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A new contractual model for law firms

15 May 2013

This article was first published by ALB Online in May 2013 

It meant opening the firm’s books to an external auditor.  It means that, unless the project is delivered on time and on budget, we recover our costs only.  No profits.

But we saw it as an opportunity to explore a new contractual model, one which suits the current corporate law market and one which we think may be picked up by other infrastructure providers in New Zealand and internationally. 

So Chapman Tripp jumped at the chance when the NZ Transport Agency (NZTA) – the government body responsible for New Zealand’s State highway network – tendered for a legal firm to join an alliance to deliver the statutory approvals for a major motorway extension north of Auckland. 

The NZTA is experienced in the use of alliancing arrangements but, to the best of its knowledge, the inclusion of a law firm in such an arrangement is a “world first”.

The project is one of seven major highway projects that have been designated by the New Zealand Government as Roads of National Significance, meaning that they are important to New Zealand’s economic prosperity.  Budgets and timeframes are very tight, creating a laboratory for experimentation and innovation in project management.

The NZTA is the “owner participant” in the Further North Alliance and Chapman Tripp is one of three “non-owner participants”, the other two being engineering consultants, Sinclair Knight Merz (SKM) and GHD. 

The Further North Alliance is not about cost-cutting.  It is about risk-sharing and – more particularly – about finding innovative, efficient and cost effective solutions.  The NZTA was clear about its requirements.  It wants to lead the industry in innovative delivery methods and it wants the Alliance to set the new benchmark for consenting best practice. 

Alliance formation

SKM and GHD were already ‘in’ when the NZTA issued a Request for Proposal (RFP) inviting the three law firms on its legal panel to tender for the legal services component of the Alliance.  As part of our pitch preparation, and despite our previous experience acting for alliances, we further researched alliancing principles to ensure we thoroughly understood the concepts involved and “spoke the language”. 

We needed to offer someone to sit on the Alliance Board and a Legal Manager who would be based in the Alliance office and would co-ordinate the rest of the Chapman Tripp team. 

The NZTA has two people on the Alliance Board and Chapman Tripp, SKM and GHD have one each.  The Board is responsible for governance and for authorising any variations in either the scope of the work or the budget.  We offered a member of our own Board for this role.  Bruce McClintock is a commercial lawyer so the statutory approvals (consents and designations) for the project were outside his practice area, but we wanted to demonstrate that the firm’s commitment to the Alliance began with our Board.

The Legal Manager choice was critical as half the points in the “relevant skills” rating of the RFP would be assigned according to the qualities of this person and the RFP emphasised the importance of “soft skills”, such as the ability to work collaboratively toward ‘best for project’ outcomes.  Paula Brosnahan is an environmental and resource management partner with significant large project experience and a reputation as a strong relationship manager.

The Alliance’s first task was to agree a Target Cost Estimate (TCE).  The NZTA participated in this process both as a member of the Alliance and also as the owner, which added a complexity, but not a conflict as the Agency’s objective in both capacities was the same – to strike a price which was ambitious but also achievable. 

As the Alliance covers the consenting phases for the project only, the TCE relates to the costs of securing the necessary planning approvals.  It does not include construction or property acquisition costs.

Sharing the risk

The TCE preparation and negotiations took three months and were reviewed by an Independent Assessor.  A TCE of $17.5 million was agreed and announced publicly. Within this are three limbs – a cost limb, a profit limb and a bonus limb. 

At Limb One, we get our salary and direct costs.  With Limb Two, we recover our corporate overheads and a standard profit margin.  Limb Three comes into play if the work is delivered under budget, in which case half of the savings will go to the NZTA and the other half will be divided among Chapman Tripp, SKM and GHD.

Alliance performance

Co-location is essential to the Alliance ethos, which is why the Further North Alliance has dedicated premises, separate from the NZTA and the other participating organisations.  This makes for more efficient communications – face-to-face rather than e-mail and phone, impromptu five minute meetings as needed, immediate feedback loops - but it also encourages an Alliance “culture”. 

To emphasise the Alliance’s bond, the Alliance also has its own business cards, email addresses, values framework and social events.  The expectation is that when Paula is at the Alliance office, she leaves her Chapman Tripp “hat” at the door and thinks of herself not as a Chapman Tripp partner but as the Alliance’s Legal Manager.  This level of engagement is expected of all Alliance participants.

Early indications are that the Alliance can deliver results that would be extremely difficult to achieve under a business as usual model.  The Alliance programme requires that all  applications and associated information are lodged within a seven month timeframe.  Typically this stage can take a year to 18 months, so getting there within seven months will be a challenge and industry-leading.

General practice is that the lawyers are brought in when the consent applications are about to be lodged with the relevant consenting authority, by which time all of the supporting technical documentation will usually be completed.  But legal review often determines that these documents have holes in them or include irrelevant information and therefore must be re-worked or re-written so that they meet the relevant statutory tests.

Patrick Kelly, the manager responsible for the “interface” between the NZTA and the Alliance, says that having legal input into the technical reports as they are being prepared is already delivering great efficiencies.

Mark Reese is Chapman Tripp’s Managing Partner in Wellington.

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