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Sector: State Highway  |  Module 2: Work through the PPP process

Goals, principles and stages of contract management

Contract management stages during the life of the PPP

Contract management over the lifetime of the PPP naturally divides into four stages:

  • Pre-operative stage – covering the period from technical to financial close to:
    • The start of construction activities for a PPP that involves new or additional assets
    • The start of operation for a non-asset PPP
  • Construction stage – covering the period during which assets are being built
  • Operation stage – covering the operating period of the PPP
  • Contract closure and asset transfer stage – covering the period leading up to and during the end of the contract lifetime

Contract amendment may also be required at any time if changes beyond the concessionaire’s control occur during the life of the contract. Dispute resolution procedures may also be required at any time if there is significant disagreement between the contractual partners.

Each stage has a different focus and this will be reflected in the particular performance and monitoring requirements. It is no coincidence that the stages for contract management correspond to the stages used to define the major project risks (see for example the risk matrix in the Background Module, which is also used in the mode validation tool ). The Concession Agreement allocates responsibility for the risks during each stage. The specification of the performance standards and the allocation of the monitoring roles follow from and support this allocation.

Pre-operative stage

The pre-operative stage begins from contract closure (end of Phase 3). The contract management focus during the pre-operative stage is on ensuring that the selected private partner brings the project to financial closure and carries out any tasks that are required before construction or operation can begin.

The performance requirements during this stage are likely to specify the timely completion of the preparatory tasks and the required standard of the technical designs and other plans.

Construction stage

Clearly, the construction stage is only relevant to PPPs that involve building new assets or expanding existing assets.

During construction, the contract management process will focus on checking that works will be completed on time. The public sector sponsor should be careful to avoid becoming involved in detailed design decisions and approval of drawings and plans. By doing so, it may be taking back some of the risk that should have been allocated to the private sector concessionaire.

Operation stage

Following any testing and acceptance of the delivered works, the contract management process will move to monitoring operation of the project. This monitoring should focus on measuring whether the main outputs from the project—for example, for a roads project, traffic carried and lane availability. It should not be concerned with the details of the concessionaire’s operations or in trying to measure every aspect of the service provided—to do so will be hugely burdensome for both parties.

To further reduce monitoring costs, the Sponsor should largely rely on performance reporting by the concessionaire—once it is happy that the concessionaire has appropriate quality measurement systems in place. The accuracy of the reports provided can be checked through a random auditing process by the Sponsor—with the frequency and extent of audits increased where reporting is unsatisfactory.

The Sponsor may also make use of additional indicators of the service performance of the concessionaire. For example, the number and nature of customer complaints might be a valuable means of monitoring user satisfaction with the services—particularly where increasing this is a key objective of the PPP project.

Contract closure and asset transfer stage

The contract closure stage involves preparing for the end of the contract and carrying out the activities that bring the contract to a close. Clearly, asset transfer is only relevant for PPPs whose assets will be transferred to the public Sponsor at the end of the contract life.

Monitoring is an important part of contract closure especially for PPPs that have assets which will be transferred to the Sponsor. In this case, the focus of the contract management is on ensuring the condition of the assets is up to the agreed standard. Contract management in this stage will also focus on ensuring that the necessary records, documents and legal titles are provided and correctly transferred.

Contract management also involves managing risk during the operating life of the PPP. For further information on this connection, see for example the Australian PPP Unit’s guidance for PPP project managers, which is presented in the context of risk management.

 

 

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