Government is likely to allocate the cost consequences of delays in design or construction or of any failure to meet the agreed standards to the private party by:
• buying services at pre-agreed prices and paying for them only on service delivery
• limiting the circumstances in which the contract term may be extended
• having an agreed damages regime for late delivery.
However, this starting position may unintendedly shift if government interferes in the detailed design process or requests a change to the agreed service standards leading to additional costs and/or delays in starting service delivery.
It can be difficult for government to maintain the balance between communicating its needs by clearly specifying service outputs, and standing back from direct involvement in the design and construction process so that it does not unintentionally assume design and construction risk. This is especially so if the services delivered under the contract are accommodation services providing the functional space from which government itself will deliver core services. Unless government clearly conveys its functional requirements for particular areas, the contract may not succeed in delivering the accommodation services to the level or suitability necessary to ensure efficient delivery of core services from the facility. Government needs to secure a level of confidence in the suitability of the design to meet the outputs specified, so as to avoid making the allocation of design risk to the private party ineffective.
The onus of ensuring that the design is capable of delivering the specified outputs must remain with the private party. It is imperative that no action taken by government can be construed as offering assurances as to the efficacy of a design and so discharge the onus on the private party.
If, however, the design is efficacious but government - for its own reasons - seeks a variation, it is appropriate that government meet the costs of modification or receives any net benefits. To the extent that this design variation causes delays in service delivery or other loss of revenue, government may also bear consequential costs. For example, government may request variations to the project design, or request new connections to privately or publicly-owned roads to integrate a privately-operated road into the public roads system. This request is subject to reasonable notice being given, government agreement to bear all costs of the works and to indemnify the private party for any related revenue losses or expenditure arising from the variation.
A more moderate, shared approach may be to allow government to request variations during the development phase, provided they do not affect the commissioning date, and with the cost of variations borne by the private party being capped. Caps on the private party's liability for the cost of government-initiated variations should be limited to relatively small sums to ensure achievement of a value for money outcome, as the private party will be likely to factor these potential costs into its bid price.
It is important to note that government-initiated requests for variation will inevitably lessen the totality of the risk allocation to the private party by interfering with the private party's liberty to determine a commercially-effective design. For this and other reasons outlined above, government should resist initiating change to design and construction processes.