A key consideration that specifically relates to scope changes is the potential impact that a scope change will have on the risk allocation agreed between the parties. This is of particular relevance where the scope change is significant and the terms of the PPP contract are required to be amended. Renegotiation is detailed in Chapter 4 (Renegotiation). As noted above, the allocation of project risks between parties is normally carefully developed, negotiated and agreed in the PPP contract and this allocation should be maintained through any scope changes.
Given the long-term nature of PPP contracts, it is not uncommon that there will be a need for a scope change at some stage. This can arise through changing priorities of the Procuring Authority, advancements in technology, required design enhancements or through broader economic changes in the country or region (including changes in demand). Scope changes can also occur as the result of inadequacies in the original scope or due to an opportunity to optimise design or construction works or services (such as costs savings available due to changed market conditions for steel or concrete).
Typically, each party has the right to initiate a scope change request, and an agreed scope change procedure typically prescribes the step-by-step arrangements for managing the requested scope changes and associated timelines for the parties to submit proposals and provide approvals. It is also not uncommon for the Procuring Authority to have the right to instruct an immediate minor scope change with pricing and time to be agreed at a later stage. The specific procedure will depend on the PPP contract and the underlying legal framework and should be well known to the Procuring Authority.
Where the Project Company has initiated a scope change request, the Procuring Authority will need to carefully analyse the Project Company's rationale for the proposed scope change and all the implications of the Project Company's request, including whether the evidence submitted to document the cost, time and risk implications is valid and robust and satisfies value for money tests.
Where the Procuring Authority has initiated a scope change, the Procuring Authority should have undertaken an initial assessment and have an understanding of the scope of the proposed change, its cost and time implications, and the overall impact on the risk profile, before the scope change request is passed to the Project Company.
Irrespective of whether a scope change is initiated by the Procuring Authority or the Project Company, a full assessment of its impacts will need to be undertaken by the Procuring Authority. There will generally be a cost and/or time impacts (although not always, and such cost/time implications may be positive for the Procuring Authority in cases where the scope is reduced). There may also be an overall impact on the risk profile. This impact assessment should be completed before any negotiation over the terms of the scope change begins and should include evaluations of the financial, technical, contractual and program implications of any scope change.
Any potential scope change assessment should consider in full the implications on: scope of works; cost implications; allocation of risk; impacts on the existing risk profile; changes to the existing capital expenditure; operational expenditure and lifecycle budgets; time implications; impacts on the payment mechanism and performance standards; impacts on the existing security packages (e.g. performance bonds and guarantees) provided by the Project Company, liability caps; and any potential impact on the value for money of the project.
Any added value that could be generated for the project as a result of a potential scope change should also be explored.
To assist its assessment, the Procuring Authority may be able to implement a form of benchmarking or market testing to ensure it is still receiving value for money for the changed scope. This is typically not a simple process, particularly given that alternative contractors are likely to charge a premium for taking on a project delivered by another contractor, and given that the intervention of another contractor may adversely affect the warranties and indemnities provided by the Project Company. In some jurisdictions, a schedule of rates will be included in the contract for certain scope changes, which can also be used in assessing scope changes.
EXAMPLE Use of benchmarking On the Central Berkshire Waste project in the UK some waste and haulage services were subject to benchmarking. The contractor would compare its costs with the market price of equivalent services. The price would then be adjusted accordingly, unless the Procuring Authority chose to proceed to market testing, which is effectively re-tendering of the contractor's scope. Any subsequent increase or decrease in the cost of the works or service would then be reflected by an adjustment to the unitary payment available to the Project Company. While benchmarking may be carried out by the Project Company, it is essentially a joint exercise, as the Procuring Authority must be satisfied that it is receiving value for money. A team comprising representatives from both parties can be set up to oversee this type of benchmarking exercise. For more information, see the Central Berkshire Waste Case Study. |
The allocation of risk associated with a material scope change can also be the subject of prolonged commercial negotiations and the Procuring Authority may need to hire external advisors for significant or complex scope changes. Questions over what constitutes a change and what falls within the scope of the Project Company's pre-existing obligations also have the potential to lead to disagreements.