Contact Management Guide Final 0

Par tnerships
Victoria
Contract management guide

January 2018
The Secretary
Department of Treasury and Finance
1 Treasury Place
Melbourne Victoria 3002
Australia
Telephone: +61 3 9651 5111
Facsimile: +61 3 9651 5298
www.dtf.vic.gov.au
Authorised by the Victorian Government

1 Treasury Place, Melbourne, 3002
© State of Victoria 2018
You are free to re-use this work under a Creative Commons Attribution
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comply with the other licence terms. The licence does not apply to any
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Copyright queries may be directed to: IPpolicy@dtf.vic.gov.au
ISBN 978-1-922222-91-6
Published January 2018
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information@dtf.vic.gov.au
This document is also available in PDF format at: www.dtf.vic.gov.au
Version Last Updated sections Rationale

control updated
1 June 2003 Original publication
2 January 2018 Material update and revisions throughout Updates made to reflect Partnerships
document Victoria policy development and best
Addition of: practice contract management to improve
project outcomes.
 Part 3: Contract performance
 Part 4: Specific contract management
events
Par tnerships
Victoria
Contents
Glossary ............................................................................................................. 1
Part 1: Introducing Partnerships Victoria contract management .......................... 7
1. Overview of managing contracts and performance ................................................. 8
1.1 The purpose of the guide ......................................................................................... 8
1.2 The Partnerships Victoria contract management framework ..................................... 8
1.3 Contract management through the project lifecycle .................................................. 9
1.4 Where do I start? ................................................................................................... 11
1.5 Success factors for effective contract management ................................................ 13
1.6 Contract performance ............................................................................................ 14
1.7 Overview of common contract management events................................................ 15
2. The relationship between risk, service delivery and contract management ........ 17
2.1 Risk and service delivery........................................................................................ 17
2.2 Government accountability ..................................................................................... 17
2.3 Contract management, the project deed and the procurement process .................. 18
2.4 Effective contract management manages risk ........................................................ 18
2.5 Ensuring accountability and protecting the public interest ....................................... 19
2.6 What retained risks must be identified and managed? ............................................ 19
2.7 The private sector perspective ............................................................................... 22
Part 2: Key elements of effective contract management ................................... 25

3. Resourcing, governance and probity ...................................................................... 26
3.1 Introduction ............................................................................................................ 26
3.2 Contract management team and resourcing ........................................................... 26
3.3 Developing a governance, probity and compliance framework ............................... 31
3.4 Governance ........................................................................................................... 32
3.5 Internal reporting arrangements ............................................................................. 35
3.6 Coordinating with other public sector entities.......................................................... 36
3.7 Probity requirements .............................................................................................. 38
3.8 Compliance ............................................................................................................ 39
4. Relationship management, dispute resolution and issue management ............... 41
4.1 Introduction ............................................................................................................ 41
4.2 Relationship management ...................................................................................... 41
4.3 Issue management and dispute resolution ............................................................. 48
5. Contract management planning ............................................................................... 51
5.1 Introduction ............................................................................................................ 51
5.2 Developing a contract management plan ................................................................ 51
5.3 Approval of the contract management plan ............................................................ 53
5.4 Information collection and analysis ......................................................................... 53
6. Contract administration ............................................................................................ 56
6.1 Introduction ............................................................................................................ 56
6.2 Purpose of the contract administration manual ....................................................... 57
i
6.3 Assumptions underlying contract administration manual development framework .. 58
6.4 Content of the contract administration manual ........................................................ 59
6.5 Collecting information for the contract administration manual ................................. 60
6.6 Risk analysis for contract administration ................................................................. 61
6.7 The relationship between contract administration and performance monitoring ...... 62
6.8 Managing unresolved issues .................................................................................. 62
6.9 Reviewing and updating the contract administration manual ................................... 63
7. Knowledge and information management .............................................................. 64
7.1 Why manage knowledge and information? ............................................................. 64
7.2 What are knowledge assets and knowledge activities? ........................................... 65
7.3 How do I manage knowledge and information effectively? ...................................... 66
7.4 Developing a knowledge and information management strategy ............................ 66
7.5 Measuring the success of a knowledge and information management plan ............ 68
7.6 Regulatory and compliance requirements ............................................................... 68
7.7 Access to information and the Freedom of Information Act 1982 ............................ 70
7.8 Intellectual property and confidential information .................................................... 70
8. Contingency planning ............................................................................................... 73
8.1 Introduction ............................................................................................................ 73
8.2 Contingency framework .......................................................................................... 73
8.3 Planning for contingency events ............................................................................. 74
9. Ongoing review ......................................................................................................... 80
9.1 Introduction ............................................................................................................ 80
9.2 Keeping knowledge and information up to date ...................................................... 80
9.3 Review and testing of existing plans, processes and tools ...................................... 81
9.4 Identifying and recording ‘lessons learned’ ............................................................. 81
9.5 Formal review of the project performance .............................................................. 82
Part 3: Contract performance ............................................................................ 84

10. Construction phase .................................................................................................. 85
10.1 Introduction ............................................................................................................ 85
10.2 Governance and relationship management ............................................................ 85
10.3 Risk management .................................................................................................. 87
10.4 Design development .............................................................................................. 88
10.5 The independent reviewer ...................................................................................... 88
10.6 Contract variations or amendments ........................................................................ 89
10.7 Modifications and design departures ...................................................................... 90
10.8 Funding of modifications ........................................................................................ 91
10.9 Claims for relief events and compensation events .................................................. 91
10.10 Transition to operations .......................................................................................... 92
10.11 Common issues at completion and commissioning ................................................. 92
10.12 Handover to operations contract management team .............................................. 93
11. Service delivery phase.............................................................................................. 94
11.1 Introduction ............................................................................................................ 94
11.2 General framework for performance monitoring and reporting ................................ 95
11.3 Service standards and the payment mechanism..................................................... 99
11.4 Broader contract performance monitoring and reporting ....................................... 100
11.5 Broader project management ............................................................................... 106
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Par tnerships
Victoria
Part 4: Specific contract management events ................................................. 107

12. Change management and innovation .................................................................... 108
12.1 Introduction .......................................................................................................... 108
12.2 Change events ..................................................................................................... 108
12.3 Change control procedures .................................................................................. 110
12.4 Change and contractual risk allocation ................................................................. 113
12.5 Change and resource planning ............................................................................ 114
12.6 Service delivery innovations ................................................................................. 114
13. State-initiated modifications .................................................................................. 117
13.1 Introduction .......................................................................................................... 117
13.2 Specifying a State-initiated modification ............................................................... 118
13.3 Developing a proposal ......................................................................................... 119
13.4 Design development ............................................................................................ 120
13.5 The need for an independent reviewer ................................................................. 120
13.6 Confirming value for money ................................................................................. 120
13.7 Funding the State-initiated modifications .............................................................. 122
13.8 Impact on existing services .................................................................................. 123
13.9 Documentation ..................................................................................................... 124
14. Reviewable services ............................................................................................... 125
14.1 What are reviewable services? ............................................................................. 125
14.2 Why are service reviews undertaken? .................................................................. 126
14.3 Planning for reviewable services .......................................................................... 126
14.4 Benchmarking – key issues .................................................................................. 128
14.5 Market testing – key issues .................................................................................. 129
14.6 Ongoing knowledge management ........................................................................ 129
15. Refinancing ............................................................................................................. 130
15.1 Introduction .......................................................................................................... 130
15.2 Risks associated with refinancing ......................................................................... 134
15.3 Factors influencing the timing and nature of refinancing ....................................... 138
15.4 Potential benefits to Government from refinancing ............................................... 139
15.5 Dealing with refinancing requests and notices ...................................................... 141
16. Change of ownership/control ................................................................................. 145
16.1 Introduction .......................................................................................................... 145
16.2 State consent prior to any change in ownership/control ........................................ 146
17. End of term arrangements ...................................................................................... 151
17.1 Introduction .......................................................................................................... 151
17.2 Step 1: Due diligence ........................................................................................... 152
17.3 Step 2: Determining future asset and service requirements .................................. 155
17.4 Step 3: Government approval and funding ........................................................... 157
17.5 Step 4: Developing an end of service plan and project team................................. 158
17.6 Step 5: Implementing the transition to a new or ongoing arrangement .................. 159
iii
Par tnerships
Victoria
Glossary
The glossary contains explanations of terms used in this guide. 1
Abatement Commonly seen in payment mechanisms, where abatement refers to a
reduction in a service payment due to underperformance relative to a specified
key performance indicator (KPI).
Asset management plan (AMP) A plan developed for the management of one or more infrastructure assets that
combines multi-disciplinary management techniques, over the life cycle of the
asset in the most cost effective manner to provide a specific level of service.
Business case A document that sets out the rationale for a proposed project. It details what
services the project will deliver, and provides analysis of the expected costs and
benefits. A business case enables government to decide whether to support the
project, before significant resources are spent on its development.
Cabinet Cabinet includes a Cabinet committee, or other body or person exercising
authority delegated by Cabinet.
Commercial acceptance A stage in the carrying out of works under a project deed when all of the
commercial acceptance criteria have been met to the satisfaction of the
independent reviewer (or sometimes the government party on social
infrastructure projects). Commercial acceptance generally occurs when the
works are deemed substantially complete (save for minor defects or omissions)
and reasonably capable of being used for their intended purpose and after
which the private party can begin performing the contracted services and the
service payment begins to be paid. On linear infrastructure projects, this is
usually the first stage of completion, and on social infrastructure projects this is
usually the second stage of completion (after technical acceptance) – however
this may differ between projects.
Commissioning Commissioning refers to the proving processes involving the start-up of
operations and delivery of the contracted services as specified in the project
deed.
Construction phase (also called, Project stage including design and construction (or implementation) from
among other things, financial close through the commissioning process to commercial acceptance.
development phase)
Contract administration manual A document or set of documents developed by the government party, based on
(CAM) the contract management plan, to identify, understand and manage project risks
over the life of the project. It provides detailed information for the contract
management team on how to administer the contract over the life of the project .
It needs to be regularly reviewed and updated.
Contract director The contract director has overall responsibility for managing the project, usually
after commercial acceptance once steady-state operations has been achieved,
and acts as the government party’s agent in managing contractual
arrangements between the government party and the private party during the
service delivery phase.
Contract management Contract management incorporates all the activities required to identify, monitor
and mitigate all risks over the life of the project deed to assist the government to
achieve its project objectives and maximise value for money.
1
These explanations are not necessarily the same as definitions adopted in authoritative documents, such as
accounting standards, or in other Partnerships Victoria guidance material, as the context in which the terms are used
may differ in this document.
Contract management guide Page 1

Contract management plan An initial high-level document that seeks to identify, understand and manage
project risks and service improvement opportunities during the term of the
project. The Partnerships Victoria Requirements (2016) mandates it to be
developed by the government party (or the procuring agency if applicable) and
signed off by both the responsible Minister and Treasurer within 60 days of
financial close.
Contract management team A contract management team, reporting to the contract director, will carry out
many day-to-day contract management activities.
Contracted services The services the private party is required to perform during the service delivery
phase under a project deed. Contracted services may include building
maintenance, cleaning, catering, pest control, logistics and portering. On a road
project, it may often include operation of the relevant road. Unless a
Partnerships Victoria project is fully outsourced to the private party (for
example, both operations and maintenance of the relevant project assets), the
contracted services are to be distinguished from the services, operations or
functions provided by the government (or a separate entity) in relation to the
project assets.
Cure period A specified period of time for a party to rectify/cure a default (that can be
rectified or cured) before the government party has the right to enforce any
remedies for default specified in the project deed.
Default The failure of a party to perform a contractual requirement or obligation,
including failures to meet deadlines, to perform to a specified standard, to meet
a loan repayment or to meet its obligations in relation to a materialised risk.
DTF Department of Treasury and Finance, Victoria.
Estoppel The legal principles known as estoppel arise in contracts where a party has:
(a) made a representation (oral or by conduct) which is not included in the
actual agreement; or
(b) where after the agreement is signed, a party agrees not to exercise a
discretion in a certain way. In such circumstances, the relevant party
may be bound by that representation or action.
For example, in the context of a Partnerships Victoria project, if the government
party leads the private party to expect that the government party will not require
the private party to achieve a particular contractual KPI, and the private party
acts in reliance on this expectation, the government party may be unable to
later abate payments for failure to meet the KPI.
Financial close The time where all documentation for a project has been executed by the
relevant parties, and all conditions precedent have been satisfied or waived. At
financial close, the borrower (generally the private party or a specifically
purposed special purpose vehicle) may obtain the finance for the project as
negotiated with its financier.
FOI Act The Freedom of Information Act 1982.
Force majeure Acts of God and other specified risks (for example, terrorism) that are beyond
the control of the parties to a contract, and as a result of which a party is
prevented from performing all or a material part of its obligations under a
contract.
Government party The department, agency or any other public sector entity sponsoring a
Partnerships Victoria project.
Key performance indicator (KPI) A specified performance standard or benchmark that the government party is
seeking for the private party to achieve or maintain during the service delivery
phase. The private party’s service payment is usually calculated by reference to
the KPIs.
Material adverse effect regime The designation of particular categories of risks (usually only on economic
infrastructure PPP projects) which, if they materialise, will have a material
adverse effect on the project and are to undergo a special process of
assessment and allocation between the parties.
Page 2 Contract management guide

