Potential pitfalls encountered by stakeholders in public private partnership projects relate primarily to risk allocation and the partnership relationship. Effective and cooperative contract management is therefore vital to the successful development and implementation of the project.
Mechanisms must be incorporated into contract management to prevent potential pitfalls or problems and realise the benefits of improved value for money, competition, innovation in service quality, efficient risk allocation, additional capital investment and reduced costs.
The following table illustrates some of the challenges that have been identified in public private partnership projects to date, together with some mechanisms for dealing with such challenges.
| Issues | Contract management challenges | Contractual solutions |
| Risk allocation | Unsatisfactory risk identification and risk transfer, resulting in a failure to deliver the necessary incentives for the Private Party to perform. | An efficient allocation of risk first involves a comprehensive identification of the contractual, operational, financial and external risks relevant to the project. Once identified, the risks should be allocated to the party best able to assess, control and manage those risks in a manner that allows the reduction of costs and best access to risk mitigation techniques. |
| Clearly defined roles | Inadequate definition of roles and responsibilities assumed by Government and the Private Party. | Government and the Private Party must be in clear agreement on all key issues before commitment to the project. The project objectives and the respective roles of Government and the Private Party must be clearly defined and understood by the stakeholders, both contractually and culturally. |
| Output specification | Difficulty in establishing the output specification. While excessively prescriptive output specifications may create obstacles to innovation and competition, ambiguous or broad specifications may create uncertainty. | The output specifications must be clear and comprehensive to ensure the continuity and quality of supply. This will require detailed collaboration and research during the planning and development phase, including the comparison of performance incentives and penalties against forecasted output Comprehensive output descriptions must also be accompanied by performance monitoring and reviews so that actual output meets the performance required by Government overtime. |
| Flexibility | Lack of flexibility amongst contract administrators to respond to changes required by Government overtime, or as a result of legislative or policy changes. | The need to ensure flexibility to optimise further ongoing improvement and value for money in a project is an inevitable corollary to the long-term nature of PPP projects and the often underlying objective to achieve a desired public policy outcome that may change over time. The contract management should include a commitment to monitor and evaluate the project and, incorporate a mechanism that enables the Project Agreements to manage change in both the short-term and long-term. The process should also consider the impact of change on the costs and resources of the parties, and the possible apportionment of any costs and savings. |
| Trust and teamwork | Protracted negotiations or an uncooperative partnership relationship. | An attitude of trust and teamwork is desirable to reach a productive partnership relationship. This may be fostered by maintaining communication and providing constructive feedback as well as carrying out a review of the project progress and any difficulties or obstacles that arise. |
| Administrative support | Non-existent or redundant administrative and technology systems. | The Contract Manager must be supported by up to date project management systems and processes. |
| Performance mechanisms | Ineffective or unsuitable incentive and/or penalty based contractual mechanisms to support the achievement of performance criteria. | Contractual mechanisms to encourage optimum performance should be appropriate for the PPP model and transaction. |