to FAR 1.601 and 1.602. This may re-quire that the owner’s management group representative be theproject contracting officer or that all management group deci-sions be subject to contracting officer approval. Because clause4.6 already empowers final determination to the owner, thegovernment retains the power to block any decisions that do notmeet contracting officer approval. Therefore the contract shouldnot have any difficulty meeting the requirements of 1.601and 1.602.

Overall, the FAR does not provide any notable barriers to jointdecision making. In fact, some areas of federal construction alreadyuse similar techniques. However, when applying this practice to thegovernment it is important to ensure proper executive buy-in andrepresentation in the management group. Federal bureaucracy cancause leadership confusion and typically creates a disparity be-tween the agency that executes construction projects and theagency that actually uses the facility. Addressing these types of is-sues is essential to a successful executive decision making team.

Shared Risk (Article 3)

ConsensusDOCS 300 implements a shared risk environment pri-marily through clause 3.8.2.1, in which the parties release eachother against liabilities arising from non-negligent decisions, and3.8.3, in which all parties waive claims against each other for con-sequential damages. The FAR directly addresses these types ofclauses in FAR 50.102, in which it limits the authority of indem-nification clauses in cases of “unusually hazardous or nuclearrisks.” “Unusually hazardous” is not defined by the FAR, butAir Force acquisition guidance describes unusually hazardous risksas a potential loss that would severely impact a contractor’s finan-cial or productive capabilities and for which sufficient insurance isnot available (SAF/AQCS 1998). The majority of federal construc-tion projects are unlikely to fall in this category, so this will notapply in most cases.

The more glaring difficulty with these shared risk clauses are incases in which the FAR explicitly provides for damages, such ascases of liquidated damages, nonperformance, or default. FAR 33.2and the Contract Disputes Act of 1978 also expressly allow forcontractors to apply for claims. The explicit requirements of theseregulations prevent the use of a blanket waiver of liability anddamages.

However, ConsensusDOCS also offers a traditional risk optionas an alternative. When using traditional risk, the contract suggestssetting monetary limits on the total liability (beyond the coverageof insurance) to which the designer and constructor are subject.

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However, this runs into the same difficulty with federal regulationsas the shared risk liability waivers. Fortunately, because of thestrict requirements of the FAR, federal contracts already providea great deal of liability protection for contractors. Numerousclauses provide for equitable adjustments for a contractor in certaincircumstances, including government delay of work (52.242-17),changes (52.243-1), variations in estimated quantities (52.211-18),differing site conditions (52.236-2), and termination for conven-ience (52.249-2).

Therefore, the FAR manages many contract performance risksthrough existing FAR clauses. These clauses allow for a fact-finding and negotiation process to agree on the impact and resolu-tion of unexpected events (risks). Combined with joint decisionmaking and the other IPD key practices, this allows for a reasonableand equitable management of risk.

Budget Development and Management andPain/Gain Sharing (Articles 8–11)

ConsensusDOCS 300 does not include any provisions for com-petitive price proposals or any precontract price negotiations.This presents a significant issue to the FAR, in which FAR6.101 requires full and open competition in source selection, with16.104a establishing price as a primary competition concern.ConsensusDOCS 300’s budget development model begins witha loose target budget that is successively narrowed down until afinal target cost is determined at 100% design completion. Thismodel would first appear very difficult to fit into the typical FARfixed-price or cost-reimbursable price models, but the FAR pro-vides strikingly similar contract models in Subpart 16.4: IncentiveContracts. In 16.403-2: Fixed-Price Incentive (Successive Targets)Contracts, the FAR provides a contract model that aligns quiteclosely with the intent of ConsensusDOCS 300 while allowingfor cost negotiation and competition. FAR 16.403-1 Fixed-Price(Firm Target) Contracts also meets some alliance concepts by pro-viding pain/gain sharing, but does not provide progressive budgetmanagement.

