Improving Delivery Models / Contractual Models

Improving Delivery Models

Overview of different infrastructure contractual models

Being contractual model agnostic is critical to improving the delivery of infrastructure.

The table below provides a menu of infrastructure contractual models, categorised by the ultimate functions the models deliver. These functions cover the main activities to deliver an infrastructure project; design, construction, operations, and maintenance.

Each model has been defined along with identification of alternative variants or names that can relate better with known categories in some jurisdictions.

Finally, it provides a representation for the common aspects within each contractual model but is not considered absolute due to the ways that parts of each model may be combined by the procuring agency.

Collaboration or co-operation are considered pertinent to all models with the contract form influencing these resulting behaviors. This needs to be a procurement agency priority in order to deliver the benefit of working in partnership with the private sector in order to deliver innovation, mitigate risks and deliver reliable outcomes.

Is there a model or variant we’ve missed? Let us know here.

This table has been developed with input from the World Bank and has drawn from definitions of PPPs developed by the World Bank PPIAF and APMG Certification Program.

The contractual models function as classified below are: Build or Construct Only, Design & Build, PPP, Privatisation, and Regulated Asset Base.

NOTE: "Build" names the action of construction of the new infrastructure asset and covers ’construct’ and ’rehabilitate’

Build or Construct Only

Contractual Model Function Definition Alternative names or variants Characteristics Appropriateness

Design Bid Build

The project owner contracts the design and construction efforts separately in a linear process. Plans are developed to 100% completion and the project is advertised for bid by contractors, bidding on the project exactly as designed.

 

The design professional is typically compensated on a percentage of construction cost which can create wrong incentives in scope changes. This usually employs an open tender which does not allow any dialogue between the project owner, the design team and the constructor during the procurement process.
  • Construct Only
  • Traditional contracting method
  • Traditional, well-known delivery method, with a simple procurement process
  • Design professional protects the interests of the owner
  • Able to select designer and contractor independently
  • Linear process means a longer schedule
  • Design and construction teams have competing interests
  • No owner control over subcontractor selection
  • No input from contractor on constructability or cost
  • Lack of flexibility for change during construction can result in a high level of claims post-completion
  • Simple, uncomplicated projects that are not sequence, schedule, or change-sensitive
  • Client requires high level of control with well-defined scope
  • Client controlled design

Certainty of price required (with adequate contingency)
Design Bid Build

Design & Build

Contractual Model Function Definition Alternative names or variants Characteristics Appropriateness

Design and Construct

A single entity provides for the design and construction of the project. The owner contracts with a designer and contractor simultaneously as a single team (consortium agreements).

This usually requires a design criteria package (usually about 25 to 30% design) to be prepared by a separate design consultant to communicate project intent to the D&C team.

 

It is a non-linear process in which design and construction overlap. This usually employs a two-phase qualifications based procurement. The design-builder usually provides a lump sum bid based on the design criteria package.
  • Design and Build
  • Engineer Procure Construct (EPC)
  • Design Procurement and Construction (DPC)
  • Turnkey
  • Progressive Design Build
  • Lump-Sum Design Build
  • Single point of accountability for design and construction
  • Enables fast-track delivery with construction beginning before design is complete
  • Project cost defined early in the process
  • Design-build firm controls contingency
  • Does not take full advantage of competitive bidding for materials and services
  • Requires a separate design consultant for design criteria package
  • Can be limited flexibility of design after contracting design-builder
  • Change management may be expensive
  • Design professional works for the design-builder and has profit motivation for the project instead of the owner
  • Large projects that are not change-sensitive
  • Projects less focused on the whole life-cycle approach
  • Risk is able to be reasonably assessed and priced by the contractor

Alliance

Arrangements between the owner, designers and contractors where the parties are collectively responsible for performing the work and profit margins of the private parties are put at risk if project objectives are not achieved.

The alliance participants work as an integrated, collaborative team to deal with key project delivery matters.

Under alliance contracts, risks of project delivery are often jointly managed by the parties, although financial exposure lies mostly with the owner.
  • Integrated Project Delivery
  • Allows construction input during design
  • Collaborative approach during design phase
  • Enables fast-track delivery, early equipment procurement, integrated design, and phased construction
  • Not suited for small projects
  • No single point of responsibility for design and construction
  • Requires active participation by owner's representative in project - especially in change management
  • Tension may exist between alliance parties but ultimately the model is based on a no blame culture
  • Large, complex, schedule-driven projects
  • Risk is jointly defined and managed by alliance participants
  • Requires sufficient resourcing from the procuring agency during procurement and the on-going delivery
  • Contractors need to have the financial capability to deliver the project and be comfortable with cost transparency
  • Alliance participants need to be prepared to embrace working together in good faith, acting with integrity and making best-for-project decisions

Managing Contractor

The managing contractor is legally responsible to the owner for the delivery of the project. It subcontracts all design and construction work to others with the owner highly involved in the process.  

Despite being accountable for the overall project, it only provides its own resources for the provision of management services and some common on-site costs.  

