5.5 Agreeing the commercial arrangements
In simple terms, the commercial arrangements define the price to be paid by the Owner for the project's benefits to be delivered by the alliance.
After the NOPs have been selected as preferred proponent they must develop and agree commercial arrangements (including the PAA, TOC and painshare/gainshare) to deliver the VfM proposition in the business case.
It is expected that the commercial arrangements will either validate the business case at this stage or the investment decision may need to be revisited.
Key finding 4: Agreeing the commercial arrangements - Commencement of physical work Often physical works commenced prior to finalising the commercial arrangements with the NOPs. |
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Key finding 5: Agreeing the commercial arrangements - business case cost compared to initial TOC In general the agreed (initial) TOC was higher than the business case cost estimate. The average increase was of the order of 35-45%. |
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Key finding 6: Agreeing the commercial arrangements - Project Alliance Agreement (PAA) A variety of commercial terms and conditions were found in the PAAs. In particular: • NOP corporate overhead and profit: Generally fixed upon agreement of the TOC, often variable as a percentage of actual costs. • No blame clause: Generally unconditional; little indication of modified clauses. • Dispute resolution: Generally silent; little indication of express provisions for resolution beyond the ALT (outside the alliance). • Incentive/penalty arrangements on time: Generally included; often not. • Owner reserved powers: Often reserved powers stated; sometimes not. • Performance security by NOPs: Little indication that security was required; generally not. |
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Key finding 7: Agreeing the commercial arrangements - Outstanding outcomes Generally it is a requirement expressed in the PAA that the parties commit to achieving outstanding (game breaking) outcomes. The commercial arrangements generally provide financial incentives for NOPs (incentivised KRAs) to achieve outstanding (game breaking) outcomes. It was also noted that estimated costs associated with pursuing outstanding (game breaking) outcomes are often included in the TOC. |
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Key finding 8: Project delivery - Non-price objectives In general, Owner representatives (regardless of approach to selecting NOPs) rated their alliance's performance in all areas of non-price objectives as above expectations or game breaking. The areas of non-price criteria assessed were: • quality of work • functionality • safety • environment • community • other stakeholders • team dynamics • KRA achievement • flexibility of approach. |