A fixed-price incentive (successive targets) contract negotiatesthe following elements at the outset of the contract according toFAR 16-403-2(a)(1):• An initial target cost;• An initial target profit;• An initial profit adjustment formula to be used for establishing

the firm target profit, including a ceiling and floor for the firmtarget profit;

• The production point at which the firm target cost and firmtarget profit will be negotiated (usually before delivery or shopcompletion of the first item); and

• A ceiling price that is the maximum that may be paid tothe contractor, except for any adjustment under other contractclauses providing for equitable adjustment or other revisionof the contract price under stated circumstances.This method moves the initial target costs and profits required in

Articles 8.1.2 and 8.1.3 from the start of project design to the solici-tation and negotiation phase. It also adds a ceiling price. These areminor changes to the intent of ConsensusDOCS 300 but are sig-nificant changes in terms of meeting the FAR requirement forfull and open competition. They allow specific cost values thatcan be used for negotiation and competition. The profit adjustmentformula also allows for the parties to set a pain/gain sharing profitformula in accordance with the ConsensusDOCS contract.

As specified in ConsensusDOCS 300 Article 8, the successivetargets incentive contract allows the target cost to be improved

until the firm target cost is set at a certain production point,such as 100% design. At this point, 16.403-2 allows for theparties to establish a formula for establishing the final price usingthe firm target cost and firm target profit. The final cost is thennegotiated at completion, and the final profit is established bythe formula:

“When the final cost is less than the target cost, application ofthe formula results in a final profit greater than the targetprofit; conversely, when final cost is more than target cost,application of the formula results in a final profit less thanthe target profit, or even a net loss. If the final negotiated costexceeds the price ceiling, the contractor absorbs the differenceas a loss. Because the profit varies inversely with the cost, thiscontract type provides a positive, calculable profit incentivefor the contractor to control costs.” (FAR 16.403-1)

This meets nearly the exact purpose of the pain/gain sharing prin-ciple of ConsensusDOCS 300. The only key difference is the abil-ity of the contract to allow for the contractors’ losses to be limitedto their overhead and profit. Loss limits are not an essential feature,but they can reduce the prevalence of contractor risk aversionbehavior, such as padding estimates, inflating contingency funds,or abstaining from competing for a project altogether.

However, the FAR does not leave the selection of contract typepurely to contracting officer discretion. First, there are limits onwhich contract types can be used in certain situations. FAR 6.102establishes sealed bids as the preferred method of establishingfull and open competition, and FAR 16.102 requires all sealedbid solicitations to use a firm-fixed-price or fixed-price contractwith economic price adjustment contract type. Therefore, to usean incentive contract the contracting officer must first make a caseagainst sealed bids. FAR 6.401 outlines the four points on whichthis could be done, requiring the use of sealed bids when:• Time permits the solicitation, submission, and evaluation of

sealed bids;• The award will be made on the basis of price and other price-

related factors;• It is not necessary to conduct discussions with the responding

offerors about their bids; and• There is a reasonable expectation of receiving more than one

sealed bid.The project contracting officer would have to make a case on

one of these points that sealed bidding is not appropriate in orderto avoid the fixed price requirement. Fortunately, this is not difficultand quite common. The most typical method is by establishingnonprice measures, such as technical qualifications or past perfor-mance, as significant selection criteria. The contracting officer canthen utilize performance-based selection methods, such as Perfor-mance Price Tradeoff or Full Tradeoff.

Next, FAR 16.401(a and d) requires that to use an incentivecontract, the contracting officer must make a determination andfinding, signed by the head of the contracting activity, establishingthat “a firm-fixed-price contract is not appropriate and the re-quired supplies or services can be acquired at lower costs and, incertain instances, with improved delivery or technical performance,by relating the amount of profit or fee payable under the contractto the contractor’s performance.” This may be a more difficult caseto make, but it can use many of the same arguments as would beused to avoid sealed bids, specifically the importance of quality andperformance criteria to the success of the project.

