Construction risk

Toll Road Toll Road

Description (What is the Risk)

Labour dispute. Interface/ project management.
Commissioning damage.
Intellectual property breach / infringement.
Quality assurance standards.
Defects.
Subcontractor disputes/insolvency.
Cost overruns where no compensation /relief event applies.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The Private Partner assumes project management risk unless certain work is dependent on Contracting Authority work/related infrastructure work being completed in which case risk could be shared.

The Contracting Authority may request a performance and warranty bond from the Private Partner.

Private Partner assumes labour dispute risk unless primarily political risk, however relief may be available for strikes and other widespread events of labour unrest.

Private Partner takes risk of intellectual property infringement.

Private Partner required to design and construct the project in accordance with good industry practice, and is responsible for completing the project free of defects and latent defects.

Private Partner assumes risk of cost overrun where no compensation/relief event applies.

Private Partner takes risk of cost overrun where no compensation/relief event applies.

Mitigation Measures (What can be done to minimize the risk)

The Private Partner will mitigate risks by appropriately allocating such risks to appropriate subcontractors.

Additionally, standards or codes revised after the tender date may be deemed relief events if compliance with such revisions increase the cost and or time to perform the work.

In cases of cost overruns, contractual provisions may provide for additional equity or additional financing.

Government Support Arrangements (What other government measures may be needed to be taken)

If standards change after the tender, the Contracting Authority may consider increasing the payments to account for increased costs of compliance or Private Partner will be excused from compliance with the new standard.

Comparison with Emerging Market

Associated risks that can affect construction costs, such as inflation, should also be considered. The Private Partner will generally price in this risk in economies where such risk can be projected and quantified.

Turnkey construction contracts and guaranteed completion dates, costs, and performance standards are often negotiated during project development.

In developed markets risk is considered manageable through robust pass through of obligations to credible and experienced subcontractors and by appropriate timetable and budget contingency.

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Description (What is the Risk)

Labour dispute. Interface/project management.
Commissioning damage.
Intellectual property breach breach/infringement.
Quality assurance standards.
Defects.
Subcontractor disputes/insolvency.
Cost overruns where no compensation /relief event applies.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The Private Partner assumes project management risk unless certain work is dependent on Contracting Authority work/related infrastructure work being completed in which case risk could be shared.

Private Partner assumes labour dispute risk, however relief may be available for strikes and other widespread events of labour unrest.

Private Partner takes risk of intellectual property infringement.

Private Partner required to construct the project in accordance with good industry practice, and is responsible for completing the project free of defects and latent defects.

Private Partner assumes risk of cost overrun where no compensation/relief event applies.

Private Partner takes risk of cost overrun where no compensation/relief event applies.

Mitigation Measures (What can be done to minimize the risk)

The Private Partner will mitigate risks by appropriately allocating such risks to appropriate subcontractor.

The Private Partner will often agree on a lump sum price with subcontractors in order to exclude the risk of cost overruns.

The Private Partner will then retain the risk that liability caps agreed under the subcontract are reached or that the warranty period under such subcontract is shorter than its defect rectification obligations towards the Contracting Authority.

Additionally, standards or codes revised after the tender date may be deemed relief events if compliance with such revisions increase the cost and or time to perform the work.

Government Support Arrangements (What other government measures may be needed to be taken)

It is elemental in PPP projects that the Private Partner is responsible for construction risks and that the responsibility for defects does not expiry prior to the expiry of the contract.

However, if standards change after the tender, the Contracting Authority may consider increasing the payments to account for increased costs of compliance or Private Partner will be excused from compliance with the new standard.

Comparison with Developed Market

Associated risks that can affect construction costs, such as inflation, should also be considered. In emerging markets such risk determination may be difficult, especially considering the foreign supply contracts that may be necessary for the project.

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