Par tnerships
Victoria
National PPP guidelines: The National PPP policy and guidelines – Volume 3: Commercial principles for
commercial principles social infrastructure and Volume 7: Commercial principles for economic
infrastructure.
National PPP guidelines: The National PPP policy and guidelines – Volume 2: Practitioners’ guide.
practitioners’ guide
Output specification The output specification sets out the range of outcomes the government is
seeking to achieve, including the contracted services that government is
seeking to procure. In project deeds entered into after 2017, the output
specification will be included in the project scope and delivery requirements
(PSDR).
Payment mechanism The payment mechanism puts into financial effect the allocation of risk and
responsibility between the government party and the private party. The payment
mechanism sets out how the service payment is calculated, including various
components (e.g. availability component, services component, lifecycle
component etc.) as well as abatement arrangements for poor performance
against KPIs.
Partnerships Victoria framework The Victorian government PPP policy framework that consists of the
Partnerships Victoria Requirements 2016 and annexures (which include the
Partnerships Victoria contract management guide) and the National PPP policy
and guidelines <https://infrastructure.gov.au/infrastructure/ngpd>.
Partnerships Victoria project A public private partnership procured under the Partnerships Victoria
framework.
Partnerships Victoria standard Partnerships Victoria guidance materials provided for standard form project
project deed guidance notes deeds introduced in 2017 to deliver either social infrastructure availability PPP
projects or linear infrastructure availability PPP projects, available on the DTF
website <http://www.dtf.vic.gov.au/Infrastructure-Delivery/Public-private-
partnerships/Policy-guidelines-and-templates>.
Partnerships Victoria The Victorian government requirements for Partnerships Victoria projects,
Requirements contained in the Partnerships Victoria Requirements 2016 document
<http://www.dtf.vic.gov.au/Publications/Infrastructure-Delivery-
publications/Partnerships-Victoria/Partnerships-Victoria-Requirements>.
PPP Public private partnership.
Private party The private sector entity with which the government party directly contracts.
Traditionally, the private party has been a special purpose vehicle created
specifically for the purposes of the project. The private party is not limited to this
form, and it can be set up under a number of structures, including a joint
venture or a trust. Behind the contracting party, however, there may be a
number of private sector interests, seeking to be represented through the
contracting party. (See also special purpose vehicle.)
Procurement team Under the guidance of a steering committee, the procurement team is
responsible for the day-to-day management of the project until commercial
acceptance.
Procurement phase The phase in which a Partnerships Victoria project is procured, usually through
a number of stages, including: an invitation for expression of interest, a request
for proposal, contract negotiation, contract execution and financial close.
Procuring agency In some Partnerships Victoria projects, a separate entity may act on behalf of
the government party, during the procurement phase to procure the project and
possibly for part or all of the construction phase.

Project assets Generally, the assets that the project company must design, manufacture,
supply, construct, install, commission, complete and, in respect of which the
contracted services are provided.
Each project deed may refer to the project assets in a different way, for
example, the facility or the relevant infrastructure.
Project deed or project The main project contract setting out the terms on which the private party
agreement carries out the project for the government party.
Project director The project director has overall responsibility for delivery of the project through
the procurement phase, and management of all members of the procurement
team, including external advisers and consultants.
The project director usually stays on the project during the construction phase.
The project director role usually transitions to the contract director role once
commercial acceptance has been achieved and the project is in steady-state
operations. However, the transition between project director and contract
director (where different people) occurs during construction phase to ensure a
smooth transition.
Project risks Those risks which may cause actual project circumstances to differ from those
assumed when forecasting project benefit and costs.
Project scope and delivery In project deeds entered into after 2017, the PSDR contains all project
requirements (PSDR) requirements for the construction phase and service delivery phase, including
the output specification and the services specification.
Public sector comparator (PSC) The public sector comparator (PSC) represents the most efficient public
procurement cost (including all capital and operating costs and share of
overheads) after adjustments for competitive neutrality, retained risk and
transferable risk (for definitions of these terms please refer to the public sector
comparator technical note
<https://infrastructure.gov.au/infrastructure/ngpd/files/Volume-4-PSC-Guidance-
Dec-2008-FA.pdf> to achieve the required service delivery outcomes. This is
used as the benchmark for assessing the potential value for money of private
party bids in Partnerships Victoria projects.
Refinancing A change in the type, amount, pricing, tenor, terms for payment or repayment or
hedging of financial accommodation.
Reviewable services Those elements of the contracted services which will be subject to a periodic
benchmarking or market testing process.
Risk Potential events, consequences, or a combination of these, and how they can
affect the successful delivery of the benefits expected of the investment. Risk is
often expressed in terms of a combination of the consequences of an event or a
change in circumstances, and the associated likelihood of occurrence.
Risk allocation The allocation of responsibility for dealing with the consequences of a project
risk to one of the parties to a contract, or agreeing to deal with the risk through
a specified mechanism which may involve sharing the risk.
Risk assessment The determination of the likelihood of identified risks materialising and the
magnitude of their consequences if they do materialise.
Risk identification The process of identifying all the relevant risks.
Risk management The identification, assessment, allocation, mitigation and monitoring of risks.
The aim is to reduce their variability and impact.
Risk matrix A method of presenting all possible significant risks likely to be encountered, the
magnitude and likelihood of the risks occurring, their areas of impact, and the
risk mitigation techniques to be employed.

Par tnerships
Victoria
Senior responsible owner The person in the government party responsible for the project, usually the
Chief Executive Officer or a Deputy Secretary. The project director and then the
contract director usually report to the senior responsible owner.
Service delivery phase (also Project phase in which the contracted services are delivered by the private
called, among other things, the party, usually commencing on commercial acceptance and ending on expiry or
operational phase, operating termination of the project deed.
phase or services phase)
Service payment The periodic payment made by the government party to the private party for
performance of the contracted services and calculated in accordance with the
payment mechanism. The service payment is usually only payable after
commercial acceptance. Service payments are made periodically (usually
quarterly or monthly) and the frequency of the service payment will be set out in
the project deed.
Services specification The contractualised outcome of the output specification. It sets out the
contracted services and the performance levels required for each of those
contracted services, usually within the project deed schedules.
In project deeds entered into after 2017, the services specification will typically
be included in the PSDR.
Special purpose vehicle (SPV) In establishing a project consortium, the sponsor or sponsors typically establish
the private party in the form of a special purpose vehicle (SPV) which contracts
with the government party. The SPV is an entity created to act as the legal
manifestation of a project consortium and only acts for the purposes of the
project it was created for. The SPV itself has no historical financial or operating
record which government can assess.
State-initiated modification A change to the project assets and/or contracted services that are initiated by
the government party.
State representative The person formally nominated in the project deed to act on behalf of the State,
to administer the project deed on behalf of the State, by exercising all rights,
powers, authority and functions of the State.
Step-in The government party’s election to assume all or some of the service delivery
obligations of the private party under the project deed for a period of time. The
circumstances where the government party may have the right under the project
deed to exercise rights to step in may include a need to prevent or mitigate a
serious risk (to the environment; public health; the safety of persons or
property), guarantee continuity of an essential service, discharge a statutory
duty or deal with a default by the private party under the project deed.
Technical completion (also That stage in the carrying out of work under a project deed when all of the
called, among other things, technical completion criteria have been met to the satisfaction of the State. The
technical acceptance, practical first stage of completion for projects (usually social infrastructure projects)
completion and provisional where the government party requires a significant period of time to work with
acceptance) the private company to commission the asset after technical completion.
Value for Money A balanced whole of life benefit measure that considers quality levels,
performance standards, risk exposure, other policy or special interest
measures, as well as price.

Par tnerships
Victoria
Part 1: Introducing Partnerships Victoria

contract management
The diversity and long-term nature of Partnerships Victoria projects requires a range of contract
management strategies to assist government achieve project objectives and value for money
outcomes.
The Partnerships Victoria Contract management guide (the guide) includes:
 Contract management guide
 Contract management guide – Templates
 Contract management guide – Appendices
This guide is intended to help contract managers develop and implement suitable contract
management strategies. It sets out principles for managing a Partnerships Victoria project. It is not
a substitute for the terms of the project contracts. Neither this guide, nor any action taken or not
taken in reliance on it, are to be taken as a variation of contract, waiver or estoppel by the
government party, unless the government party, by a person duly authorised to do so, expressly
confirms in writing that it is varying the contract or waiving a specific right under the contract.
The guide is an update of the version published in June 2003.
Part 1 outlines the nature and function of contract management, critical elements for success and
key contract management issues.
Chapter 1 Overview of managing contracts and performance
Chapter 2 The relationship between risk, service delivery and contract management
http://nginx-php-dtf-production.lagoon.vicsdp.amazee.io/sites/default/files/2018-02/contract-
management-guide-appendices.docx

1. Overview of managing contracts and performance
Part 1: Introducing Partnerships Victoria contract management
Overview of managing contracts and performance Chapter 1
The relationship between risk, service delivery and contract management Chapter 2
The Partnerships Victoria framework requires compliance with:

 the Partnerships Victoria Requirements and supporting guidance
<http://www.dtf.vic.gov.au/Publications/Infrastructure-Delivery-
publications/Partnerships-Victoria/Partnerships-Victoria-Requirements>, which
includes the Partnerships Victoria contract management guide; and
 the National public–private partnerships policy and guidelines
https://infrastructure.gov.au/infrastructure/ngpd, published by the Commonwealth.
1.1 The purpose of the guide

Contract management is a key activity for the government party to a Partnerships Victoria
contract after the project contracts are executed. This contract management guide largely
focuses on the contract management activities required for the service delivery phase.
Implementing effective contract management practices will assist the government to
achieve project objectives and value for money outcomes on behalf of the community.
The guide is for government departments, agencies and entities proposing, procuring
and/or managing Partnerships Victoria projects. It provides:
 guidance for the government contract management team in managing Partnerships
Victoria projects over the project lifecycle to help achieve project objectives and value
for money outcomes;
 guidance for the procurement team developing a Partnerships Victoria project to ensure
the executed project contracts can be effectively managed; and
 best practice principles relevant to managing a Partnerships Victoria project.
The underlying principles in this guide should be considered best practice at the time of
publication. They may also be useful in the managing long-term service contracts that are
not public private partnerships.
1.2 The Partnerships Victoria contract management framework

The Partnerships Victoria contract management framework is set out in the Partnerships
Victoria Requirements 2016, which details both the government party and DTF
accountabilities, as set out below.
The government party is responsible for establishing a robust contract management
framework, maintaining effective contract management practices during the project term
and achieving project objectives. The government party will implement:
 appropriate governance structures and effective communication and reporting lines;
 appropriate training for contract management team members within 12 months of their
appointment, unless they have existing contract management experience or
credentials;
 systems to ensure the continuity and retention of project knowledge and information;
 risk and dispute mitigation and reporting; and
 ongoing review of contract management practices to manage issues.

Par tnerships
Victoria
Partnerships Victoria in DTF is accountable for:

 supporting and reviewing contract management and assist in risk mitigation and dispute
resolution;
 managing all re-financing consent requests;
 facilitating the sharing of contract management knowledge, including conducting forums
for contract managers to share lessons learned;
 implementing appropriate training for public sector contract managers; and
 monitoring and advising the Treasurer and Government on significant contract
management issues.
1.3 Contract management through the project lifecycle

A typical Partnerships Victoria project has the following phases:
 project preparation phase – the phase in which the business case is developed to
enable project and funding approval. Following these approvals, it also includes the
preparation of the project to start the formal procurement phase;
 procurement phase – the phase in which a project is procured, usually through a
number of stages, including: an invitation for expression of interest, a request for
proposal, contract negotiation, contract execution and financial close;
 construction phase – the phase in which the design and construction (or
implementation) occurs, commencing after financial close and concluding through the
commissioning process, once commercial acceptance has been achieved;
 service delivery phase – the phase after commercial acceptance, when the private
party utilises project assets to deliver contracted services required under the services
specification during the remaining life of the project deed which concludes upon project
deed expiry or termination; and
 contract expiry or termination phase – the conclusion of the contract, including any
handover or transition period leading up to and after project deed expiry or early
termination.
The guide contains material relevant to each lifecycle phase and significant contract
management activity that may occur within the stages. The key activities in each lifecycle
phase are summarised in Table 1.1.
Partnerships Victoria projects are long term, and the operating environment will change
over the project lifecycle. In addition, the project itself will pass through a number of
phases and significant events. Each lifecycle phase and significant event involves risks
and opportunities for the government party to implement control and mitigation strategies.
The government party’s contract management strategy will evolve over the project
lifecycle.
Effective contract management must take account of and adapt to changing circumstances
and significant events through the project lifecycle.