Finally, fixed price incentive (successive targets) contracts comewith their own limitations, stated in 16.403-2. They can only beused when:

JOURNAL OF CONSTRUCTION ENGINEERING AND MANAGEMENT © ASCE / MAY 2013 / 485

• The contractor’s accounting system is adequate for providingdata for negotiating firm targets and a realistic profit adjustmentformula, as well as later negotiation of final costs; and

• Cost or pricing information adequate for establishing a reason-able firm target cost is reasonably expected by the governmentto be available prior to contract performance.Fortunately, both of the points made by these limitations can be

reasonably expected to be met in a typical construction project.All of these requirements present challenges to the project con-tracting officer, but none of them are insurmountable. In fact, oncea suitable case is made for a successive target incentive contractfor one construction project, it could likely be easily revised to ap-ply to most subsequent projects.

Incentive Program (Article 11)

Article 11.2 of ConsensusDOCS 300 outlines the development ofan incentive program to reward superior performance based onproject expectations and benchmarks. This IPD key practice isdirectly addressed by FAR 16.402-2, 3, and 4, allowing for per-formance, delivery, and multiple-incentive contracts, respectfully.ConsensusDOCS 300 leaves open to the management group theestablishment of the details of an incentive program, but FARPart 16 makes provisions for incentive arrangements that agreewith the alliancing goals envisioned by ConsensusDOCS. How-ever, incentive programs are under the same conditions of FAR16.401(a and d) previously identified for incentive contracts, re-quiring a determination and finding that they are in the best interestof the government.

Dispute Resolution (Article 23)

The FAR sets a clear policy in 33.204 of trying to settle contrac-tual issues by mutual agreement at the contracting officer’s levelprior to submission of a claim. This precisely agrees with thedirect discussion and management group decision procedures ofConsensusDOCS 300 Article 23.2. In regard to Articles 23.3 and23.4’s use of mitigation or mediation, ConsensusDOCS 300’s dis-pute resolution procedures closely resemble the Alternative DisputeResolution (ADR) components of the FAR. FAR 33.210 allows andencourages the use of ADR to resolve any claim over which thecontracting officer would have decision authority, which includesall claims except those involving fraud or for which another agencyhas authority. FAR 33.214 allows the use of ADR when the follow-ing elements exist:• Existence of an issue in controversy;• A voluntary election by both parties to participate in the ADR

process;• An agreement on alternative procedures and terms to be used in

lieu of formal litigation;• Participation in the process by officials of both parties who have

the authority to resolve the issue in controversy;• The confidentiality of ADR proceedings are protected consis-

tent with 5 U.S.C. 574; and• The solicitation does not require arbitration as a condition of

award, unless otherwise required by law.FAR 33.214d also allows a neutral party to “facilitate resolution

of the issue in controversy using the procedures chosen by the par-ties.” With the limitations previously mentioned, these regulationsgive the project contracting officer the capability to execute the firstthree dispute resolution methods used by ConsensusDOCS 300:direct discussions, mitigation, and mediation.

However, there are strict limits on the final method of bindingarbitration. Binding arbitration authority is specifically limitedby 33.214g to the guidelines of individual agencies, so its use isdetermined by the specific agency. This limitation comes fromthe Administrative Dispute Resolution Act, which states insection 575(c):

“Prior to using binding arbitration under this subchapter, thehead of an agency, in consultation with the Attorney Generaland after taking into account the factors in section 572(b),shall issue guidance on the appropriate use of binding arbi-tration and when an officer or employee of the agency hasauthority to settle an issue in controversy through bindingarbitration.”

The Department of the Navy is one such agency that has publishedinstructions for use of binding arbitration (Secretary of the Navy2007). This document has strict instructions and limitations on theimplementation of binding arbitration. The instructions and limita-tions include the parties involved, when it may be used, howarbitration agreements are written, the choice of arbitrator, the con-duct of arbitration hearings, arbitration awards, and the judicialreview of arbitration awards.

