Adjustments to the TOC will apply in the limited situations agreed by the Participants under the PAA (which should incorporate the Adjustment Event Guidelines finalised during the selection process).60 These identified acts, events and circumstances which may result in the TOC being altered are known as Adjustment Events.
The Owner will need to adjust the TOC where the Owner has directed a change to the project works which amounts to a significant change, amendment or alteration to either the scope of works, or the fundamental requirements of the works. This type of Adjustment Event is referred to as a 'Scope Variation'. Scope Variation Benchmarking Guidelines, which provide indicative examples of when a direction by the Owner will constitute a Scope Variation, should be developed and agreed by the Participants during the selection phase and incorporated in the PAA.
It is expected that if any Scope Variations occur during the delivery phase, this will generally involve a change to the Owner's VfM Statement and will therefore require Owner approval.
Cases of genuine innovation by the alliance, which could not have been foreseen during TOC development, should not constitute an Adjustment Event - that is, the NOPs should be entitled to the benefit of any cost savings to the alliance that arise in connection with genuine innovations. Reviews should take place of any innovations which have arisen during the project delivery phase to determine whether they have made a 'genuine' contribution to cost savings. The NOPs' entitlement to any gainshare payment should follow demonstration to the Owner of how the relevant cost savings against the TOC have been achieved. If the Owner determines that innovation is not demonstrated, the NOPs' gainshare entitlement should be reduced to the extent that the relevant cost saving innovation/approach should have been identified during the TOC development. General changes to the scope of work or the technical brief for the project (e.g. reduction in the quality of materials) should not constitute an Adjustment Event.
Cost underruns and overruns may occur for any of the following reasons:
human error in the TOC;
innovation post TOC;
risks that didn't materialise (e.g. escalation was less than expected);
systemic market change, i.e. changes in the market that are not project specific (e.g. movement in prices for key items); or
if none of the above apply, a TOC that lacked rigor.
The requirement for the NOPs to demonstrate how cost underruns have occurred satisfies fundamental requirements for public sector scrutiny of expenditure/public accountability requirements. Further guidance on this topic is provided in Schedule 4 of the Model PAA.
The selection process should be structured to incentivise the NOPs to bring forward potential innovations or opportunities prior to finalising the TOC.
Consideration needs to be given to ensure that the omission of scope (from the PAA documentation which establishes the scope of works for the alliance) or pricing omissions from the TOC does not lead to a Scope Variation during the delivery phase. The Owner needs to ensure that the PAA clearly reflects the agreed scope of work, scope of services, any risks retained by the Owner, and the Owner's reserved powers.
If an Adjustment Event occurs, the ALT will recommend to the Owner a reasonable adjustment to the TOC (and, where relevant, the KRAs or the Date for Practical Completion). The Owner should undertake a valuation of the increase or decrease in costs independently from the alliance, taking into account the relevant TOC estimate and risk provisions within the TOC and the Owner's VfM Statement before deciding on the ALT's recommendation.
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60 Refer to clause 12 of the Model Project Alliance Agreement in Template No 1: The Model Project Alliance Agreement.