The private party mitigates the possible consequences of design, construction and commissioning risks by apportioning elements of the risk to its sub-contractors (and their indemnity insurers), who are familiar with the specialised territory and used to dealing with its risks. Notwithstanding this chain of risk bearers, the private party retains the primary liability for the particular risk under the contract with government. If a risk eventuates, the private party will seek to meet the costs by exercising its rights against the sub-contractors under the sub-contracts, but if for any reason this fails, the private party must meet the costs itself.
Although design and construction risk is essentially borne by the private party, materialised risk events impact on government in the form of delays or interruptions to service and/or less efficient service. In these circumstances, it is in the interests of all parties to actively manage risks. However, government needs to be careful not to become overly involved in the management of risks and in doing so, assume risks allocated to the private party.
The first necessity in managing design and construction risk is the proper specification of project outputs and of the core services government will be delivering. It also requires linking the contracted services to key performance indicators and, in turn, to the payment mechanism. This puts both parties in the best position to achieve their objectives. Incorrect or ambiguous specifications at this stage obviously increase the project risks.
Government should consult with the successful bidder when detailed service options are being developed and ensure that government is briefed on the proposed design and kept abreast of design evolution. Without involving itself prescriptively, this gives government the opportunity to comment where it considers a design proposal may create difficulties in meeting the service specifications.
Clear commissioning tests should be used to enable government to test the ability of the asset to deliver the required outputs to the specified performance standards under the full range of operating environments. Such tests also ensure design and construction defects are amended before service delivery commences.
To mitigate the private party's exposure to commissioning delays that are caused by government inaction, the private party may seek to establish an inspection and commissioning program that is backed by clauses in the project contract. The inspection program may deem the asset to have been commissioned if government fails to complete its testing program within the agreed timeframe. Alternatively, it may be agreed that testing be carried out jointly by government and the private party through an independent commissioning tester. The concern of the private party and its financiers for objectivity in the commissioning process is recognised by government.
Finally, and most importantly, government should invest resources in appointing a highly skilled contract manager. The contract manager can monitor the project progress on government's behalf (ensuring also that government meets its obligations during commissioning) and be available to consult with the private party on risk management issues. (For further detail refer to the contract development and management supporting document.)