4.3 The generic Commercial Framework

As discussed above, the Commercial Framework for an alliance (as incorporated in the PAA), is the principal mechanism that aligns the achievement of the Owner's project objectives with the commercial objectives of the NOPs. In particular, the Commercial Framework will set out the structure and principles that govern the NOPs' remuneration for the project.

The Commercial Framework typically provides for the NOPs' remuneration to comprise the following three elements:

Reimbursable Costs This covers the direct project costs and indirect project specific overhead costs actually and reasonably incurred by the NOPs (and the Owner if applicable) in the performance of the work.

the NOPs' fee: This comprises both Corporate Overhead and Profit, that is, the respective NOPs' agreed profit margin and a contribution towards recovery of non-project specific (or corporate) overhead costs; and

Figure 4.1: Alliance Compensation Framework

Risk or Reward Amount This is a performance-based payment to the NOPs that increases or decreases to reflect the project's outcomes, and is designed to enable the NOPs 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.

Figure 4.2: Risk or Reward Framework for Financial Outcomes

General principles that should guide the Owner when developing the proposed Commercial Framework for the alliance include the following:

The Commercial Framework should drive the right behaviours and incentivise the Participants to achieve the objectives set out in the Owner's VfM Statement.

The Commercial Framework should be clear, concise, and robust. It should be easily understood and able to be applied by all Participants.

There should be complete transparency in all project financial arrangements.