Where possible, an Owner should have a clear and comprehensive understanding of how the cost estimates in the Business Case have been established, including any assumptions which underpin those cost estimates. This is important so that the Owner is well positioned to:
• identify whether the Target Outturn Cost (TOC) developed for the alliance project is reasonable;
• manage contingency and escalation provisions in the project during the delivery phase; and
• at the conclusion of the project, comprehensively assess the financial outcomes of the project against the Business Case estimate.
This Guidance Note has been prepared based upon the following assumptions:
1. Business Case estimate: The estimates of the project costs contained in the Business Case are normally risk adjusted. The Business Case would also include a Base Cost estimate (risk free), plus a transparent estimate of contingency or risk. It should be recognised that there will be a difference between the Business Case project estimate of all costs associated with project delivery (i.e. the 'estimated total project cost') and the Owner's budget for the alliance.
2. Target Outturn Cost (TOC): The TOC is the estimate of project costs for delivery of the alliance works by the alliance. The TOC is typically a P5016 estimate of the project. The process for developing and approving the TOC is critical, as it forms the basis for assessing the VfM outcome (including the painshare/gainshare arrangement).
3. Actual Outturn Cost (AOC): The AOC for the project is the actual total cost for delivery of the alliance works by the alliance (inclusive of NOP fees and reimbursable costs to the NOPs and the Owner).
4. Actual Total Project Cost: The actual total project cost includes the AOC plus any additional costs which sit outside the AOC but arise as a result of the commercial arrangements agreed in the PAA (e.g. gainshare/painshare and any performance pool payments); plus all other Owner costs outside the alliance.
The Owner's VfM Statement should clarify:
• the basis for estimates within the Business Case;
• the basis upon which the Owner anticipates the TOC to be developed and approved; and
• where possible, how contingency on the project will be defined and managed (i.e., whether certain risks will be retained by the Owner).
This clarity is important as the VfM Report, which is expanded upon in Chapter 7, should provide a thorough reconciliation of any movements in project budgets and costs (both overruns and underruns), including the basis of such movements and the approvals given for changes.
As note above, the Owner's VfM Statement should note the expectations the Owner/government held when it approved the alliance procurement strategy over other alternatives. One such expectation is that, theoretically, alliancing should give the team greater flexibility and ability to collaborate and innovate, which in turn should enable better control of costs and risks throughout the alliance lifecycle. Therefore, from a VfM perspective, the expectation is that alliancing should provide the Owner with a more attractive financial outcome, for the same non-financial and quality measures, than traditional, fixed price contracting. The Owner's expectations in this regard should be noted in the VfM Statement, and later the VfM Report should comment on whether these expectations were realised in the context of items 1 to 4 above being reconciled.
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16 There is a 50% confidence level that the outturn cost will be less than the P50 value, given the risks accounted for in the model.