Table 1.1: Contract management issues and the project lifecycle
Project preparation Procurement phase Construction phase Service delivery Project deed expiry or
phase phase termination phase
Resourcing Resourcing Manage performance Manage performance Manage performance
 Identify and  Plan for contract  Monitor construction  Manage performance  Manage performance by
obtain approval director progress and by government government including the
for contract arrangements management quality including service end of service strategy
management throughout project delivery payments
 Consider detailed  Monitor private party’s
resourcing lifecycle
designs  Monitor private compliance with
 Confirm budget for party’s performance obligations on
 Manage
contract management against KPIs expiry/termination and
commissioning and
resources provision of adequate
prepare for  Manage any legacy
handover information
operations/service issues
delivery
 Seek user feedback
(e.g. via survey)
Planning and Planning and Manage relationships Manage relationships Planning and development/
development development Manage relationships
 Develop service  Develop contract  Continue and  Maintain and  Confirm service delivery
needs and broad management plan strengthen strengthen arrangements post
KPIs communications with communications with contract expiry
 Collect and analyse
private party private party
 Incorporate relevant information  Maintain strategic
lessons learnt  Establish contract  Ensure the right relationship with private
from any current management participants from party
or previous committees government and
contracts for private party are
 Interact with 3rd party
similar services involved in contract
stakeholders
management
committees
 Interact with 3rd
party stakeholders
Develop tools Manage change Manage change Manage change
 Develop performance  Manage transition  Manage evolution of  Implement end of service

monitoring from procurement services strategy and prepare for
through construction specifications transition of services
 Develop contract
to contract
administration  Manage automatic  Manage asset transfer
management
manual template contractual changes, (including transfer of
(including transition
such as indexation of necessary information
 Develop other tools from project director
payments and records) if assets are
and processes to contract director)
transferred to
 Assess changes in
 Manage any disputes government
service requirements
or subcontractor
and technology that  Manage any disputes or
claims
impact project subcontractor claims
 Manage service delivery
commissioning issues
 Manage any
disputes or
subcontractor claims
Integrate contract Manage contingency Manage contingency Manage contingency events

management in the events events
project deed
 Integrate reporting  Maintain contingency  Maintain and review  Maintain and review
and KPIs plans and review contingency contingency framework
prior to framework
 Integrate dispute and  Scan environment for
commencement of
issue management  Scan environment potential impacts
service delivery
mechanisms for potential impacts
 Respond to breaches,
 Respond to
 Respond to any defaults and disasters
breaches, defaults
breaches, defaults
and disasters
and disasters

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Project preparation Procurement phase Construction phase Service delivery Project deed expiry or
phase phase termination phase
Governance Governance Governance Governance
 Project director  Project director  Contract director  Contract director or

ensures that: usually continues in assumes similar asset and service
– the contract director role during the responsibility at the manager role continues
construction phase. commencement of,
has access to  If required, accountable
or early in, the
resources and  Contract director government entity
information required service delivery
engaged at provides or procures
to prepare the phase
appropriate time replacement services or
contract during the  Contract director, assists in transfer of
management plan construction phase to applies and regularly facilities and knowledge
– the contract ensure smooth reviews contract to government
transition to the management tools
management plan  Contract director reports
is prepared service delivery and processes
to senior management
phase.
 Contract director and DTF
– governance,  Project and/or reports to senior
reporting  Contract director
contract director management and
arrangements are in represents the
ensures that DTF
place for government party on
commencement – contract  Contract director project control group and
management plan represents the senior representatives
is approved and government party on group (if applicable)
implement the project control group
contract and Senior
management plan Representatives
– reports to senior Group (if applicable)
management and  Government entity
DTF plans succession
 represents the
government party on
project control group
and Senior
Representatives
Group (if applicable)
Administration Administration Administration Administration
 Is the contract  Populate contract  Update contract  Manage knowledge and

director credentialed? administration administration project records
manual manual
 Do reality checks.  Review contract
Can the KPIs be  Manage knowledge  Manage knowledge management practices
measured etc.? and project records and project records
 Review contract  Review contract
management management
practices practices
1.4 Where do I start?

Developing and implementing a contract management strategy for a Partnerships Victoria
project can be a complex task requiring significant resources. However, completing this
task early has significant benefits, as effective contract management assists the
government party to achieve the value for money and project outcomes agreed upfront in
the project deed.
The diverse nature of Partnerships Victoria projects requires a range of contract
management strategies to manage a wide variety of risks that differ in likelihood and
severity from one project to another. For instance, the scope of services and number of
KPIs is different across projects. Consequently, this guide is a starting point to assist
contract managers ask the right questions as they develop and implement effective
contract management strategies in Partnerships Victoria projects.
Existing Partnerships Victoria contract managers are very useful sources of information to
assist develop both procurement documentation and contract management strategies.
The contract management strategy should be developed and implemented through steps,
as outlined in Figure 1.1.

Figure 1.1: Steps for developing and implementing the contract management strategy
Input contract management expertise into RFP

Procurement phase requirements
Start developing contract management strategy
Ongoing information collection and analysis
Contract execution and Within 60 days of financial close have approval of

financial close contract management plan and publish contract
Develop and finalise contract administration manual

Construction phase (or similar tools)
Transition project director to contract director
Implementation and ongoing review of contract

Service delivery phase management framework
Procurement phase activity – contract management plan

Developing and implementing a contract management strategy should start at an early
stage during the procurement phase so that contract management requirements are
included in the request for proposal and draft contract developed by the government party
(or procuring agency if applicable).
Once the project deed has been executed, the contract management strategy should
capture all of the obligations relevant to the construction phase and service delivery phase
based on plans developed by the successful private party during the procurement phase.
The contract management plan is the key output at the end of the procurement phase
based on the executed project contracts. The plan should be developed during
procurement and approved by the Treasurer and the relevant Minister within 60 days of
financial close. The central task in this process is to list and understand each party’s
obligations and identify and analyse the key risks to the project’s success. The contract
director can begin the planning process by asking the following questions:
 What contract management tools and processes may be required for the project?
Appendix G lists the tools and processes discussed in this guide, and may assist the
contract director to identify the tools and processes relevant to their project.
 What human, financial and technology resources are available? The available
resources may dictate the form of contract management tools and processes. In
instances where the government party has existing Partnerships Victoria projects on
foot, it will be a case of identifying additional resource needs and obtaining related
budgetary and staffing approval.
 What time constraints should be set for developing the contract management
tools and processes? The time constraints should be matched to both the available
resources and the expected project delivery dates and milestones. The contract
management plan should also outline arrangements for a transfer of responsibilities to
the contract director and the contract management team.

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Construction phase activity – contract administration manual

After obtaining appropriate resources, and collecting and analysing r elevant information,
contract directors should proceed to develop and implement the necessary contract
management tools and processes.
These processes and tools should be collated in a contract administration manual. It may
be appropriate to document some of the tools and processes separately from the contract
administration manual. For example, certain contract management processes may be
contained in documents that apply across the government party, rather than applying
specifically to the individual project deed. If this is the case, an up-to-date copy of the
separately document should be available to the contract management team.
The contract administration manual and the performance reports produced by both the
private party and the government party over the life of the project are key documents for
the project.
Service delivery phase activity

It is important for the contract director to establish a system of ongoing contract
management and review. The contract director, supported by senior management should
establish a culture of ongoing contract management which includes the systematic review
of the contract management strategy and tools and processes during the lifecycle of the
project.
As part of establishing an effective contract management culture, contract directors and
their teams should undertake training that provides skills and competencies in manag ing
Partnerships Victoria projects and engage in ongoing knowledge exchange with peers by
participating in whole-of-government contract management networks.
1.5 Success factors for effective contract management

Developing the contract management strategy early
Effective contract management requires developing a contract management strategy early
in the project lifecycle. The strategy should be in place before contract execution. It should
also be reviewed and updated over the life of the project.
Dedicated resourcing, governance and probity

The government party must dedicate adequate resources to contract management
activities. This will ensure that the value for money outcome and contracted performance
standards are not compromised and risk is managed over the life of the project. Adequate
budget and experienced personnel are required for good contract management as well as
ensuring that appropriate governance, probity and compliance practices are established.
Active relationship management, dispute resolution and issue management

Given the long-term nature of Partnerships Victoria projects, it is important to maintain a
strong relationship between contracting parties. Effective relationship management
enables the parties to anticipate and deal with risks and benefit from opportunities that
arise.
Upfront planning, information collection and analysis

Planning, information collection and analysis are key ongoing steps in effective contract
management. Determining the information required from the private party will assist
structure and implement the contract management strategy. The information collected and
analysed helps the government party to identify, understand and manage project risks and
service improvement opportunities.

Formal contract administration plan and manual
Contract administration is a significant task in managing a Partnerships Victoria project. An
approved contract management plan is required post contract execution. The plan is then
developed into more detailed contract management strategies or a manual. The contract
administration manual will evolve over time as the project moves through different phases.
This will cover the key aspects of managing performance and reporting.
Active knowledge and information management for performance monitoring

The contract director will implement a knowledge and information management strategy
tailored to the project ensuring the information collected is relevant to performance
management, maintained, periodically reviewed and organised for easy retrieval. This
enables the government party to comply with obligations relating to information retention,
disclosure and protection. It also enables the government party to efficiently undertake a
range of activities including its payment arrangements, administering change notices and
effective asset lifecycle replacement using transparent asset registers.
Effective contingency planning

Effective contingency planning in a Partnerships Victoria project ensures the government
party can respond to unplanned events and control the impact of these events on service
delivery and value for money outcomes.
Ongoing review
Contract management processes will need to adapt over the lifecycle of a Partnerships
Victoria contract and should be reviewed on an ongoing basis. In addition, the following
specific events should be considered:
 divergence between each party’s expectations and actual project outcomes;
 changes in the project itself through change events, contingency events, or as a result
of the project moving from one stage to the next in its lifecycle; and
 changes in the operating environment.
1.6 Contract performance

Construction phase
During the construction phase, relationships with the private party that are embedded in
the governance and reporting arrangements formally commence. Specific contract
management issues can arise during the construction phase that can impact future service
delivery or value for money.
The period of design development requires due diligence by the contract management
team to ensure the government party receives the required standard of asset and that the
asset will have the capability to provide the contracted services. The technical completion
tests for the asset are a key milestone during the construction phase (in projects where
technical completion is contemplated) as is the operational readiness period leading up to
commercial acceptance and its related commissioning tests.
The role of the independent reviewer is also critical during the construction phase. Both the
government party and the private party must cooperate and provide the information to the
independent reviewer to ensure commissioning tests are able to be completed in a timely
manner.

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Service delivery phase

Contract performance during the service delivery phase focuses on monitoring service
provision, maintaining asset condition and managing payments. An effective performa nce
monitoring and reporting strategy is based on:
 understanding the business environment and the objectives of government in entering
into the project deed. It is important that performance measures are linked to strategic
objectives and desired outcomes;
 understanding the private party’s internal operating environment, including its cash
flows and the range of subcontracted or associated service providers can lead to an
awareness of the private party’s strengths and weaknesses, including financial
performance;
 actively monitoring the management quality of the private party, checking for
weaknesses or trends that may provide an early indication of risks to the project; and
 regularly reviewing the quality of the service against the key performance indicators
and services specifications. The government party acts to mitigate or control any risks
that are materialising and to maximise value for money from the project.
Effective performance monitoring in a Partnerships Victoria project has a robust strategy

for monitoring service delivery and accessing relevant information to mitigate any risks and
take advantage of any service improvement opportunities that are materialising.
1.7 Overview of common contract management events

Change management
Changes during the lifecycle of a Partnerships Victoria project require active management.
Changes may be contemplated during procurement and provided for in the project deed. In
some cases, unanticipated alterations to the project assets, contracted services or the
project deed (or other project contract) become necessary. In either case, change events
are both a source of risk and a potential opportunity to gain additional benefits from the
project. The government party should ensure there is no unintentional take-back of risk
allocated to the private party during a change event.
State-initiated modifications and augmentations

State-initiated modifications are likely to occur during the life of most Partnerships Victoria
projects to change the project assets or the contracted services performed by the private
party. Typically, a State-initiated modification will involve the government party preparing a
change request to issue to the private party in order for the private party to provide a
proposal to the government party for design (if required), pricing and any other relevant
information in relation to the State-initiated modification.
A material modification to the project may be treated as an augmentation (significant
increase in the size of the asset or service requirements). Typically, the project deed will
specify a process to agree and implement a State-initiated modification and augmentation.
Reviewable services
A range of ‘soft services’ – such as cleaning, security and grounds maintenance services –
are typically subject to a price review at regular intervals during the service delivery phase.
It is likely to provide better value for money to review these labour-based services
regularly, rather than locking in price and other arrangements for the full term of a

Refinancing
Refinancing refers to any change to a project’s debt financing arrangements. There can be
scheduled and unscheduled refinancing events. Partnerships Victoria Requirements state
that all refinancing consent requests must be managed by DTF in conjunction with the
contract director. The financial and risk impact of a refinancing event must be reviewed by
the government party when assessing the refinancing proposal and determining State
consent.
Change of ownership/control
A change in control refers to a material change in the private party’s ownership
arrangements whereby a different entity assumes effective control. Typicall y, the State
requires the private party to seek prior approval of changes in control (other than in respect
of on-market acquisitions, where consent may be sought immediately after the change in
control) in order to ensure that the private party entity continues to be a suitable body to be
entrusted with the contracted service delivery responsibilities. More recent project deeds
may also allow for ‘permitted share capital dealings’, which are changes of control that the
government party and the private party agree as part of negotiating the project deed.
These do not require State approval.
End-of-term arrangements
A Partnerships Victoria project can conclude at expiry of the term of the project deed or
earlier through mutual agreement or early termination due to force majeure, private party
default or the government party termination for convenience.
Planning for the end of term must occur well in advance and an end-of-service strategy
developed to set out the approach and steps to be taken by the government party.

