How to select the right contracting model for your energy project

Where projects are complex or the scope is open to change, determining a framework for scoping and pricing is difficult. Contractors don’t feel confident submitting a proposal. It’s risky business. Alliance contracting is one model designed to address this. It establishes a more relationship-driven approach. Various parties come together to determine scope, design, and costs collaboratively, manage risks together, and share rewards accordingly.

Say you were working on a project to enhance distribution infrastructure across a portion of your network. In some areas you might be doing small-scale upgrades to existing substations. In other areas you may be building and integrating entirely new ones. The conditions and constraints will be completely unique for each project within this broader program.

Alliance contracting is a flexible option that allows a program owner to select the best partners to solve the challenges of individual pieces of work, rewarding them via a performance-based renumeration agreement. When there are a lot of unknowns, Alliance contracting can be a good solution.   

Where projects are less complex and proponents are confident in the capacity of contractors to deliver the outcomes they need, Design and Construct (D&C) contracts are still a popular approach. They allow owners to hand over the responsibility and risk for both the design and construction phase to the contractor, who agrees to complete the work for a lump-sum price. There are benefits on both sides, as by having full control over design and delivery, contractors can work to improve their margin through cost savings and value management. In theory, this means less input and involvement from the project owner.

One of the most important things required to procure a successful D&C contract is a firm understanding of the scope of works and an ability to confidently communicate this as a delivery specification to the contractor. D&C’s do not lend themselves to change once the contract is signed, and changing the scope post award can be very costly.

As a project owner, you need to ensure you have enough resources to support good contract management.

Variations and claims are common practice, and this can increase the actual cost of delivery significantly. These can be managed successfully, but open communication and strong contract management are vital for avoiding the common pitfalls of a transactional approach to delivery - disputes over cost, time, and quality.

Large projects often go down the path of developing customised contracts that are completely unique to the delivery initiative. But it pays to consider carefully how necessary this is. The costs associated with developing these contracts is higher to begin with, and they are subject to far more legal scrutiny on the contractor side when you go out to market.

In general, bespoke contracts are more complex and expensive to execute. With standard options such as the NEC suite available, it’s worth evaluating the cost benefit of developing from scratch. A good transaction and delivery advisor can help you weigh up the risks vs the rewards.   

Looking beyond the boundaries of your project is more important than ever in 2025. The cost of materials has gone up across the board, construction labour is spread thin, and global economic and political uncertainty are also adding pressure. All of this is increasing competition for expertise, materials, capital and labour - both within the energy sector, and beyond it.

As a result, we’ve seen the infrastructure market shift towards target cost based contract options, rather than lump-sum agreements. Incentivised Target Cost (ITC) contracts provide a target cost for the project which is kind of like the par score in golf. The aim is to deliver the project ‘under par’. This is encouraged through a ‘pain and gain’ system where the contractor and project proponent split (through an agreed percentage) any over or under-spend.

Moving from design to delivery can be the highest-risk phase of a project’s lifecycle. A lot can be lost in translation. And that can cause huge flow on problems in terms of cost, quality, and time. A poor transition can be a breeding ground for disputes, which is why Early Contractor Involvement (ECI) can be a good option to consider.

ECI allows selected contractors to be involved in a project from the earliest design phase. While incumbency provides a natural advantage to the contractor/s, who usually go on to be selected for the construction phase, project owners do reserve the right to move to a competitive tender process after the design phase is complete. By participating in a project pre-delivery, contractors gain a far better understanding of the logic and intent behind the design. This can help de-risk the transition into delivery and reduce future variations and disagreements down the track.

Successful project delivery is all about relationships

By asking the right questions and choosing the right contract model, the foundation is laid for positive partnerships between proponents and contractors where risk is laid with the appropriate party. Such relationships ensure that infrastructure’s rewards are realised on both sides of the delivery ledger. The construction industry is a crucial player in Australia’s energy transition. Without successful contractors, grid transformation moves further over the horizon, along with our hopes of meeting emissions reduction targets.

By selecting the right contracting model for your project, you will not only be delivering the commercially successful energy infrastructure we need in the here and now. You’ll be building positive relationships with delivery partners that will sustain our sector long into the future.