The model involves a combination of a fixed price for the management services and site facilities provided, in addition to reimbursement of the subcontract or consultant costs incurred plus a fixed percentage fee covering profit and overheads. The reimbursable costs are all on an open book basis.

There may be an incentive payment based on a target cost with a painshare / gainshare arrangement.
  • Delivery Partner
  • Allows early involvement in the project including the feasibility stage and is highly collaborative
  • Advises on the contracting strategy and manages the tendering process, but the owner has the final decision on the final consultants or subcontractors chosen
  • Best endeavours on the part of the managing contractor to achieve the required completion time, with the fixed management fee ensuring commercial alignment with the owner’s timeline
  • Contractor is ultimately responsible for the final design and its constructability
  • Provides a fit for purpose warranty
  • Owner requires contractor’s management expertise to manage the risks through the development and delivery stage of the project
  • Owner requires high visibility of tendered subcontractor pricing
  • Flexibility required by owner for input into scope or design that has not been defined

Engineering, Procurement, Construction Management (EPCM)

The EPCM model is similar to the Managing Contractor model but with the owner separately engaging the design and construction contractors, assisted by the EPCM contractor.

 

A fixed management fee and reimbursement of subcontractor and consultant costs apply. A painshare / gainshare regime may apply against a target cost.
  • Each individual contractor is responsible for its own defects
  • Allows for early involvement in the project development phase and strong collaboration
  • EPCM contractor exercises due care and skill in the performance of the services but does not provide a fit for purpose warranty
  • Best endeavours on the part of the EPCM contractor to achieve the required completion time, with the fixed management fee ensuring commercial alignment with the owner
  • The owner retains better control over design development (than in an EPC approach) while at the same time, the design can consider constructability issues
  • Owner requires contractor’s management expertise to manage the risks through the development and delivery stage of the project
  • EPCM structures may be used in the delivery of large projects where an owner is keen to take a ‘hands on’ approach throughout the project with an expectation that getting things right will take ‘fine tuning’ to design
  • Allows fast track construction due to phased design and construction with project schedules similar in overall design-construction time as compared with an EPC approach

Early Contractor Involvement (ECI)

ECI is a ‘relationship’ procurement method that involves contractors in the preliminary design process which can be an efficient means of designing and planning infrastructure projects in a less adversarial structure.

ECI is similar to a design and build contract model, with the key difference being that ECI seeks to obtain the benefit of the contractor’s specialist knowledge early in the project planning and design process, as opposed to novating a design to the contractor which has been developed by the owner.
  • Initially the contractor proceeds with the design development working with the owner on identifying, mitigating and apportioning engineering and constructability issues and risks
  • The preparation of a preliminary design and subsequent detailed design allows for pricing in the next stage subject to the discretion of the owner
  • The ECI contractor is then able to submit a fixed price for the project, with key construction risks and issues already identified and defined. If this is deemed by the owner to be acceptable then it will proceed into a D&C or alternatively another form of collaborative contract with a target cost
  • It may include KPI incentives or other ways of sharing risks and rewards to continue the collaborative and cooperative themes of the ECI procurement method
  • Owner is able to develop a scheme design and pre-tender cost estimate with sufficient certainty to assess a fixed price from the ECI contractor
  • Owner is capable of managing program risk related to tendering back to the market if the ECI contractor’s offer is not accepted
  • Risks of the project can be defined and priced

Design Build Finance

The private sector finances, designs, and builds the asset. Financing for the project is sourced by the contractor through private debt. Payments are deferred until the end of the construction period and can be made over a number of years by the public sector owner. These future payments are used by the contractor to secure the required finance.
  • P3
  • Single point of responsibility for design and construction
  • Owner receives the asset upon completion of construction
  • Maintenance and operations remain with the project owner or is outsourced separately
  • Normally considered as public finance in many jurisdictions
  • Enables risk transfer for the construction risk only
  • Large projects that are not change-sensitive
  • Projects less focused on the whole life-cycle approach
  • Risk is able to be reasonably assessed and priced by the contractor
  • Finance by the design builder allows the project to be expedited providing there is available budget and an appetite for a premium on the interest rate compared to owner debt
Design and Construct
Alliance
Managing Contractor
Engineering, Procurement, Construction Management (EPCM)
Early Contractor Involvement (ECI)
Design Build Finance

PPP

Contractual Model Function Definition Alternative names or variants Characteristics Appropriateness

Service Concession

The private sector designs, builds, operates, and maintains the asset over a medium to long-term period with periods up to 20 years or greater.

Financing for the project remains with the public sector as does the demand risk.
  • Turnkey procurement
  • Build Operate Transfer (BOT)
  • Build Transfer Operate (BTO)
  • Single point of responsibility for design, construction, operation and maintenance
  • Enables fast track delivery and minimises total time to market
  • Integration of maintenance for a fixed term, with a transfer of the lifecycle risk
  • Longer term contract can mean that if specifications (e.g. maintenance requirements) are not developed adequately, there are long-term implications
  • Asset owner can specify upfront the relevant standards that they want the asset to meet beyond the design and construction, and through to operations or maintenance

Design Build Operate Maintain

The private sector finances, designs, builds, and maintains the asset. Financing for the project is through private debt or equity while the public sector would normally retain demand risk.

