It is important to understand the wider commercial environment in order to tailor the selection and delivery of an alliance project accordingly. The commercial and project objectives of the Owner and the NOPs need to be aligned if the alliance is to operate effectively. The prevailing commercial environment will likely shift over time, reflecting a number of different considerations, which include:
the general level of activity in the broader construction sector, with conventional wisdom being that as activity increases, then profits increase (which in turn, is likely to impact the NOPs' approach to bidding for work);
companies becoming over-committed or extended during boom times, with the risk that performance levels may be adversely impacted and become inconsistent as a result;
the Owner's appetite for risk sharing36 (noting that this is a continuum) will vary over time in response to:
the prevailing government position and risk appetite;
the Owner's tolerance for risk and their current portfolio risk profile;
the government's capital works program intensity (which may relate to the size and/or speed of the capital program); and
the importance of a particular industry.
the attractiveness of the project to potential NOPs, which may be influenced by factors including:
the proposed commercial and legal framework, including financial incentives provided to the NOPs;
the Owner's reputation;
the potential for the project to lead to further work for the NOPs; and
policies to compensate the NOPs for their costs of participating in the bid process.
potential NOPs' risk assessment of the project and appetite for risk sharing generally (noting that this is likely to vary considerably amongst potential NOPs, depending on factors such as the size, culture, management approach and market share of the relevant NOP);
the commercial objectives of the potential NOPs, their position in the market and their corporate objectives as publicly-listed organisations (which ultimately require them to maximise and sustain shareholder returns); and
government policies or strategies which are relevant to infrastructure projects, such as local industry participation plans and free trade agreements.
There needs to be a thorough understanding of the commercial environment in which the NOPs operate in order to develop a Commercial Framework that will drive achievement of the Owner's VfM Statement.
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36 Refer to section 4.2 and Appendix F for further discussion of risk sharing in an alliance context