18.6  Modification costs and savings

The Compensation payable for government-initiated Modifications will be determined in a manner consistent with the principles in sections 17.1.2 and 17.1.3 of Chapter 17 (Compensation payable)60 and of the following additional principles and requirements:

(a)  During the bid phase of the project, the private party will be required to bid fixed or maximum margins and other specified on-costs (including preliminaries) that the private party or its major sub-contractors may apply to the cost of Compensation Events during both the design and construction phase and the operating phase. These will be taken into account in evaluation of the bids and, once agreed by government, will be included in the project agreement. The private party and its major sub-contractors will not be entitled to recover any margin or costs above the amounts specified in the project agreement.

(b)  If the Modification will result in an increase in costs, government will pay the agreed Modification costs progressively after the relevant work is undertaken or as agreed depending upon whether the Modification is being funded by government or the private party.

(c)  If the Modification will result in a decrease in costs, the private party may set off the Modification saving against a Modification cost payable by government or where there is no set-off, progressively over the period when the cost would otherwise have been incurred if the Modification had not been implemented, or as otherwise agreed by the parties.

(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 capital cost of any works).

(e)  Modification costs means, to the extent a Modification increases the costs of the project activities, the:

(i)  direct costs and associated on-site overheads reasonably arising from the Modification; and

(ii)  a reasonable amount on account of the off-site overheads and profit margin (calculated at a specified rate in accordance with section 18.6(a)) of the major sub-contractors; and

(iii)  where the Modification is funded wholly or partly from raising new equity, a reasonable market rate of return on that new equity; and

(iv)  if the proposed Modification will delay Completion beyond the Date for Completion, an amount that will provide the equity investors a return equal to their Base Case Equity Return on their committed amount for the period of the delay beyond the Date for Completion,

after deducting all decreases in the costs of the project activities.

(f)  Modification savings are the:

(i)  cost savings arising from the Modification; and

(ii)  a reasonable amount on account of the off-site overheads and profit margin (calculated at a specified rate in accordance with section 18.6(a)).

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60  Paragraphs (d), (e), (f), (h) and (i) of section 17.1.2.