Although the aggregate value of operating period risks is typically many times less than the aggregate value of design and construction risk, care must still be taken to determine the appropriate value of these risks as they will usually be transferred under a DBFM where the private sector partner will become responsible for maintenance and life cycle activity. By the time risk quantification is undertaken, there should be a cost estimate for the maintenance and life cycle obligations associated with the new asset that can be used for the purpose of quantifying the associated risks.
The approach to quantifying operating period risks is not always clear. To help clarify, assume for discussion purposes that the cost estimate for maintenance and life cycle of a project is $1 million per year. This estimate means that the public sector body under traditional delivery could be assumed to receive a $1 million allocation from the owner towards the maintenance and life cycle of the new asset, and is a necessary assumption for an apples to apples comparison of procurement alternatives. The actual amount of money spent by the public sector, however, on life cycle and maintenance, can be expected to be less than $1 million due to competing budgetary pressures and priorities. The extent to which the actual amount spent falls short of the assumed allocation depends on the owner, and can be determined based on historical life cycle and maintenance funding.
This under-funding or delayed funding can result in significant risk in the public sector delivery model, since the asset will not be able to meet the intended performance standards. In addition, there is the risk that the cost of deferred life cycle and maintenance will be higher when it is eventually performed. This risk should be reflected by a premium that is sufficient to demonstrate what would be required to achieve hand-back standards at the end of the performance term under traditional delivery. When calculating this risk premium, care must be taken to ensure it addresses the additional cost of deferred life cycle and maintenance that would need to be incurred to achieve hand-back standards. If the premium is too low, the outcome of the deferral on an NPC basis will suggest that deferring these costs is the best economic decision, which is neither intuitive nor correct.