Public Private Partnerships, also known as PPP's occur where one party owns a parcel of land and desires to have a specific facility constructed for them. The other party develops and maintains the facility over an agreed period of time whilst the first party operates within the facility. The second party is paid an annual fee for the facility. At the end of the term of the contract the facility reverts to the ownership of the first party.
Government are users of this form of contract as they do not need to find the capital to undertake the development or maintenance of the facility, they only need to pay an annual fee and will obtain an asset at the end of the contract term. Of course the value of the development and the end value of the asset being handed back to the first party are calculated by the development party when tendering on the project and are included in the annual fee payments.
Strategic Alliances are also favoured by government when there are projects that need to be delivered in a timely manner.
These types of contracts are, as the name suggests, an alliance between a client and a contractor where both parties come together to deliver a project jointly. The client party has a project that they need delivered for a budget value. The contractor party joins forces with the client party to create a team that will design and deliver the project for the agreed budget.
The parties work together to achieve the outcome. The contractor party is paid all its costs plus a margin or fee. The intention of these forms of contract are to bring together the expertise of the client team, the design team and the contractor team to ensure a timely and cost effective project delivery.
Trust is critical to the success of these forms of contract. Without trust a strategic alliance cannot succeed.
Quite often there is a profit share and a loss sharing provision in these contracts. Where the budget is achieved and a saving made, the contractor may receive half of the saving. Where the budget is exceeded, the contractor may share half of the loss, but most likely only up to the value of their margin or fee. In effect, if there is a cost blowout the contractor may undertake the project for nothing.
This blog concludes the series on the various forms of construction contracts. In upcoming posts I will discuss various property development related issues.
For more information on PPP or Strategic Alliances please visit the LEFTA Website