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2. The relationship between risk, service delivery and

contract management
Part 1: Introducing Partnerships Victoria contract management

Overview of managing contracts and performance Chapter 1
The relationship between risk, service delivery and contract management Chapter 2
2.1 Risk and service delivery

Project risk is the effect of uncertainty on project objectives. It refers to the risks associated
with potential events occurring and the consequences that may impact on project
objectives. As such, project risk is often expressed in terms of a combination of the
consequences of an event or a change in circumstances, and the associated likelihood of
occurrence.
The Victorian Government risk management framework
<http://www.dtf.vic.gov.au/Publications/Victoria-Economy-publications/Victorian-risk-
management-framework-and-insurance-management-policy> describes the minimum risk
management requirements for government entities covered by the Financial Management
Act 1994 and adopts the Australian Standard ISO 31000.
Service delivery is central to Partnerships Victoria projects. Government contracts with the
private party to deliver contracted services to prescribed standards and the government
party pays according to delivery of the services.
Risk is the chance of an event occurring that would cause actual project circumstances to
differ from those assumed when forecasting project benefits and costs.
Service delivery risk is the foremost concern to contract managers.
2.2 Government accountability

Ultimate accountability for the delivery of government services rests with government in a
Partnerships Victoria project, even though the contractual responsibility for certain
deliverables is transferred to the private party. The reporting and procedural obligations of
the government party include:
 Ministerial accountability to Parliament and the people (including accountability for
government’s contracting activities);
 complying with the Financial Management Act 1994 and the Financial Management
Regulations and Directions, designed to achieve a high standard of public financial
management and accountability;
 complying with the Audit Act 1994, if required, by assisting the Victorian Auditor-
General’s Office to undertake a performance audit to assess the efficiency and
effectiveness of the management of public resources by the procuring agencies, or
service delivery through contracts with private providers (under its ‘follow-the-dollar’
powers);

 meeting the Partnerships Victoria Requirements, including:
– ensuring that all contract directors and relevant members of their teams undertake
appropriate training within 12 months of their appointment, unless they have
existing contract management experience or credentials;
– regularly reporting to DTF and consulting with DTF on matters including changes in
control, refinancing, material modifications and augmentations, and any dispute
resolution;
– publishing both the contract and project summary within 60 days of financial close;
– complying with whole-of-government probity standards and practices. Government
must meet a high standard of probity in its commercial contracts, and act as a
‘moral exemplar’ in contracting by behaving fairly and ethically;
 adhering to administrative law remedies, including the Ombudsman’s jurisdiction and
the Freedom of Information Act 1982; and
 complying with privacy obligations in relation to personal information in the hands of
the government under the Privacy and Data Protection Act 2014.
2.3 Contract management, the project deed and the procurement process
The project deed should clearly identify the obligations of the private party and the
government party and enable the parties to build a productive relationship. The project
deed (and other project contracts) drafting and negotiation process is conducted with the
understanding that the project contracts will form part of a broader risk management
framework for the project.
The relationship between the parties is an essential component of effective contract
management. The project contracts should not be so rigid that it precludes flexible,
constructive management or the natural maturing of the relationship between the parties.
The foundation for good contract management will be established during the procurement
phase by including a contract management perspective in the procurement team. The
project director and procurement team must work with the contract director and contract
management team (who will be responsible for managing the project during the service
delivery phase) to develop an effective contract management strategy and ensure a
smooth transition.
Effective contract management must be initiated early in the procurement phase of the
project and requires a strong understanding of the project deed (and other project
contracts).
2.4 Effective contract management manages risk

Effective contract management manages material risks over the project lifecycle to achieve
project objectives and value for money outcomes. This includes:
 understanding the project objectives and the intent of the project deed;
 understanding the principles behind allocating specific risks;
 identifying risks and assessing their materiality; and
 developing management strategies to assume, control, mitigate or eliminate risks and
associated impacts.

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Contract management is based on the risk allocation in a project deed. The commercial
principles in the National PPP policy guidelines and the Partnerships Victoria standard
project deed guidance notes form the foundation of the PPP risk allocation for all
Partnerships Victoria projects, which is further developed and refined for each specific
Partnerships Victoria project during the procurement phase. The private party bears the
risks that the built asset meets the output specification and is suitable for service delivery
over the project lifecycle. Usually, this risk allocation is enforced through the fitness for
purpose warranty provided by the private party in the project deed.
All risks associated with service delivery are allocated to the private party except where the
project deed specifies a risk the government party has retained, on the basis it is better
value for money for the risk to be managed by the government party. The payment
mechanism, and the associated performance regime, is the key tool for enforcing this risk
allocation to the private party in a project deed.
2.5 Ensuring accountability and protecting the public interest

Appropriate standards of accountability in Partnerships Victoria projects must be
maintained over the project lifecycle. Partnerships Victoria projects must satisfy a public
interest test as an integral part of the procurement process.
The procurement team must ensure the public interest is protected in the executed project
deed and other project contracts. Public interest can cover issues such as accessibility,
accountability, security and equity. The government party must ensure that the private
party complies with its obligations related to the public interest, and must implement a
strong governance, probity and compliance framework throughout the life of the project.
The risks to government can be effectively managed by developing a project governance,
probity and compliance framework and integrating it into the contract management process
so that appropriate standards of project accountability and performance are establ ished,
measured and maintained.
The governance framework is linked to the contract administration manual and the project
performance, monitoring and reporting measures.
2.6 What retained risks must be identified and managed?

Contract management includes thorough information collection, analysis and review. New
and emerging risks through the project lifecycle must be identified and control action s
taken. Figure 2.1 outlines some key government retained risks that require contract
management strategies.

Figure 2.1: Categories of contract risk in a Partnerships Victoria project
Risks to government
Risks contractually allocated to Example: Risk of cost and delay if native title claims are
government (‘project risk’) made in respect of the project site
Risks arising from issues not resolved or

Example: Finalising planning risks
clearly specified at contract execution
Risks arising from issues not resolved at

Example: Land titles issues
commercial acceptance (‘legacy issues’)
Intrinsic risks to government in long-term

service delivery projects
Residual risk to government of risks Example: Risk that private party fails to provide services,
contractually allocated to the private compromising governments ability to provide related
party services
Examples:
Risk to the government of ineffective  Inadvertent ‘tack back’ of risk allocated to the private party
public sector management  Inefficient use of services supplied in accordance with the
output specification
Government’s implied obligations
Examples:
Risks associated with proposed changes
 Proposals for expanding service to new parties
to the contractual arrangements  Proposals due to changes in the business environment
Risks contractually allocated to government

Selected project risks are contractually allocated to the government party in the project
deed developed during the procurement phase, based on the commercial principles
outlined in the National PPP guidelines: commercial principles and the Partnerships
Victoria standard project deed guidance notes. The contract director must appropriately
manage those risks retained by the government party in the project deed.

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Risks arising from issues not resolved at contract execution

Not all issues that may arise in a Partnerships Victoria project will be identified and
allocated in a project deed. Some risks may have been identified, but were intentionally or
unintentionally left unresolved.
The contract director must manage the unresolved issues in accordance with the risk
allocation for the project generally to minimise negative impacts on the project objectives
and maintain value for money outcomes.
Risks arising from issues not resolved at commercial acceptance

The aim of commercial acceptance is to have a fully functioning and service offering ready
for service delivery. However, there may be some outstanding issues which are not
resolved. The project director or contract director (as applicable) should ensure that where
completing a matter is required to achieve technical completion, commercial acceptance or
final acceptance, that the matter is in fact completed prior to certification of acceptance.
Intrinsic risks borne by government

A variety of risks are intrinsic to a long-term contract and must be managed by the contract
director. These risks include:
 the residual risk to government of a failure by the private party to adequately control
and mitigate risks contractually allocated to the private party;
 risks arising from ineffective public sector management; and
 risks arising from the government party’s implied obligations.
Residual risks
The nature of Partnerships Victoria project deeds is that all project risks not allocated to
the government party implicitly fall to the private party.
Government’s preferred position is that this interface risk is allocated to the private party.
Allocation of interface risk to the private party may entitle the government party to financial
compensation if the private party’s failure to deliver the contracted services interferes with
government’s ability to provide services.
Government may also retain a significant residual risk if it has a continuing, non-delegable
duty of care to people receiving services provided by the private party. There can be
similar residual risks to government where a project risk allocated to the private party
materialises and there is a political or public interest imperative for government to deliver
the services.
Government also bears risk if the private party is unable to continue to provide the
contracted services due to circumstances such as financial failure of a major sponsor or
the triggering of a major probity event (i.e. relating to whether the private party is a fit-and-
proper legal entity to undertake the contracted services). While the government may be
entitled to financial compensation under the project deed for such events, government
ultimately retains responsibility to continue service delivery.
Risks arising from ineffective public sector management

Risks can arise if the government party does not meet its administrative responsibilities
and mismanages the project deed. The consequence may not directly affect service
delivery, but it may compromise value for money.

Government’s implied obligations
Partnerships Victoria contracts expressly impose obligations on the government party
(such as service payment obligations) and there are also likely to be implied obligations on
the government party. In particular, the contract director should be aware of implied
obligations for the government party to:
 refrain from engaging in any activity which would hinder the ability of the private party
to fulfil its contractual obligations or deprive the private party of the benefit of the
contract; or
 act reasonably and in good faith when performing obligations or exercising discretions
under the project deed.
Risks associated with proposed changes to the contract

Proposed changes to contractual arrangements involve risks that the change process is
not managed effectively and that the change may jeopardise the ongoing success of the
project. These risks should be identified, assessed and allocated as part of an appropriate
mitigation strategy. Tools and processes for managing risks in the change process are
discussed in detail in Part 4 of this guide.
The project director succeeds by achieving a contractual arrangement that will deliver the
project objectives and enable effective contract management. The contract director
succeeds by ensuring that the project objectives are delivered, State obligations are met
and risks are actively managed.
2.7 The private sector perspective

Effective contract management requires an understanding of the dynamics of the private
party, the allocation of risks between consortium members and the impact of project
financing on the private party’s approach to due diligence and risk management.
Who is the private party?

The private party is the party that enters into the project deed with the government.
Typically, the private party will comprise a consortium of debt financiers, equity investors, a
builder, a facility management subcontractor and potentially an operator (in projects where
the operations have been outsourced to the private sector). Figure 2.2 shows a typical
consortium and its relationship with the government party. In most projects, the consortium
forms a special purpose vehicle specifically for the purposes of the PPP project. This
special purpose vehicle enters into the project deed with the government party and is
referred to as the private party.
The contract director’s primary point of contact for the project will be the nominated
representative of the private party. In some cases, the private party will engage a specialist
asset manager under an asset management agreement. The role of the asset manager is
to provide whole-of-life asset management services on behalf of the consortium members,
and they will be a primary contact for the contract director. The contract director may also
on occasion interact with a representative of the facility management subcontractor during
the service delivery phase.

Par tnerships
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Figure 2.2: Typical private sector consortium
Government adviser/s Government
Private Party
Private Party adviser/s Guarantor
(SPV/Sponsor)
Design and construction Operator and Facilities

Debt financiers Equity participants
contractor Manager
Funding adviser/s
Subcontractor/s Subcontractor/s
Occasionally, the private party is a company that already has other significant business
activities, or has subsequently undertaken other business activities. Where the private
party is not a special purpose vehicle, there are both risks and benefits for government.
Risks include:
 the private party, and hence the project, may be affected by its other interests – poor
performance of its other activities may even result in the private party becoming
insolvent; or
 there may be a loss of transparency, as management of the project by the private party
(and the consequent costs) may be intermingled with management (and costs) of its
other business activities – this can add complexity to the operation of various
contractual mechanisms such as the sharing of additional revenues and refinancing
gains, and the pricing of modifications.
Benefits include:
 the private party’s other business interests mean that it is not dependent upon the
individual project, and therefore may have greater ability to effectively manage
challenging project circumstances; or
 there may be efficiencies for the private party in operating a number of similar
businesses, which may result in financial benefits for government. For example, the
private party may be able to refinance on better terms than if it was a special purpose
vehicle, and government may share in this benefit.
If the private party requests the government party’s approval to undertake activities other
than the project activities under the project deed, the contract director should seek advice
on the potential implications and take action to ensure that the government party is, on
balance, no worse off.

