Procuring Authorities should consider how lifecycle replacement can be utilised as a key part of seeking to introduce NZ. Contractually, Project Co is generally required to replace components on a like for like basis, unless there has been legislative change. It should be noted that, where legislative change results in additional cost there is typically provision for recovering additional cost from the Authority under the Project Agreement, subject in the Standard Form contracts to a sharing mechanism. Where technological obsolescence occurs, a component is no longer available due to the technology being superseded to the point of obsolescence, then this risk is owned by Project Co.
There is a mixed approach across the industry in respect to how the principle of "enhancement" has been addressed within PPP projects. Enhancement is a term that is often applied where, at time of component renewal, rather than a like for like replacement being installed, an alternative product with an improved specification is utilised.
The installation of LED lighting is often considered as an enhancement, this is because lighting in PPP projects is typically assessed on an output basis, for example, achieving a given lux level within an area. This output can be achieved through a variety of products ranging from fluorescent tubes to halogen bulbs to LED. When LED lighting first started to be installed, it typically attracted a higher unit price that might not have been considered within the lifecycle model, particularly in early PPP projects. This was therefore considered as an enhancement by moving to a more expensive solution when a cheaper specification was available to meet the contract requirements, though maintenance and replacement costs should also have been taken into account as they are cheaper for LED lighting systems. LED lighting is now considerably cheaper as well as being more technologically advanced so any enhancement that existed when it initially became available has now reduced and, in most cases, is now a cheaper and more readily available alternative to halogen or fluorescent replacements.
Thus, while some technologies are considered enhancements, this does not necessarily mean an additional cost is always warranted. There are examples of projects where the introduction of technologies, such as LED lighting, have been fully funded through lifecycle because, while they are technically an enhancement there is also cost benefit to Project Co parties through lower maintenance cycles and longer life expectancy. Authorities should consider testing these factors in any discussions with their respective private sector partners to drive improved value in the implementation of NZ initiatives. It should be noted that this is dependent on the point of time within the project term, those projects that are closer to handback will see reduced benefit to
Project Co and the FM provider because of the shorter project term remaining.
There is some evidence that lifecycle funds have been utilised to fund rectification and remedial works that would otherwise be considered defects, in particular the remediation of building or latent defects. While this remains a Project Co risk to draw funds from lifecycle reserves for such works that were unlikely to have been forecast, it demonstrates that deviations from the standard practices do occur. In this regard, Authorities should explore this in the context of their own projects to see if this provides options for discussion around funding of NZ solutions when undertaking lifecycle replacement.