These rigorous and extensive directives would make binding ar-bitration a difficult endeavor, especially because they still allow forlegal review subsequent to the decision. Although binding arbitra-tion is designed to offer a timelier and less costly method of finalresolution, litigation will ultimately serve the same purpose. In fact,ConsensusDOCS 300 recognizes that some parties may prefer orrequire litigation, offering it as an alternative to binding arbitrationin the contract. Ultimately, the intent of dispute resolution is toexpressly agree on dispute procedures before a dispute occurs andto offer the parties opportunities to resolve the dispute amicablybefore a binding resolution is required. The FAR allows for thisintent to be maintained.

Conclusions

Of the five key IPD practices in ConsensusDOCS 300, only sharedrisk and the binding arbitration component of dispute resolu-tion cannot be effectively implemented under current regulations.Although not a key practice, ConsensusDOCS 300’s tri-party con-tractual method also runs into difficulties. However, each of theselimitations can be addressed without severely limiting the effective-ness of a comprehensive alliancing contract.

First, design-build would be the most reasonable method for afederal alliancing project. While the tri-party agreement could bequite effective in the civilian sector, design-build allows for the useof contracting and source selection methods that are already estab-lished in the federal government. It is an unnecessary distraction toattempt to break new ground on contracting and bidding methodswhen they are not directly related to the key practices to be imple-mented. Other than requiring some additional coordination internalto the contractor, design-build does not detract from the alliancingpractices.

However, some compromises are required for the key practicesof shared risk and dispute resolution. Unfortunately, a shared riskof liabilities is not feasible in federal construction. Neither isConsensusDOCS 300’s alternative of traditional risk allocationwith liability limits. One of the goals of an alliance embodied bysharing risk is to create a cohesive team that shares wins or lossestogether. Traditional risk does not enhance this goal, but much ofit is still retained by joint decision making and pain/gain sharing.Another benefit of shared risks or contractor liability limits is

486 / JOURNAL OF CONSTRUCTION ENGINEERING AND MANAGEMENT © ASCE / MAY 2013

reducing contractors’ financial risk, the cost of which is almostalways passed on to the owner. Federal contracts already addressmany of these issues in their existing equitable adjustment clauses.Therefore, the existing federal construction risk structure can beused without losing significant value of the alliancing contract.

Finally, a federal alliancing contract would need to use litigationin place of binding arbitration, an option already recognized inConsensusDOCS 300. The potential cost and time savings of bind-ing arbitration would be lost. But the contract can retain many ofthe benefits of ConsensusDOCS 300’s dispute resolution methods,such as setting clear resolution procedures before a dispute createsan adversarial relationship and providing the parties opportunitiesfor alternative dispute resolution before resorting to litigation.

The remaining key practices (joint decision making, budget de-velopment and management, pain/gain sharing and incentives) canbe achieved without any compromise from ConsensusDOCS 300.Although the decision-making teams must be carefully assembled,there is no reason the joint decision making clauses cannot bereplicated in a federal contract. With proper contracting officerjustification, ConsensusDOCS’s budget development and manage-ment, pain/gain sharing, and incentives practices can be accom-plished through the FAR’s incentive contract methods.

If the preceding steps are followed, an effective alliancing con-tract can be used in federal construction without major difficulty.It is hoped federal construction authorities will use this basic frame-work to draft a federal contract that implements the key practicesof alliancing. New techniques always carry some risk, but severalexisting federal contracting avenues, such as small business set-aside (FAR 2005) or AFCEE’s construction programs, provide di-rect access to stable, capable, vetted, and experienced contractorsthat could be used to minimize this risk. Partnering has served as aneffective first step during the last 25 years, but it is time to take thenext one. The private sector may have taken the lead this time, butthere is still time for federal construction to catch up.

Acknowledgments

The writers would like to thank the excellent contract review par-ticipants and the Air Force Center for Engineering and the Envir-onment for their invaluable contribution to this work.

The views expressed in this article are those of the writers anddo not reflect the official policy or position of the U.S. Air Force,Department of Defense, the U.S. Government, or the Air ForceInstitute of Technology.

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