The private party's approach to risk
The project deed allocates project risks. While the private party special purpose vehicle is
responsible to the government party for the project and services, the risk allocation is
typically passed down to relevant consortium members through the subcontracts and other
project contracts. The risk allocation between the consortium members is determined
during the procurement phase and will be priced by the builder, facility management
subcontractor, operator (if applicable), debt financiers, equity participants. There are often
interface agreements between consortium members that specify risk allocation and the
financial consequences of the risk. This is particularly relevant in relation to the payment
mechanism that underpins the contractual performance regime.
The contract director should understand how risks are shared between consortium
members at different stages of the lifecycle of the project. At times, there may be
competing or differing views between consortium members. The contract director needs to
ensure that the private party as a whole remains accountable.
In some projects, the private party or related companies of the private party will undertake
commercial development activities in conjunction with the project. These activities can
affect the commercial positions taken by the private party and its consortium members in
dealings with government. The commercial development may also offer synergistic
benefits for the Partnerships Victoria project (for example, if the commercial development
is a hotel associated with a convention centre project) and there may be interface risks
between the project and the commercial development. It is therefore important that the
contract director understands the risks, benefits and commercial arrangements associated
with the commercial development, and how these may affect the project and the private
party’s behaviour.
The impact of project financing on risk assumptions

The equity and debt financiers in a Partnerships Victoria project will conduct ongoing due
diligence of project performance against modelled project returns, both during the
construction phase and the service delivery phase. Therefore, risk events and change
events are assessed against their impact on project returns. Different members of the
consortium may have different appetite for risk or willingness to adopt contractual changes.
The contract director should understand this as part of managing the project.
Equity participants may accept a greater level of risk than debt financiers, as their potential
returns are higher. While the majority of risks are transferred to subcontractors, some risks
remain with equity providers, such as the risk of subcontractor insolvency or
non-performance.
Debt financiers will be concerned not to take on risks that may jeopardise the project cash
flows. This is particularly so if the project is funded on a limited-recourse basis (most
common in PPPs), which means that the debt financier is dependent on the cash flow from
the project, and has no call on any other assets of the equity participants or related
parties/activities, other than any bonds or guarantees provided to the private party by
members of the consortium (usually the builder and the facility management
subcontractor).

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Part 2: Key elements of effective contract

management
Part 2 (Chapters 3–9) outlines the key elements to be considered in designing an effective contract
management framework. It also provides guidance on a range of contract management processes
and tools that can be used to manage Partnerships Victoria projects.
Contract management guide – Templates have been developed for a number of these contract
management processes and tools are available on the DTF website.
Chapter 3 Resourcing, governance and probity
Chapter 4 Relationship management, dispute resolution and issue management
Chapter 5 Contract management planning
Chapter 6 Contract administration
Chapter 7 Knowledge and information management
Chapter 8 Contingency planning
Chapter 9 Ongoing review

3. Resourcing, governance and probity
Part 2: Key elements of effective contract management

Resourcing, governance and probity Chapter 3
Relationship management, dispute resolution and issue management Chapter 4
Contract management planning Chapter 5
Contract administration Chapter 6
Knowledge and information management Chapter 7
Contingency planning Chapter 8
Ongoing review Chapter 9
3.1 Introduction
This chapter addresses the contract management team and its resourcing, governance
issues and reporting, probity issues and related principles to guide the conduct of the
contract management team. It also outlines issues relating to compliance.
3.2 Contract management team and resourcing

Contract administration resources
The government party must ensure that adequate resources are applied to contract
administration which should ideally be planned upfront during the business case stage.
The procurement phase and construction phase of a Partnerships Victoria project are
considered to be high value and high risk. Consequently, these phases require sufficient
procurement team members, advisory resources and budget to be allocated. During the
construction phase, the project needs to retain sufficient resources and budget, typically
managed by the project director and the carryover procurement team. The service delivery
phase is considered lower risk once steady-state operations have been achieved.
During the procurement phase, the government party (or procuring agency if applicable)
should take steps to confirm or recruit the resources needed to manage the contract during
both the construction phase and the service delivery phase. Usually, the project director
and the members of the procurement team remain engaged with the project during the
construction phase to manage the design and construction process.
It is common for the project director and members of the procurement team to leave the
project once commercial acceptance is achieved. In this case, the procurement team and
the new contract management team must work closely together to transition the project
from the construction phase into the service delivery phase. This close working relationship
will also ensure that the contract management team is ‘up to speed’ on the project from the
beginning of the service delivery phase.
The contract management team is responsible for a complex high-value project and for
delivery of important services during the service delivery phase. This means that prior to
the service delivery phase commencing, the government party must allocate sufficient and
appropriate staffing, consultancy and other budget resources to enable efficient and
effective contract administration during service delivery.

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Determining the appropriate resources will require the government party to:
 identify contract management team obligations – both contractually and more broadly
– and their resource intensity;
 consider the volume of the private party’s reporting requirements, including service
performance KPIs that require monitoring;
 consider the extent to which the contract management team will delegate direct
monitoring of service performance KPIs to another government entity (e.g. Department
of Health and Human Services will delegate direct monitoring of service performance
KPIs to a local health service hospital);
 assess the range of project risks and issues and identify the expertise required to
monitor and respond to those risks;
 determine the extent to which that expertise should be sourced internally or from
external consultants – this will influence the relative staffing and consultancy resource
requirements;
 consider whether the contract management team has appropriate resources for the
acquisition and operation of technical support systems (e.g. there can be sizeable
costs in establishing and operating electronic knowledge and information technology
platforms); and
 consider whether the allocated budget for the range of contract management activities
is sufficient.
Another important factor in determining resource requirements will be whether the relevant
government party has an existing Partnerships Victoria contract management team in
place. If such a team is in place, additional resources required may be less than if a
contract management team needs to be established from scratch.
It is also important to be aware that the contract management resources needed to
manage a Partnerships Victoria project will vary significantly from project to project and
over the lifecycle of individual projects. For instance, there is likely to be a need for greater
resources during major change events, such as a State-initiated modification or
augmentation to expand the asset.
Contract management team members
The government party must ensure that team members involved in contract administration
have appropriate levels of authority to administer the contract effectively.
The key roles within the government party during contract management stages of a
Partnerships Victoria project include:
 the senior responsible owner (the person with overall responsibility for the project and
related services, and to whom the project director and contract director report. This
term is used for consistency with gateway review terminology);
 the project director and the procurement team (during the procurement phase and
construction phase);
 the contract director (during the service delivery phase); and
 the contract management team (during the service delivery phase).
Contract management team members need to have sufficient authority, in the form of
delegations or otherwise, to fulfil their roles in managing contracts (delegations and
authority are discussed in detail in Section 3.4 of this guide).

The government party responsible for the project must:
 nominate a State representative under the project deed as the primary interface with
the private party;
 identify the role of staff involved in administering the contract, particularly the actions
contract management team members are required to undertake on behalf of the
government party;
 identify the source of authority of the contract management team members (for
example, legislation or regulation, Ministerial delegation);
 identify the scope of the authority of all staff involved in administering the contract ;
 determine whether existing forms of authority are sufficient for staff to carry out the
tasks required to manage the contract; and
 identify the capacity and flexibility with which the authority of contract management
team members can be increased as the need arises or circumstances change.
The senior responsible owner

The senior responsible owner is usually the Chief Executive Officer or a Deputy Secretary
of the government party. The senior responsible owner has overall responsibility for the
successful delivery of government services relevant to the Partnerships Victoria project.
The senior responsible owner must ensure that:
 the project’s significance is appropriately recognised;
 the government party’s board or Minister is periodically briefed;
 the government party’s senior management group takes an active interest in the
ongoing delivery of the contracted services during the life of the project; and
 adequate financial resources, an appropriate contract director and contract
management team are in place to satisfactorily deal with the private party and the
project’s complexity and challenges.
The project director and contract director

It is essential to the success of a Partnerships Victoria project that a suitably qualified
individual has overall responsibility for managing the project from the date of contract
execution to achieve project objectives and value for money over the project term. This
person is the State representative under the project deed.
Figure 3.1 below shows how the transition of responsibility for management of the contract
generally occurs on projects from the procurement phase to the service delivery phase.

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Figure 3.1: Transition from project management to contract management
Contract Commercial
execution acceptance
Procurement phase Construction phase Service delivery phase
Project director Transition Contract director
Procurement team Transition Contract management team
Generally, the project director during the procurement phase will remain engaged on the
project during the construction phase to manage the design and construction process. The
timing of transition to a contract director can vary.
The appointment of a contract director should be identified early in the construction phase
and will usually be either the:
 appointment of the project director as the inaugural contract director following
commercial acceptance. If the project director during the construction phase becomes
the inaugural contract director, the project director should appoint a contract
management team with responsibility to develop the contract management tools and
processes during the procurement process; or
 appointment of a new contract director. If the project director does not intend to remain
engaged on the project after commercial acceptance, a new contract director should
be appointed as early as practical during the construction phase.
Regardless of when the transfer of responsibility from the project director to the contract
director occurs, the contract director must be familiar with the project, and be ready with
the necessary tools and processes before the start of the service delivery phase.
The project director, the procurement team and their advisers should assist the contract
director to establish these contract management tools and processes. The project director
must ensure the procurement team’s knowledge is transferred to the contract management
team. Where feasible, the project director should provide support as necessary until the
project has reached stable operations, working with the inaugural contract director during
the transition.
The contract management team

A contract management team, reporting to the contract director, will carry out many
day-to-day contract management activities. The size of this team may vary depending on
the nature of the project and may vary over the life of the project.
Where the government party has an existing Partnerships Victoria contract management
team, this team will likely provide input in the procurement phase, so that practical contract
management provisions can be included in the project contracts.

Training
Personnel involved in contract management must be adequately trained to effectively and
competently carry out their roles and responsibilities. Inexperienced personnel represent a
significant risk to effective contract management, public sector accountability and
successful project outcomes.
DTF has established a formal training program to provide contract directors and contract
management team members with relevant skills. It is expected that the government party
will supplement this training with ongoing training for skill development, including:
 project and time management;
 negotiation and communication skills;
 probity and compliance;
 dispute and issue management; and
 relevant computer software.
Succession
Given the long-term nature of Partnerships Victoria projects, the personnel involved in
management of a project are likely to change several times through the project lifecycle.
New personnel will need time to become familiar with a project before they can effectively
manage it.
The government party should establish a succession plan for key personnel to manage
personnel changes efficiently by:
 limiting concurrent departures;
 ensuring that the team has a good mix of experience levels; and
 integrating its contract administration manual (Chapter 6) and knowledge and
information management systems (Chapter 7) into succession planning.
The importance of having a detailed, up-to-date and easy to use knowledge management
system with good record keeping to ensure smooth succession planning cannot be over -
emphasised.
The succession plan must be sufficiently flexible to provide quality ongoing management
and accommodate change, including:
 the possibility of personnel choosing to leave their positions prematurely or being
absent on extended leave;
 the need for incoming personnel to complete appropriate training (preferably with the
involvement of the incumbent contract director); and
 the likelihood that roles and workloads will change over the lifecycle of a Partnerships
Victoria project.
The need for a comprehensive succession plan is related to broader government
objectives of supporting contract management as a recognised career path and the career
advancement of contract management personnel.
Consultancy resources
Effective contract management will also require use of expert external resources from time
to time. The original private sector legal, commercial and technical advisers will have a
level of familiarity with the project circumstances to provide specific advice.
A sufficient budget will need to be available for regular ongoing contract management
activities. This budget may need to be supplemented during major change events.