An availability payment is made to the private sector partner once the asset achieves operational status.
  • Social PPP
  • Availability PPP
  • Government pays PPP
  • PFI
  • P3
  • Mutual Investment Model (MIM)
  • Long-term contracts
  • Integrated design, construction and operations and maintenance to consider a whole of life approach to achieve ‘value for money’
  • Whole of life approach encourages innovation and focus on outcomes
  • Private finance and equity discipline to ensure appropriate due diligence around the potential risks and mitigations
  • Enables risk transfer for construction and O&M
  • Substantial procurement costs
  • Depending on the project, funding is primarily sourced from payments from the public sector, user charges, or a mixture of both
  • Greater budgetary certainty for public sector
  • Applicable for large projects due to the transaction costs involved
  • Projects that can be ‘bankable’
  • Government has adequate skills in contract management within a PPP framework
  • Significant risk transfer to the private sector
  • Where emphasis on long-term performance and outcomes is desired

Design Build Finance Maintain

The private sector designs, builds, finances, operates and maintains the asset for a set term and can take a level of demand risk, depending on the project.

Asset transferred back to public sector at end of term.
  • Economic PPP
  • Users-pays PPP
  • Availability PPP
  • Concession contract
  • Build Own Operate (BOO)
  • Build Own Operate Transfer (BOOT)
  • Build Lease Transfer (BLT)
  • Long-term contracts
  • Integrated design, construction and operations and maintenance to consider a whole of life approach to achieve ‘value for money’
  • Whole of life approach encourages innovation and focus on outcomes
  • Private finance and equity discipline to ensure appropriate due diligence around the potential risks and mitigations
  • Enables risk transfer for construction and O&M
  • Substantial procurement costs
  • Depending on the project, funding is primarily sourced from payments from the public sector, user charges, or a mixture of both
  • Greater budgetary certainty for public sector
  • Applicable for large projects due to the transaction costs involved
  • Projects that can be ‘bankable’
  • Government has adequate skills in contract management within a PPP framework
  • Significant risk transfer to the private sector
  • Where emphasis on long-term performance and outcomes is desired

Design Build Finance Operate Maintain

Private sector takes responsibility for the operation and maintenance of an existing asset and may be granted a concession to charge for the services provided or through availability payments, or a combination of the two.
  • Service Concession
  • Franchise
  • Operate Maintain Transfer (OMT)
  • Lease
  • Rehabilitate Operate Transfer (ROT)
  • Medium to long-term contracts
  • Government controls the terms of the services provided
  • Enables risk transfer for operations and maintenance, with outcomes subject to a performance regime
  • May include upgrade or refurbishment work
  • Asset owner is able to specify upfront the relevant standards that they want the asset to meet over the operations and maintenance period
  • Government has adequate skills in contract management within a PPP framework
  • Risk transfer to the private sector
Service Concession
Design Build Operate Maintain
Design Build Finance Maintain
Design Build Finance Operate Maintain

Privatisation (All functions as an owner)

Contractual Model Function Definition Alternative names or variants Characteristics Appropriateness

Privatisation

Private sector acquires the government infrastructure asset either via a long-term lease or an outright partial or full acquisition, and undertakes all activities as an owner including expansion, upgrades, operations and maintenance, and charging for the services provided.
  • Long-term lease
  • Sale
  • Leases are over a very long term, such as for 99 years
  • Payment made by private sector to the government for the lease or purchase
  • Risk is fully assumed by the private sector
  • Creates incentives for growing revenue and meeting market demand
  • If the private sector’s capability to manage and operate the asset is considered more efficient and economically sustainable
  • Certain essential services may not be suitable depending on the policies and priorities of the government
  • This may be used as a financing option such as part of a capital recycling initiative to provide funding for new infrastructure investments required
Privatisation

Regulated Asset Base (covers design, build, operations, maintenance)

Contractual Model Function Definition Alternative names or variants Characteristics Appropriateness

Regulated Asset Base

Private capital is incentivised to operate the infrastructure asset efficiently through economic regulation of the prices charged for the services produced, to avoid it acting as a natural monopoly. This may be done through what is termed a building block approach that refers to recoverability of costs including depreciation, operating expenditure, capital expenditure for expansion of the RAB and a rate of return.
  • Privatisation
  • Long-term lease
  • Price controls may comprise price caps, revenue caps and a regulated rate of return
  • Applies more commonly to a privatisation process rather than greenfield projects
  • Efficient cost service provision resulting in fairer prices
  • Provides pricing certainty for investors as well as for customers
  • More common for brownfield infrastructure assets, but has been used for greenfield assets such as the Thames Tideway Tunnel in the United Kingdom
  • Suitable for network industries such as transport, water, and electricity
  • Improvement and investment in existing infrastructure
Regulated Asset Base