6 December 2018

PPP contract management – Claims and scope changes are a reality, so they need to be effectively managed

6 December 2018

Transferring risk to the private sector in a PPP contract is frequently referred to as a key part of a PPP arrangement, as well as a key reason why governments use such an approach to procure infrastructure.

However, not all risks can be transferred to the private sector project company. Instead, project risks should be allocated to either the government or the project company in a manner that aims to deliver greater value for money; i.e. risks should be allocated to the party that is best able to manage them.

The GI Hub’s PPP Risk Allocation Tool describes in detail typical risk allocation arrangements in PPP transactions.    

For a government contract manager of a PPP contract (the procuring authority), this means that there are risks retained by government. Such risks, if they eventuate, will typically entitle the project company to make a claim under the PPP contract.

Claims are a reality. And they should not cause friction between the parties or lead to a dispute. Instead, they are merely a means of handling change and ensuring the risk allocation agreed at financial close is maintained throughout the life of a PPP.    

In fact, either party can make a claim under a PPP contract for a variety of reasons. For example, the government party may make a claim against the private project company for liquidated damages for failing to construct the infrastructure on time. At the same time, the project company may make a counter-claim seeking compensation because the procuring authority didn’t grant access to the site on time.

There are several other types of claims, for example:

  • failure by the procuring authority to deliver interfacing works
  • breach of a construction warranty by the project company
  • material adverse government action or MAGA
  • force majeure
  • change in law

The claims processes are part of any contractual arrangement. Where a party has not performed in accordance with an agreement, the other party can make a claim for relief, including for compensation.

PPP contracts are very complex contractual arrangements with many risks involved, which makes the existence of claims common.         

The focus for governments then becomes on managing claims effectively and efficiently—not only to protect its rights—but to also mitigate against the risk of disputes, which are typically not a preferred outcome in a partnership style arrangement for either party.

The guidance in the PPP Contract Management Tool highlights several ways for governments to manage claims made by the project company:

  • understand the project company's rights to claim under the PPP contract and ensure the team is adequately resourced to assess claims
  • process claims and scope changes quickly to avoid them turning into disputes or having other adverse impacts on the project
  • monitor the risk of potential claims to mitigate their occurrence and prepare early for their receipt

Several of the case studies developed highlight how parties worked collaboratively to price and process claims, or to successfully navigate strict claims procedures, including the Brabo 1 Light Rail Case Study in Belgium and the Central Berkshire Waste Case Study in the UK.

Unfortunately, there are also several examples of where claims have quickly turned into disputes or caused other challenges for governments.

The other circumstance detailed in the guidance is where a project company makes a claim for relief in relation to a required scope change.

For example, the procuring authority may decide a few years into a road project that the street lighting being delivered as part of the road should instead be ‘smart’ street lighting; street lamps that collect data for processing and running of a ‘smarter’ city with more efficient energy consumption.

In these circumstances, the project company will seek to be compensated for the changes to the scope of work and may also need additional time to fulfil such requirements.

The GI Hub’s full guidance on managing claims and scope changes is available in Section 3.5 (Claims) of the PPP Contract Management Tool and more significant scope changes that require renegotiation are described in Chapter 4 (Renegotiation)

The next blog will be focused on renegotiations, but will also discuss scope changes in more detail, specifically when such scope changes also require renegotiation of the PPP contract.

Please submit your questions and feedback on this blog and the PPP Contract Management Tool in the question and answers section of the tool’s website here.