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In addition, expert resources may be sourced from the public sector, such as:
 DTF;
 Treasury Corporation of Victoria (TCV) – financial modelling and invoice payments;
 Victorian Managed Insurance Authority (VMIA) – insurance advice; and
 Valuer-General Victoria (VGV) – valuations advice.
3.3 Developing a governance, probity and compliance framework

Appropriate project governance, probity and compliance arrangements are fundamental to
good contract management. Good governance is important for dealings with the private
party and internally within government. The contract management team must conduct itself
and its dealings in a way that is consistent with acceptable probity principles , as well as
ensuring the private party complies with relevant laws, regulation and government policies.
The task of developing a governance, probity and compliance framework relies on an
analysis of four questions:
1. What assurance is necessary to ensure appropriate standards of governance, probity
or compliance (as applicable) are met?
2. What needs to be done, by whom and when, to ensure adherence to the applicable
standards, and that the risk to government is managed effectively?
3. What are the consequences to government and project outcomes if the applicable
standards are not met?
4. How should the consequences of a failure to meet the applicable standards be
effectively managed?
Figure 3.2 shows the elements of the governance, probity and compliance framework .
Figure 3.2: Governance, probity and compliance framework
Governance, probity and

compliance
 Roles and responsibilities

 Delegated authority
 Internal reporting arrangements
Governance
 Governance and change management
 Stakeholder consultation and communication
 Involvement of other public sector entities
 Contract probity plan

Probity
 Confidentiality and conflict of interest procedures
 Contract compliance program

Compliance
 Compliance procedures
Note: Appendix E contains additional compliance information that may be useful when developing a project
compliance program and procedures.

After analysing the collected information, the government party should consider the
division of public/private responsibility. This enables the government party to identify each
task relating to the Partnerships Victoria project as either:
 the government party’s sole responsibility;
 the private party’s responsibility;
 a shared responsibility between the government party and private party; or
 a residual government party responsibility that is not the subject of any project deed
obligations.
The government party can then develop specific governance, probity and compliance tools
and processes.
3.4 Governance
Governance is concerned with processes for project decision making and reporting. It
defines the behavioural controls within the government party that ensure accountable
project outcomes and processes. Governance is concerned with accountability and
responsibilities. It encompasses authority, stewardship, leadership and control.
Roles and responsibilities

For good governance of a Partnerships Victoria project within the government party, the
contract management team must have:
 clearly defined roles and responsibilities;
 an appropriate mix of skills, experience and training; and
 enough time, resources and support from their government entity to fulfil their
responsibilities.
Clearly designated accountability, based on a comprehensive understanding and an
appropriate allocation of responsibilities minimise the risk of contract management tasks
‘falling through the cracks’. Roles and responsibilities relating to the administration and
fulfilment of the contract should be identified in the contract administration manual
(discussed in Chapter 6). Any other roles and responsibilities should also be clearly
identified and should be recorded.
Delegated authority and reporting lines
The nature and function of delegations

Good governance requires that powers to enter into and administer government contracts
are only exercised by people with the authority to do so. Under this principle, a project
deed is executed following compliance with a series of government approval requ irements,
set out in section 6 of the Partnerships Victoria Requirements. The project deed requires
the government party to exercise various functions, rights and powers.
However, as a practical necessity, contract management personnel exercise many of th ese
functions, rights and powers. These personnel, principally the senior responsible owner
and the contract director, are generally authorised to act on behalf of the government
party, and to make the financial commitments, within certain parameters, necessary to
manage the project.

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It is vital that the contract director has the necessary authority to take action which is
required to comply with the government party’s obligations under the project deed (and
other project contracts). In some cases, the level of monthly/quarterly service payments
may be such that they require approval of the senior responsible owner. In some projects,
action by other stakeholders may be required for the government party to comply with its
obligations under the project deed. In these circumstances, a mechanism must be
established so that an appropriate person – for example the contract director, senior
responsible owner or a Minister – can direct those stakeholders to take action that is
necessary to ensure that the government party complies with its obligations.
Delegations in the context of a Partnerships Victoria project

Appendix D to this guide provides background information on delegations. In the context of
a Partnerships Victoria project, the government party should give an appropriate member
of its staff responsibility for managing delegations relating to the project. The following
discussion assumes that person is the contract director.
The contract director should have thorough knowledge of the regulatory and policy
frameworks that apply to delegation of legal power and financial capacity in the
government party, and obtain legal advice where required.
Delegation of legal power

It is common for a project deed to include delegations by the Minister who executes the
project deed, or by the government party if it is a separate legal entity. These delegations
allocate particular functions, rights and powers under the project deed (and other project
contracts) to the holders of specified positions or specified individuals. For example, some
powers may be delegated to the Secretary of the relevant department, and others to a
person nominated as the project director or contract director. There may be a clause or
schedule in the project deed that identifies all the delegated functions, rights and powers.
A typical clause delegating functions, rights and powers in this way is:
‘The State may from time to time appoint a person to be contract director. The contract
director will have the functions, rights and powers set out in Schedule xx.’
Alternatively, specific clauses in the project deed may confer specific functions, rights or
powers on the holders of specified positions or an identified individual.
In some instances, legislation applying to a project will also delegate func tions.
In addition to delegation in the project deed or legislation, particular functions, rights or
powers may be delegated in separate instruments of delegation. For example, the Minister
of the relevant department may give a separate delegation of a particular power conferred
on the Minister by the project deed.
The contract director should maintain a delegations register identifying the functions, rights
and powers delegated under or in relation to the project. A delegations register template is
set out in Template D.
The contract director should also keep a record of authorisations in which one person
authorises another to exercise any function, right and power relating to the project on
behalf of the first person. The authorisation should be in writing. If there are numerous
authorisations relating to the project, these should be summarised, either by identifying in
the delegations register who is authorised to exercise each delegated function, or by
establishing a separate authorisations register and storing this with the delegations
register.
If a member of the contract management team is exercising a function that involves
making a financial commitment on behalf of government, they must have capacity to make
that financial commitment, as well as legal authority to exercise that function.

Financial conferrals or authorisations
If the government party is subject to the Financial Management Act 1994 (the FM Act), the
entity’s personnel should only make financial commitments according to any financial
conferrals or authorisations under the Minister for Finance’s Standing Directions made
under s. 8 of the FM Act. If the government party is not subject to the FM Act, the entity’s
personnel should only make financial commitments within their authority according to the
entity’s policies concerning the authorisation of expenditures. The financial conferrals or
authorisations established for contract management personnel should ensure that
appropriate personnel will be able to:
 authorise payment of service charges under the project deed; and
 up to appropriate limits, meet other expenses incurred in the management of the
project.
The financial conferrals or authorisations relevant to a Partnerships Victoria project are
usually relatively simple compared with the delegations of legal authority. Nevertheless,
the contract director should ensure that the relevant financial conferrals or authorisations
are recorded in a single accessible document, such as an up-to-date financial delegations
register.
Payments and other expenses should be recorded and reported according to the FM Act or
other requirements that may apply.
Delegations to other government agencies

In a Partnerships Victoria project where the government entity that operates the relevant
project asset is separate from the government party that is responsible for contract
management of the project deed, performance monitoring responsibilities are generally
delegated to the entity that operates the project asset. This structure will generally be
applicable to availability-type PPPs and examples of such entities include regional hospital
networks.
In such instances, the asset operator will usually report to the government party contract
management team on the findings of its performance monitoring at regular intervals,
typically in line with regular contractual service payment invoices submitted by the private
sector party.
Under this structure the contract director will need to take an oversight role to ensure
delegations are being managed appropriately to ensure that the asset operator is making
consistent decisions so that the government party can deliver on its obligations.
Review of delegations and authorisations

It is likely that, at various times during the project lifecycle, the contract director will need to
arrange for the execution of new delegations and authorisations relating to the project, and
update the delegations register accordingly. The contract director should review
delegations and identify any necessary changes in the following circumstances:
 regular review – when the contract director reviews contract management issues, the
contract director should consider whether existing delegations and authorisations are
sufficient for effective contract management at the time of the review and in the
medium term. If the existing delegations and authorisations are insufficient, the
contract director should consider what changes are necessary, obtain legal advice if
required and arrange for any necessary changes to be implemented. Changes in
delegations and authorisations should be communicated to relevant people to ensure
that their authority to act is current and valid and has not lapsed or been revoked.
Ongoing review of contract management issues is discussed in detail in Chapter 9 of
this guide;

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 personnel changes – when there is a change in contract management personnel, or

in their position titles, the contract director should consider the impact this will have on
existing delegations and authorisations, and obtain legal advice if required. The
contract director should be alert to any changes in personnel within or outside the
contract management team, and should identify and respond to any changes that
result in the lapsing of any relevant authorisations; and
 contract variations – when there is a contract variation, the contract director should
consider the impact this will have on existing delegations and authorisations , whether
any new delegations or authorisations are required, and obtain legal advice if required.
Change management, including contract variations, is discussed in detail in
Chapter 12 of this guide.
Governance arrangements with the private party

Establishing efficient governance arrangements with the private sector party is essential to
effective contract management, and promotes a good business relationship with the
private party. Relationship management is addressed in further detail in section 4.2 of this
guide.
The more recent project deeds set out in some detail the governance arrangements to
apply between the parties. These arrangements include:
 nominating the State representative and private party representatives and their
respective responsibilities. The State representative will generally be the project
director during the construction phase and the contract director during the service
delivery phase;
 nominating other key government and private party personnel who have
responsibilities set out in the project deed (and other project contracts) (e.g. the prison
governor, in a Partnerships Victoria correctional services contract); and
 inter-party committees, their membership, functions and frequency of meeting, such as
the senior representative group and the project control group (refer to section 4.2).
3.5 Internal reporting arrangements

Depending on the nature of the project, the contract director may receive a number of
reports from the private party, and produce considerable additional information through
other monitoring mechanisms. The contract director therefore needs to carefully consider
how information should be communicated to senior management of the government party.
Best practice entails that internal reports are produced in an ‘exceptions’ format, identifying
any issues of significance. They should be signed-off by the contract director regardless of
whether a reportable event has taken place or is emerging. Internal reporting is important
to maintain ongoing accountability and focus on scanning the contract management
environment.
The suggested structure and contents of these reports is detailed in Templates G and H.
These reports can be:
 regular reports – ideally these reports are aligned with the project’s performance
reporting and monthly/quarterly payment cycle, and focus on the short-term
performance of the private sector service provider (including elements such as key
performance indicators (KPIs), recent performance trends and payments); and
 annual reports – these reports should focus on the broader contractual matters,
including strategic performance and benefit realisation of the project, the health of
the private sector party and the status of its ongoing relationship with the State.

Additional guidance on reporting is provided in the contract management templates and
appendixes on the DTF website <http://www.dtf.vic.gov.au/Infrastructure-Delivery/Public-
private-partnerships/Policy-guidelines-and-templates>. A range of issues to consider in
developing a reporting regime is provided in (Annexure C), and templates are provided for
reporting during the construction phase (Template G) and the service delivery phase
(Template H).
Department of Treasury and Finance reporting requirements

Under the Partnerships Victoria Requirements, DTF is required to monitor and advise the
Treasurer and the government on significant contract management issues. The
Partnerships Victoria Requirements also provide guidance on a number of issues that
government parties must consult with DTF about in relation to a Partnerships Victoria
project. These are listed in Table 3.1.
To assist DTF monitor Partnerships Victoria projects, members of the contract
management team are required to regularly update DTF on contract performance. It is
recommended that these reports cover a range of issues which are listed below in Table
3.1. To assist, the suggested structure and content of this report is detailed in Template I.
While the government party is responsible for identifying and managing issues that arise
under the project deed, the Partnerships Victoria group within DTF is available to assist the
government party respond to issues raised by the contract management team.
Table 3.1: Level of DTF consultation required for contract management issues
Issues that must be consulted with DTF Issues recommended to be consulted

 Change in control  Service delivery issues resulting in significant or
frequent abatements and/or KPI changes
 Refinancing  Financial health
 Material modifications and augmentations  Management quality
 Dispute resolution  Relationship quality
 Default, termination and step-in events  Risk outlook
 Any other change that requires an update to the  Benchmarking and/or reviewable services
financial model
 Any material amendment to the project deed (or  End of term planning
other project contracts) impacting the State’s risk
allocation
 Extensions or delays (including delay to  Intervening events (service delivery phase)

commercial acceptance) (construction phase)
3.6 Coordinating with other public sector entities

Contract administration involves coordinating the actions of other public sector entities
where necessary.
Managing the contractual obligations of the government party can be complex because of
the range of government stakeholders involved in many Partnerships Victoria projects. The
government party acting on its own may not be able to fully meet the government’s
obligations under the project deed (and other project contracts), or to ensure that the
benefits of the project are realised.

