The Compensation payable for government-initiated Modifications will be determined in a manner consistent with the Compensation Principles and the following additional principles and requirements75:
(a) Government will determine (and advise the private party when notifying it of its Modification request):
(i) whether it requires the private party to initially fund the Modification works (with government paying for that cost through an adjusted service fee over the contract term); or
(ii) where the Modification involves capital works, whether it will pay the initial costs directly through a one-off capital expenditure payment.
(b) The private party will not be entitled to apply any margin or other on-costs to the price charged to the private party for Modifications up to a specified threshold. This threshold will be determined on a project-specific basis and will depend on the value of the project, but is intended to capture those Modifications for which the private party does not require additional resources, which do not require significant project management, or which do not materially affect the private party's project risk profile.76
(c) Where government omits work or a Contracted Service by way of Modification, deductions will be made from the service fee for any savings to the private party (including any profit on the amount of such savings).
(d) Any payment made to the private party by government (as a result of a Modification) will be on a whole-of-life basis (i.e. it will take into account the positive and negative effect of the Modification on the private party's recurrent expenditure, as well as the capital cost of any works).
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75 As a matter of structure, the project agreement may include the methodology for determination of Compensation in respect of government-initiated Modifications in a separate regime, but which will nonetheless be based on the Compensation Principles and other requirements set out in this Chapter.
76 See section 18.1.2(f) of Chapter 18 (Compensation payable).