The compensation framework of a project alliance is a key mechanism for aligning the objectives with the project objectives. Under a project alliance, the Owner and the Non-Owner Participants develop and scope the project jointly and agree a target cost and performance targets. The alliance Participants then take collective responsibility for delivering the project and achieving the agreed targets, sharing in financial pain or gain, depending on how actual outcomes compare with the agreed targets.
Once the target costs and performance targets have been agreed, the total payment to Non-Owner Participants is normally structured as follows:
• Non-Owner Participants' Fee: this comprises both Corporate Overhead and Profit, i.e., the respective Non-Owner Participants' agreed profit margin and a contribution towards recovery of non-project specific (or corporate) overhead costs;
• Reimbursable Costs: this covers the direct project costs and indirect project specific overhead costs actually and reasonably incurred by the Non-Owner Participants (and the Owner if applicable) in the performance of the work;
• Risk or Reward Amount: this is a performance based payment to the Non-Owner Participants that increases or decreases to reflect the project's outcomes, and is designed to enable the Non-Owner Participants to share in both the upside and downside associated with delivering the project. The Risk or Reward Amount measures the alliance's actual performance against the target cost and other agreed project objectives. Generally, the Risk or Reward Amount will reflect an assessment of the Participant's performance against both the financial and non-financial outcomes of the project.
| Cautionary Note Care should be taken in assessing the Non-Owner Participants' Fee and the Reimbursable Costs that insurance costs are not inherently included, or that insurance recoveries do not positively impact on the Risk or Reward Amount. Each Non-Owner Participant is reimbursed for their actual costs incurred on the project, including costs associated with mistakes, wasted effort and re-work. Reimbursable Costs must not include contributions to corporate overhead or profit. There should be no contributions to administrative or support functions not directly involved in performing the work under the alliance agreement. Care needs to be undertaken in understanding whether the cost of insurance is included, explicitly or implicitly, in calculating the Reimbursable Costs. The use of insurance claim proceeds also needs to be made clear. There are some important consequences arising from these issues: • If insurance costs are included in Reimbursable Costs, insurance costs will effectively be double-counted where an explicit cost of insurance is allocated to the alliance. • If insurance costs are included in Reimbursable Costs, then they will also be included in the NOPs Fee where it is calculated as a percentage of Reimbursable Costs. • Assuming that: o Reimbursable Costs includes (for example) re-work, and o if re-work is an insurable event, and o if an insurance claim is made and the proceeds are for the benefit of the alliance, then Non-Owner Participants may be unintentionally benefiting under the Risk or Reward agreement. |
It is recommended that the cost of risk should be included in the TOC, but the cost of insurance should not be included in either the Non-Owner Participants' Fee and the Reimbursable Costs of the Non-Owner Participant compensation. The cost of insurance should be included in the TOC, but as a direct cost to the alliance, rather than a cost of the Non-Owner Participants.