AUSTRALIAN CONSTRUCTORS ASSOCIATION PUBLICATIONS
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Strategy
Delivery systems
Our ability to manage a diversity of project delivery systems to meet changing market environments and client needs is a key part of our risk management stragegy.
All of the Group's projects have similar basic components - design, procurement, construction, operation (ie contract mining) and maintenance. When undertaking construction, mining or services work, the Group operates under a range of contractual styles or delivery systems. These influence the nature of the service provided, the risk profile accepted and the sorts of returns that are generated.
As business has changed and our clients' needs have evolved, we have honed our skills and delivery systems to continually add value and manage risk. While lump sum tender work remains an important element of our business, we have a large volume of activity in design and construct work, carrying out project management, entering into alliancing arrangements, negotiating contracts and participating in Build-Own-Operate-Transfer or Public-Private Partnership infrastructure schemes (see below for definitions).
Some delivery system definitions:
| Project Management - Management of a project on behalf of the client on a fee basis, from concept design to commissioning. | |
| Negotiated - Scope of work exclusively negotiated with the client, focus on adding value. | |
| Alliancing - Project parties assembled based on skills and expertise. All parties are focused on a successful outcome with an agreed target price on which they share risk and reward. | |
| Design and Construction - Management of the design process as well as construction. These projects are often competitively tendered, with the client setting a detailed scope for the tender. | |
| Development - Management of the development process from initial concept often involving financing, design, construction, ownership, operation and maintenance. | |
| Privatised Projects/PPP - Private sector involved in the financing and some or all of the design, construction, operation and maintenance of a project. | |
| Hard Dollar - Traditional competitively tendered contracting. Usually lowest price wins work. |
More detail on Alliance and D&C (Design & Construct) style contracts can be found in the reference documents published by the Australian Constructors Association, which can be accessed by clicking on the icons on the right hand side of this page.
A particular contracting style will be agreed depending on the clients' needs, the inherent risk of the project, our risk tolerance and that of our clients or partners, and the ability of the parties to accurately define and price the scope of work.
Broadly, the different delivery systems can be divided into three categories depending on how fixed the price and scope of the project is. These range from where significant risk is transferred to the contractor, with a fixed price; to a sharing of risk, with a semi-variable price; to the client accepting all of the risk, with a fully variable price.
The categories and the different contract styles are outlined in the table below with some examples.
| Contract Styles | Project Examples | |
| Risk accepted (by contractor) |
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| Risk accepted (with contractor) |
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| Risk retained (by client) |
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In the first category, the price is fixed and most risk is accepted by the contractor, providing some guarantee of cost to the client. We price the project for the value we are adding and the risk that we are prepared to accept.
A BOOT project, such as the EastLink Project in Melbourne had a fixed price of $2.5bn, which provided certainty for the financiers, in this case the listed company ConnectEast. The Thiess John Holland joint venture assumed substantial risk but manages this in a number of ways as described in the Tendering for work section.
In the second category, where risk is shared with the contractor, the client and contractor have an incentive to seek an optimum commercial outcome for all parties involved. Typically these contracts, such as alliances, have some form of painshare/gainshare mechanism where savings and costs overruns are shared.
On the $512m alliance to construct the Perth to Bunbury Highway, NPBH Alliance in Western Australia, Leighton Contractors and the other alliance partners share the risks and rewards. The Group's downside risk is capped with cost overruns shared to a pre-agreed level, beyond which our profit margin is guaranteed.
Over time the mix of work has changed and we are now seeing more work undertaken under alliance style arrangements than ever before.
In the third category, risk is largely retained by the client. The contractor is engaged to manage the construction process but most of the risk remains with the client.
The City of Dreams in Macau, has been undertaken as a project management contract, whereby the Leighton Asia/John Holland/China State joint venture earn a fixed fee to administer the construction on behalf of the client. This model was chosen as the joint venture was not able to adequately price the construction cost, as the project's scope was not sufficiently defined when we became involved.
Over time we've undertaken construction of some of the most complex infrastructure and building projects in Australia and Asia. Anything from massive tollroads, ports and rail lines, to casinos, hospitals and office towers. Choosing the right delivery mechanism and having a mix of risk and reward across the workload is very important for the Leighton Group. It supports our risk profile and provides diversity to our earnings.