Examining the financial uncertainty of an alliance project from the perspective of the contracting parties

Abstract

A project alliance is a project delivery system in which the owner and service providers share the risks associated with the project. The aim of this paper is to increase understanding of the functioning of the payment bases of alliance projects, especially from the perspective of diverse uncertainty. The work is based on the plans and contracts of one of the implemented alliance projects and on modelling the project’s payment system. The developed model was simulated taking into consideration the multiple uncertainties associated with the project. The compensation paid by the owner to the service providers and the service providers’ consortium fee were examined in particular. Alongside the original model based on the project’s contract, some alternative instances were also defined. The focus was on the effect of the cost escalation and on the transfer of the corresponding risk to the alliance, as according to the contract the inflation risk of the project lay with the owner. In addition, the model was examined in situations where uncertainty increases significantly, or risk events tend to co-occur. At their most extreme, the risks were assumed to be so high that the service providers’ loss limitation clause could have steered the determination of compensation. The contribution of the work is in illustrating the effect of different contractual solutions and broadening our understanding of the functionality and sensitivity of the alliance payment system.