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The contract director may need to coordinate the actions of other public sector entities in
order to ensure the government party:
 can deliver on its obligations under the project deed; and
 does not inadvertently act so as to hinder or prevent the private party from meeting its
obligations under the project deed.
In some projects, performance monitoring obligations may be delegated to another
government entity (e.g. from the Department of Health and Human Services as the
contract management entity to a local health network operating a hospital). Template J
provides an example of a structure for the delegated entity to report to the contract
management entity.
It is important to distinguish between government stakeholders that are, or need to be, part
of the governance framework and those that are not. Within government, common good
practice involves regular meetings of a steering committee with representatives from
multiple relevant government agencies. The steering committee has senior government
representation, and is chaired by the senior responsible owner. Its role is to provide
strategic guidance to the government party, and to make decisions on the more material
project-related matters – referring matters to Ministers as necessary. The project director
and contract director report to the steering committee. The steering committee will be
established to oversee the procurement phase and the construction phase, and in some
cases this will extend into the initial phase of service delivery. It is important to continue the
committee, perhaps with revised membership and meeting frequency, during the life of the
project.
In some Partnerships Victoria projects, a government party contracts to receive services
ultimately used by multiple public service entities. For instance, the Emergency Services
Telecommunications Authority is the government contracting party in the Metropolitan
Mobile Radio and Mobile Data Network projects, but the end-users are individual
emergency services agencies. In such projects, the contract director should enter into a
memorandum of understanding or a service level agreement with the other public service
entities. This document should set out the roles and responsibilities of each public service
entity, the payment obligations and processes, and the communication and consultation
processes between the contract director and these public service entities.
In some cases, establishing a reference group to enable effective communication and
consultation with other government entities that have a strong interest in the project but are
not part of the decision-making process may be warranted.
Stakeholder consultation and communications

Appropriate consultation and communication with stakeholders is an important component
of good governance. It also assists the government party to ensure the private party
conforms with public interest considerations. Some projects may be of such significant
interest to the community and other third parties (such as other governments), that the
contract management team needs to provide public information. Developing and
maintaining a project website detailing project progress and status can be an efficient way
to communicate and meet some of the community demand for information on the project.
Examples include the Royal Children’s Hospital or the Victorian Comprehensive Cancer
Centre project websites.
Stakeholder consultation and communications plans should be documented or referred to
in the contract administration manual (Chapter 6), and in contingency plans (Chapter 8).
Some project deeds may require the private party to prepare its own stakeholder
consultation and communications plan, which the contract director may refer to in
developing its own plan.

In determining what level and forms of consultation and communication are appropriate,
the government party should consider the following questions:
 Who are the stakeholders for the project?
 What are the objectives of each stakeholder?
 Which stakeholders need to be part of the governance framework for the project, and
how are they best accommodated within this framework?
 Who are the appropriate contacts within the stakeholder group?
 What matters should each stakeholder be consulted about?
 What is the likely involvement and role of each of the stakeholders?
 What information should be provided to each stakeholder?
 Have the stakeholder arrangements been discussed and agreed with the
stakeholders?
 How should the stakeholder arrangements be documented?
 Who within government should be asked for input into the stakeholder communication
and consultation plans?
 Is there a need for a public communication process?
3.7 Probity requirements

Integrity and the right culture are part of the bedrock of the Victorian public sector. Probity
signifies integrity, fairness and honesty. Probity means good process demonstrated by
transparent actions, equity, confidentiality and managing conflicts of interest, whether
actual or perceived. Probity is integral to achieving value for money outcomes. The
government party will operate with integrity, impartiality and accountability. No person
should improperly achieve personal advantage or disadvantage through involvement in the
process.
In March 2016, the Victorian Secretaries Board prioritised reforms to strengthen existing
integrity frameworks. Following recent Independent Broad-based Anti-corruption
Commission (IBAC) hearings, the Victorian Secretaries Board has reaffirmed its
commitment to a robust integrity culture across the Victorian public sector.
The existing Victorian government policy information concerning probity is detailed in the
Victorian Government Purchasing Board (VGPB) governance policy, in particular the Guide
to probity <http://www.procurement.vic.gov.au/Buyers/Policies-Guides-and-
Tools/Governance-Policy>.
Good probity practice is important for:
 business and community confidence in the integrity of government procurement
processes;
 encouraging and enabling purchasers and businesses to deal with each other on the
basis of mutual trust and respect; and
 improving the defensibility of market engagement processes and procurement
outcomes.
Probity should underpin every aspect of every procurement activity, including contract
management. In practice, probity requires:
 acting with integrity and impartiality;
 ensuring market equality by applying an appropriate level of competition and
contestability relevant to the procurement activity;

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 consistent and transparent processes;

 secure and confidential market engagement information;
 identifying and managing conflicts of interest;
 allocating appropriate capability to elements of the procurement process; and
 engaging a probity practitioner where the complexity of the procurement warrants
independent process oversight.
The government party should apply each of these principles throughout the project
lifecycle.
Ensuring appropriate probity processes are in place for contract management

The government party will have a range of existing probity requirements and processes in
place. These should be included in the contract administration manual.
The probity requirements and processes should address:
 internal organisation and decision-making processes;
 confidentiality and disclosure;
 dealing with proprietary information;
 dealing with conflicts of interest for contract management team members and their
advisers (see also Section 13.6 and Appendix C of the National PPP guidelines:
practitioners’ guide);
 consultation with the government;
 establishing a probity culture;
 queries on probity (including scrutiny by the Auditor-General, Parliament, and the
Ombudsman);
 the requirements of the Public Administration Act 2004; and
 the standards of conduct (including the duty of confidentiality and in relation to
accepting, declaring and recording the receipt of gifts or benefits ) for all public servants
under the Code of Conduct for Victorian Public Sector Employees.
Probity issues also apply to private sector parties and their conduct. For guidance on this
matter refer to Chapter 38 of the National PPP guidelines: commercial principles for social
infrastructure and Chapter 37 of the National PPP guidelines: commercial principles for
economic infrastructure (as applicable) and the Partnerships Victoria standard project deed
guidance notes.
3.8 Compliance
Compliance ensures the project meets the requirements of laws, regulations, and
government policy beyond those specifically addressed in the contract.
The government party may also develop a contract compliance program to manage and
monitor compliance with legislative or government policy requirements. This may be as
part of a broader service delivery framework, particularly if there are multiple projects
under active management.
A compliance program helps the government party to identify, document and manage
compliance risk throughout the project lifecycle. It may be appropriate to prepare a
document outlining the compliance program and compliance procedures . This will form
part of the contract administration manual.

Developing a contract compliance management system
The International Standard on Compliance Management Systems, ISO 19600-2014, is the
benchmark for compliance management systems.
According to ISO 19600-2014, a compliance management system is an essential element
in the good governance of an organisation (or project). It should:
 promote a culture of compliance within the organisation;
 aim to prevent, and where necessary, identify and respond to breaches of laws,
regulations, codes or organisational standards in the organisation; and
 assist the organisation in remaining or becoming a good corporate citizen.
An effective compliance management system requires dynamic and strategic management
of the project’s regulatory environment. Accordingly, the person responsible for the
compliance program should either have a high level of status and authority within the
government party, or be supported by a suitably senior executive.
Developing compliance procedures

The government party should develop and document compliance procedures in
accordance with ISO 19600-2014. These should address:
 the roles and responsibilities of management and staff;
 areas where compliance failures are likely to arise, and procedures to anticipate and
prevent such failures;
 action plans to deal with problems and faults that may arise;
 ongoing monitoring, assessment and reporting to ensure staff compliance;
 knowledge and information management systems (refer to Chapter 7 for further
discussion);
 incorporating compliance standards into:
– computer systems;
– forms;
– contracts; and
– administrative procedures;
 specific arrangements for reporting instances of compliance failure;
 broader government reporting requirements; and
 educational and training requirements.
The government party should ensure that the compliance procedures contain:
 a practical summary of relevant laws, regulations and organisational standards;
 operational procedures to ensure that the government party’s own compliance and
governance standards have been met, both internally and when managing the project
interface with the private sector party; and
 practical examples of compliance applicable to the government party’s management of
the contract.
The compliance procedures should be readily available to all personnel involved in
managing the project.

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4. Relationship management, dispute resolution and

issue management

4.1 Introduction
The long-term nature of Partnerships Victoria projects means it is imperative to maintain a
strong relationship between the government party and the private party throughout the
entire project lifecycle. Cooperation and open and clear communication are fundamental to
effective contract management and delivering successful project outcomes in Partnerships
Victoria projects. Establishing and maintaining strong relationships will enable the parties
to constructively manage the service delivery issues, changes or disputes that will arise.
4.2 Relationship management

Key factors in establishing good relationships
There are a number of key factors in establishing a good relationship between the
government party and the private party and other project stakeholders:
 mutual benefit – the parties must approach the project as a mutually beneficial
arrangement between the government and the private party;
 understanding of objectives – the government stakeholders, the private party and
other consortium members must understand each other’s objectives and those they
have in common;
 trust – trust can only be built up over time. It is fostered by both parties seeking to
achieve mutual benefit, through open and transparent communication and timely
completion of obligations. It involves a consistent approach to doing business with a
‘no surprises’ approach; and
 open communication – open communication is a key to maintaining a good
relationship. It fosters a spirit of cooperation and the alignment of common interests
between the parties. Open communication does not mean the parties must share all
information relating to the project. However, because open communication will
enhance the relationship, the default approach should be to share information, except
where commercial or legal reasons constrain sharing.

Establishing relationship management structures
Factors to be considered in establishing structures to manage the relationship include:
 senior management support – the relationship should be championed at senior
levels in both organisations. Senior management attitudes and actions will signal to
other personnel how they should treat the relationship;
 peer-to-peer communication – working relationships between the parties should be
conducted between peers. Typically, a government party contract manager should
communicate with their contract manager counterpart in the private party;
 separation of roles – while introducing multiple formal management levels may be
unnecessary, day-to-day contract management and service delivery should be
separate from management of the overall strategic relationship and long-term strategic
issues. In major projects, it is desirable to separate the detailed contract management
functions carried out by the contract management team, from the strategic relationship
management functions by having a senior executive officer (the contract director)
responsible for strategic relationship management. This will prevent day-to-day issues
swamping the contract director. In some projects, it is also appropriate for the senior
responsible owner to also have regular contact with equivalently senior private partner
or consortium representatives;
 appropriate and clear roles and responsibilities – roles and responsibilities of
contract team members (and also for private party representatives) should be clear
and personnel involved in managing the relationship need an appropriate level of
authority to carry out their jobs effectively; and
 escalation paths – issue and decision escalation paths should be established,
understood and used appropriately so that problems are resolved early. If a timely
decision or resolution cannot be made at one level, it should be referred promptly to a
more senior level. The project deed should set out in some detail the joint
management forums as well as escalation paths to resolve issues that arise.
The ‘partnership’ aspect of a Partnerships Victoria project
The intention of the parties to a Partnerships Victoria project should be to enter into a
project deed (and associated project contracts) that creates a long-term relationship,
recognising that each party starts the project expecting that it will receive certain benefits
from the project. This is not a ‘partnership’ in the strict legal sense, but rather it is a
relationship in which the parties understand the importance to each other of project
performance, but do not compromise their respective contractual rights and obligations.
The government party should recognise the importance of the commonality of interest
involved in a Partnerships Victoria project. The contractual risk transfer, output
specification, services specifications and payment mechanism are important contributors to
the common interest, as they align the private party’s commercial interests with
government’s project objectives. Therefore, for the partnership to be successful, the
government party must be careful to:
 enforce contractual compliance and penalty mechanisms for poor performance (or
non-performance) to ensure the services specifications are maintained and contractual
rights are not undermined or inadvertently waived; and

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 avoid action that could result in project risk being assumed or transferred back to the
government party. For example, during the construction phase, the government party
should not normally approve any detailed drawings or designs. Rather, it should focus
on providing comments on design packages submitted by the private party. Comments
should focus on where it believes the designs are not consistent with those accepted
by the government party at contract execution or they believe the design will impact
adversely the delivery of contracted services or the government’s ability to deliver
services from the project assets. For guidance on monitoring construction performance
and unintentional take-back of design risk during the construction phase see Chapter
10 of this guide, and the National PPP guidelines: commercial principles for social
infrastructure, Chapter 10 and National PPP guidelines: commercial principles for
economic infrastructure, Chapters 9 and 10 (as applicable) and the Partnerships
Victoria standard project deed guidance notes.
Joint management forums

A joint management forum for project review and improvement or a project control group is
a key tool to assist parties in developing and maintaining a mutually beneficial relationship
over the life of the project. While not involved in the day-to-day management of the project,
interparty project review forums provide significant benefits during the construction and
service delivery phases of projects. These forums provide a valuable reporting mechanism
to the government party on the progress of a project. For larger and more complex
projects, it is usually practical to have separate strategic and working level forums.
Interparty project review forums should have a clearly defined role. The parties should
ensure that the forum remains focused on its role, and does not become an environment
for the discussion of issues best dealt with through other channels or mechanisms. In
recent Partnerships Victoria projects, the framework for the interparty project review forum
is set out in the project deed. The framework generally includes the forum’s charter and
objectives, membership and chair (which may alternate), meeting frequency and powers to
create subcommittees. It may be possible to develop the forum’s procedure and specific
areas of responsibility as the project itself develops. The appointment of an independent
chair for the meetings, and to help resolve interparty issues, may also be of value in some
instances.
If not specified in the project deed, the forum should meet regularly to ensure that any
problems are addressed quickly and that solutions are recommended by the parties jo intly.
A clear escalation path for resolving problems ensures that responsibility is directed to the
appropriate level of management. The seniority, technical skill levels, decision -making
capacity and project familiarity of forum participants are all important when determining the
make-up of the forum or any subcommittees.
Recent Partnerships Victoria projects have also included a senior representatives group.
The role of this group is to ensure all key stakeholders are informed of the status of the
project and have the opportunity to address significant issues early that may impact the
project.

