A 'fixed-price' contract differs from conventional D&C and alliance contracts in that risks are rigorously allocated to the party that can best manage those risks. For example, the risk of unknown ground conditions in a tunnel project should be allocated to the contractor, because although the contractor may have no more information about this risk than the client, the contractor is better placed to manage the risk if it eventuates.23 While the allocation of more risks to the contractor is likely to result in a higher contract price, the all-up cost of a project to the client should on average be lower because risks are managed more efficiently. Moreover, the client has greater budget certainty.
Both D&C and Alliance contracts typically provide for progress payments to be made at certain stages of construction. An alternative is for the contractor to be paid at the end of the contract only. Consequently, the contractor usually requires private finance to cover costs during the construction period. The impact of finance is similar to a PPP, in that the
contractor is incentivised to complete the project on time or early. While the contract price is higher because it includes the cost of finance, the overall cost to the client should be lower because the contractor is incentivised to optimise the finance cost against speed of construction. Another benefit is that the construction finance cost, which is often not reported to ministers at the project approval stage, is made explicit.
Fixed price and no progress payments together increase the probability that the project comes in on-budget and on-time. They are also features of PPPs (see below). In fact, delivering a project on budget and on time are said to be the main advantages of PPPs. This discussion shows that these advantages can also be obtained under conventional procurement.
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23 Similarly, under a D&C the client often bears the exchange rate risk. However, a contractor has some ability to manage this risk through the choice of input materials and the timing of purchases.