Price competition
A greater demand on the Owner's management resources in a price competitive selection process was noted by Owners.
Analysis of the costs to establish the various TOCs found that when price competition approaches were used TOC establishment costs were in the order of 2% (of TOC) less than when non-price approaches were used. This recognises the costs for two teams being reimbursed when using price competition.
The TOC was also found to be lower by 5-10% (of TOC) when using price competition relative to non-price competition. In reaching this finding the Research Team recognised the difficulties in making cost comparisons between different alliances as no two projects are the same. However, an insight can be gained by comparing elements of the TOC that are common across all projects.
An analysis of the commercial data revealed that each of the following elements is lower when price competition is used:
• On-site overheads.
• Design costs.
• NOP profit margins.
• TOC development costs.
In aggregate, they were found to be of the order of 10-12% (of TOC) lower when price competition was used.
Consideration was then given to factors which may materially impact on the above elements. This included:
• the different project types under consideration (road, rail, water etc.)
• the different project values and timeframes
• the different NOPs in the various alliances who may have different margin expectations
• the differing compensation frameworks and risk profiles
• the different Owners and their expectations
• the different geographic areas and time periods with different market pressures and different demands on the project.
Consideration was also given to the fact that there was little evidence of outstanding outcomes and that savings on the TOC were generally small, as noted elsewhere.
On balance, the Research Team assessed that there was no net material change to the original 10-12% due to these factors. However, recognising that there were only two case studies, the Research Team felt it prudent to adjust the range downwards to 5-10%, to be conservative for the purpose of reporting the Study finding.
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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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Work commenced prior to finalising the TOC |
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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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Initial TOC higher than business case estimate by more than 25% |
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Analysis of the case study data found an average increase from business case cost estimate to (initial) TOC of the order of 35-45%. Although the initial TOC was generally more than 25% higher than the business case estimate, there was little evidence to suggest the investment decision was formally reconsidered.
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Key finding 6: Agreeing the commercial arrangements - Project Alliance Agreement (PAA) A variety of terms and conditions were employed by the various Owners in the PAA. 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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PAA terms |
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NOP profit margin variable |
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Unconditional no blame clause |
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Express provision for dispute resolution beyond ALT |
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Incentive/penalty arrangements on time included |
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Owner reserved powers |
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Performance security supplied by NOPs |
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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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PAA specifies outstanding or game breaking outcomes |
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Incentivised KRAs specified |
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Generally the alliances engaged external coaches and provided extra facilities and services to support the achievement of outstanding (game breaking) outcomes as set out in the alliance charter (or similar) and the incentivised KRAs. In these cases, provision for the associated costs was generally made 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. |