In traditional contracts, where a fixed price for a specific scope is set by competition, the client is not required to have high visibility of the cost structures of the proponent.
In contrast, the nature of alliances requires the Owner to have a very high, detailed visibility and understanding of the NOPs cost structures. The NOP cost structures are highly complex and require a forensic understanding if the Owner is to have confidence that the public interest is being properly managed. The Owner needs to have an understanding of:
• Game breaking vs. Business As Usual continuous improvement.
• Painshare/gainshare that is set against challenging benchmarks.
• Cost structures that are transparent and reflect the best in class prices.
• Profit calculations that are transparent and reasonable for market conditions.
• Its own project budget approvals.
It is not injurious to the alliance relationship for the development of the TOC and the settlement of commercial issues to take place in a business like environment and have 'every stone turned upside down' in the search of additional public value.
One of the many advantages claimed for alliancing is that it allows for early commencement of physical works often before the TOC is finalised and it was a finding of this Study that this did occur. While this may be an attraction it places the Owner in a commercially vulnerable position. Notwithstanding the ability to 'terminate for convenience' should the Owner disagree with the TOC, the commercial reality is that it can be extremely difficult for the Owner to negotiate a robust TOC when physical works are underway and any time gain (the reason for starting early) would be highly compromised. In other words, the Owner may become captured in the sense used by ICAC.72
Discussion Point 14 - Establishing the TOC under non-price competition To ensure optimum VfM, the process leading to agreeing the TOC requires commitment to commercial rigour in negotiations between Owner and NOPs, based on business principles rather than alliance principles. This requires that the commercial misalignment that exists in the TOC development phase is addressed openly by the NOPs and the Owner. NOPs undertake extensive in-house reviews of alliance TOCs to give confidence to senior management that all corporate requirements are satisfied. Owner representatives need to take the opportunity to understand the TOC in a similar manner. NOPs have clear corporate requirements in terms of risk and return and these are applied rigorously. The Owner also should have (but often does not have) clear outcomes, objectives and the value proposition articulated in the business case, which also need to be applied rigorously in TOC negotiations. There was some evidence from the Study that from time to time robust commercial negotiations were undertaken that resulted in substantial TOC reductions with no adverse impact on business case objectives or on NOP margins. An Owner led improvement strategy (which will help avoid capture) could include features such as: • Maintain a viable alternative project procurement and delivery strategy until TOC is agreed. • Avoid physical works being undertaken under the alliance agreement before TOC is agreed or at least recognise the potential for price premium. • Better Owner focus on the business case VfM proposition prior to and during TOC development. • Assemble an Owner's commercial team with appropriate skills and experience to drive better VfM outcomes. • Be prepared to re-assess business case decision to proceed if the project VfM proposition is not achieved or modified beyond target ranges. • Greater Owner participation in the TOC development phase. |