The Risk or Reward Regime is the key mechanism in the Commercial Framework to encourage and reward exceptional performance (if required by the Owner), address poor performance, align the NOPs' commercial interests with the Owner's project objectives and drive the NOPs to meet their behavioural commitments. The Risk or Reward Regime should always be tailored by the Owner so that it is specific to the project.
The Risk or Reward Regime is developed from and with reference to the Owner's specific project objectives, minimum conditions of satisfaction (MCOS) and cost and non-cost key result areas (KRAs). Generally, the tender documents will specify the MCOS and KRAs which the NOPs are required to achieve in the performance of the work (or, where relevant, delivery of the services). The Risk or Reward Regime is then developed and finalised during the selection process, and forms part of the Project Proposal under the Alliance Development Agreement (ADA).38 The agreed principles of the Risk or Reward Regime are then incorporated as part of the PAA.
The Owner's project objectives are set out in the Business Case and are documented in the Owner's VfM Statement, and will include both price and non-price objectives. Therefore, the preferred approach is to structure the Risk or Reward Regime to reflect both price and non-price performance to incentivise the NOPs to achieve these objectives. Under the Risk or Reward Regime, the NOPs agree to put all (or a certain percentage) of their Corporate Overhead and Profit at risk, tied to their performance against the TOC and other non-price project objectives.
There are a number of ways to structure the Risk or Reward Regime. For example, in order to ensure that the NOPs are appropriately incentivised to achieve the objectives in the Owner's VfM Statement, the Owner could adopt either of the following two approaches:
1. Option 1: The Risk or Reward Regime is separated into two components, being a cost component (resulting in payment of gainshare or painshare for performance against the TOC), and a non-cost component (resulting in a separate payment to the NOPs of an amount for performance which is better than MCOS, or a liability payment from the NOPs for performance which is worse than MCOS).
2. Option 2: The Risk or Reward Regime does not contain separate components, but rather the calculation of gainshare or painshare for performance against the TOC will be modified to reflect the NOPs' performance in key non-cost areas. This means that the gainshare will be increased or the painshare decreased to reward exceptional performance by the NOPs, where this is required by the Owner's VfM Statement (or vice versa).
Appendix E sets out a number of graphical models which represent the numerous approaches that may be taken to structuring the Risk or Reward Regime, and notes the key advantages and disadvantages of each approach.
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38 The Alliance Development Agreement for the project entered into between the project Owner and the NOPs under which the Project Proposal was developed for the approval (or otherwise) of the project Owner.