The price paid to the private party for State-initiated modifications includes:
• the base cost of the materials and labour of the subcontracted builder to construct the changed project assets (if any);
• a margin element to cover overheads and provide profit to the subcontracted builder undertaking the change;
• the lifecycle cost - the facility management subcontractor's additional cost of replacing any part of the changed project assets during the remainder of the service delivery phase;
• the maintenance cost - the facility management subcontractor's additional base costs to maintain the changed project assets or provide the changed services during the remainder of the service delivery phase;
• a margin element to cover overheads and provide profit to the subcontracted facility management subcontractor undertaking the change;
• in a full-service Partnerships Victoria project, the price may also include the operator's additional base costs and profit margin for providing the additional services; and
• possibly a management margin charged by the private party for large State-initiated modifications - it is expected that the private party's business-as-usual functions include managing unexpected events and changes in respect of the project, and therefore should be appropriately resourced to manage most modifications. Therefore any management margin should only be payable on large State-initiated modifications.
In more recent Partnerships Victoria projects, the margin that may be charged by the builder and facility management subcontractors and the private party (if any) for undertaking a State-initiated modification have been specified in the project deed, usually on a sliding scale depending on the cost of the State-initiated modification. The margin is usually levied in the form of a percentage on top of the base costs.
The private party has overall responsibility to the government party and will usually be the party coordinating the process, however the facility management subcontractor or another subcontractor will implement most of the changes involved in a State-initiated modification.
It is recommended that in projects where there is likely to be a steady pipeline of State-initiated modifications, and the project deed does not already specify the amount of any margin, that the contract director negotiates a schedule of fees in advance, to avoid delays and disputes at the time that the State-initiated modifications are eventually requested. Prior to any such negotiation, the contract director should contact DTF to get an indication of the levels of margin that have been negotiated for recent projects.
The lifecycle cost of a modification can also be a subjective measure. Determining a lifecycle cost requires a judgment of how often equipment or facilities will be replaced during the service delivery phase, as well as an estimate of how much it will cost at the time. There can be debate about which items will need to be replaced at all, particularly if routine preventative maintenance is carried out. As such, expert knowledge and experience is recommended to make these judgements. Smaller items such as knobs, hinges, taps and data points may, in practice, be treated as consumables by the facility management subcontractor and therefore be absorbed in its maintenance budget, not needing lifecycle funding.
Contract managers need to fully understand both the scope and costs of any proposed State-initiated modification. The contract managers should also be willing to question the private party about all cost items included in a proposal, and not allow the threat of possible delays due to disagreement with the private party lead to unreasonably high pricing.