Understanding each other
An appreciation of each other’s objectives, strategy and point of view, coupled with good
communication, is important to the success of Partnerships Victoria projects. The
government party benefits from understanding the private party’s strengths and
weaknesses, as it can then focus contract management efforts where the return on effort is
maximised.
It is important that the contract management team understands the interests and
composition of the private party, as this will influence the contract management team’s
actions (refer to section 2.7 of this guide for additional detail).
A strong relationship can be developed by engendering a culture of sharing appropriate
information. The types of information that can be of benefit if shared include:
 objectives and expectations of each party – these are set and shared early in the
procurement phase, and remain central to service delivery. They should be revisited
regularly. It is important that the parties also understand each other’s higher-level
expectations, strategic objectives and potential for changes to service needs. By
managing each other’s expectations, the parties can minimise surprises, and better
manage the project and potential change events for their mutual benefit;
 plans and information about potential future directions – these can help ensure
the parties develop the relationship in line with changes to business needs. At the start
of the relationship, senior management must ensure that both parties have similar
aspirations in relation to their approach to business (for example, the relative
importance of commercial approaches to resolving contractual issues), common goals
and strategic ambitions. This needs to be developed throughout the project lifecycle ,
and it should be a two-way process. An understanding of where the private party sees
its business heading is as important as the government party’s own expectations when
it comes to maximising opportunities for consistent objectives and better managing
divergent positions;
 an issues log – this outlines the outstanding issues between the parties, allocates
responsibilities, sets timelines and current status can help monitor and resolve issues.
A common issues log should be shared by both parties, ideally through an electronic
knowledge management platform. The State contract management team may also
retain a separate State issues log for the project, for issues that do not ne ed to be
shared with the private party. It can be beneficial to set up the issues log so that the
issues can be sorted and filtered in different ways (for example, by the date the issue
was raised, by the target date for resolution, and by the status of the issue);
 concerns about the wider relationship – these should be discussed frankly, whether
they relate to contract performance, progress, or people. If this is not done, there is a
risk that problems will increase in seriousness; and
 information about how the private party views the government party – the focus
should be on providing and seeking information with a view to improving the
relationship over time, rather than unnecessarily apportioning blame. The government
party should seek such information if not freely provided by the private party. A candid
approach should be encouraged, although there is a need to avoid being defensive
about criticism.

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The government party should not just passively receive information about the private party.
Information should also be analysed and synthesised into the contract management tools
and processes. A useful tool to assist in understanding the private party’s business is a
SWOT (strengths, weaknesses, opportunities, threats) analysis.
The information collected also forms part of the broader information matrix of factual
background for other contract management processes and tools. Information collection for
overall contract management purposes is discussed in detail in Section 5.4.
Establishing and using communication channels
Figure 4.1: Common communication channels in PPP projects
Government party Private sector party
Funding providers
Contract director SPV project director
(debt and equity)
SPV operations
Contract manager
manager Facilities managers
Facilities service delivery

sub-contractors may
include:
 Maintenance
 Technology
 Security
Contract management  Cleaning
SPV operations team
team
Formal and informal contact points

The project deed normally identifies one or more formal points of contact between the
government party and the private party. However, to ensure a good relationship is
maintained, a number of other contact points at various levels should be established. For
example, as suggested above, forums that meet regularly are important vehicles to
manage ongoing business issues and to coordinate the change processes that occur
through the project lifecycle. These contact points themselves may change through the
project lifecycle. Further guidance on managing risks inherent in change processes is
outlined in Chapter 12.
It is important that communication channels are properly managed so as not to confuse the
responsibilities of the parties in relation to the project deed or compromise contract
management.

The degrees of formality used in dealing with issues between the parties should vary
depending on the degree of control required, the nature of the issue, and the stage of the
project lifecycle in which the issue arises. For example, an issue related to the day-to-day
delivery of contracted services should be handled very differently from a strategically
significant issue. This is where the operation of a two-tier inter-party committee
arrangement can work well.
In addition, there can be benefit in the contract director having semi-regular informal
meetings with their private party counterpart. However, any material matters discussed in
informal meetings will need to be progressed through formal forums. The government party
should also be aware that if the private party, its parent company or another entity involved
in the project is publicly listed, it will have continuous disclosure obligations that may
impact upon communications.
If appropriate, other government departments or agencies that are stakeholders in the
project should be represented on committees, or reference groups, dealing with
communications issues. Refer to section 4.5 for further detail.
The contract director should consider establishing a communications plan to include in the
contract administration manual (see Chapter 6). This plan should differentiate between
regular business-as-usual communications and specific emergency or contingency
planning communications protocols (see Chapter 8).
Peer-to-peer communication between the parties

Communication channels operate at different organisational levels. Peer-to-peer
discussions may differ depending on the issue. Operational matters will require frequent
communication, and more strategic or health-check discussions will occur regularly but
less frequently.
Direct communication is important. The private party’s management will prefer to hear
criticism and discuss issues directly with their public sector counterparts, rather than
through indirect channels.
Agreed protocols are necessary for peer-to-peer communication to function effectively.
Where necessary, these protocols should also provide for consultation between the parties
in relation to communications between them and third parties. For example, it is
appropriate for the parties to consult each other on the content of any public
communication in relation to the project, and protocols around this are typically set out in
the project deed. In the case of larger projects with significant public profiles, the parties
should have regular formal meetings to discuss public relations.
Vertical communication within each party

To ensure consistent communication through the various communication channels,
particularly at middle and senior management levels, it is essential that there are
consistent ‘vertical’ internal communications. For example, the government party’s contract
management personnel must communicate with the contract director to ensure they have a
common understanding of the status of the relationship, and are delivering consistent
messages to their private party counterparts. If this is not done, differences in perspective
may create or mask problems in the relationship. For example, the contract director may
regard the relationship as successful, and be unaware of significant friction between junior
contract management personnel and their private party equivalents.

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Documenting verbal communications

While good communication should avoid excessive formality, it may be necessary to
document an agreed record of what was said. For example, if it is verbally agreed that
each party will consider a proposed variation to a service delivery KPI, a written record of
the discussion is critically important to clarify that no party has yet committed to the
variation.
Appropriate practices for documenting verbal communications include the following:
 For informal discussions, record the key outcomes and action points, and provide this to
the other party as confirmation of the discussion.
 For formal meetings, prepare minutes of the meeting, circulate these to all attendees,
and obtain confirmation that the minutes are accurate.
 Add agreed decisions to the electronic copy of contract documentation, where this is
used by the parties, as notes.
 Add pending matters to the parties’ joint issues log where appropriate.
The written record or minutes should be prepared or reviewed by a person with a strong
understanding of the context of the discussions before being circulated to the other party.
This is important to avoid a record that is incomplete or inaccurate. The record of verbal
discussions, or email correspondence, contribute to the information underlying the broader
contract management strategy for the project.
It is important to note that informal communication has the potential to change the
contractual agreement, where the government party makes a representation or behaves in
a way that is inconsistent with the contractual agreement and the private party relies on
that representation or behaviour, for example regular waiver of abatements . As such, all
communication, including verbal or other informal communication, should be recorded. In
addition, the contract director and contract management team should perform all contract
management activities with this in mind.
See also Chapter 3 in relation to governance and compliance requirements for project
records.
Adequacy and matching of skills

For peer-to-peer communication channels between the parties to function effectively, the
individuals responsible at each level must have adequate and ap propriate skills. If skills
are not properly matched at a particular level, it may compromise effective communication.
A contract director who believes there is a skills mismatch at a particular level should
change the communication channels between the contract management team and private
party to correct this problem.
Communication with the parent company or sponsors

In many Partnerships Victoria projects, the private party will be a special purpose vehicle
or a subsidiary of a larger company. While the project deed may provide for formal
communication channels between the government party and the private party, the
government party should also consider regular communication with the private party’s
sponsors or parent company where this is not already set out in the project deed. For
example, it may be appropriate to invite representatives of the parent company to attend
performance review meetings or government process seminars to foster better pr ivate
sector understanding of government objectives and processes.
Project deeds usually provide for a senior representative group that conducts regular
formal meetings between the contract director with senior representatives of the private
party, its parent company, its key subcontractors and its financiers. This is regarded as

best practice, and on projects where the project deed does not expressly require such
meetings, the government party should still consider holding them.
When communicating with the parent company or sponsor, the contract director should
ensure that confidentiality and privacy obligations set out in the project deed are observed.
Particular care should be taken where the parent or sponsor is not the sole owner of the
private party.
Relationship management and succession planning

Relationships can be put under significant strain when key contract management team
members move on. Trust has to be rebuilt. Ideally, there should be a period where the
successor works closely with the incumbent and the private party counterparty to enable
as smooth a transition as possible.
The lengthy contract terms of Partnerships Victoria projects mean that contract
management team members are likely to change throughout the project lifecycle.
Consequently, forward-thinking succession planning by both parties is important to ensure
appropriate relationships and understandings of the project are maintained. Effective
succession planning requires well-managed project-role handovers between incoming and
outgoing personnel with appropriate induction and exit procedures. Good knowledge
management systems and processes can assist to overcome the loss of individual
knowledge on each side of the relationship. It is important that advice from outgoing
personnel on managing the relationship is documented to assist in this succession
process.
Monitoring the relationship

As well as measuring performance against service, financial and other measures, the
government party should monitor and assess the quality of the working relationship. For
example, attendance by the private party’s representatives at formal meetings can easily
be monitored, as attendance should be recorded in the minutes of meetings. If attendance
by the private party’s representatives falls away, the contract director should consider
whether this indicates that the relationship between the parties is losing strength, attention
is being diverted to other priorities, or that the relevant committee is not an effective
communication and management forum.
Monitoring the parties’ working relationship and management processes is valuable in
highlighting aspects of the relationship that are perceived to be working well and those that
require greater attention.
4.3 Issue management and dispute resolution

In a Partnerships Victoria project, there is a clear distinction between service delivery
issues and disputes. This is summarised in the following table.
Table 4.1: Partnerships Victoria projects: differences between service delivery issues and
disputes
Service delivery issues Disputes

Is measurable and need not involve any difference of Involves a difference of opinion or position between
opinion or position between the parties the parties (by definition)
Outcome is an interruption, change or other Need not involve any interruption or other
disturbance to service delivery disturbance to service delivery
May trigger an abatement of service fees or other The existence of a dispute will not in itself trigger an
remedies abatement of service fees

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The consequences and strategies for managing service delivery issues and resolving
disputes in Partnerships Victoria projects still have much in common. Most obviously, if left
unresolved, a major service delivery issue or dispute may cause an irreparable breakdown
in the parties' relationship and failure of the project. Similarly, not properly managing minor
service delivery issues or disputes may damage the relationship and limit the benefits of
the project to the parties.
Issue management
However sound the relationship between the government party and the private party,
service delivery problems will arise. The primary objective is to ensure that problems are
recognised and then resolved quickly and effectively. Clear procedures for raising these
issues and handling problems should be established. This will ensure that issues are dealt
with at the earliest possible stage and at the appropriate level in each organisation.
The contract director and the private party should work together to establish and agree on
issue management procedures acceptable to both parties (consistent with contractual
requirements) and these procedures should form part of the contract administration
manual. A joint issues log (as discussed in section 4.2) may also be an effective avenue
for issues management.
Issues management procedures should incorporate the following:
 Service delivery issues are recorded as they occur, in order to highlight any trends and
to help in assessing overall contract performance and value for money. It is
recommended that each party add matters to the joint issues log, and that all new and
outstanding issues be jointly reviewed regularly by the parties. A sample of headings to
use in an issues log (either joint or for internal State issues) is set out in Template F.
This can be modified to suit a particular Partnerships Victoria project.
 Effective communication means promptly advising the counterparty directly of major
issues before adding to the issues log.
 Approaches and efforts taken to resolve problems should be documented clearly and
precisely.
 Escalation procedures should be followed where escalation is appropriate to resolve the
issue.
The contract director should collate information on the number and severity of issues, as
well as the way they are resolved, during the life of the project. This information should be
used to cross-check the accuracy of service delivery performance reports. In addition,
trends in the frequency with which service delivery issues arise and the speed and
effectiveness of resolving them are a useful indicator of private party performance.
Performance reporting and soft indicators of performance are discussed in detail in
Chapter 11.
Serious or persistent service delivery issues may trigger a right for the government party to
initiate default processes and, ultimately, terminate the project deed. Responses to private
party defaults are discussed in detail in Chapter 8.

Dispute resolution
In a well-planned and well-managed Partnerships Victoria project, disputes between the

parties should be infrequent, but may occur because of unforeseen outcomes or
circumstances. Like service delivery issues, disputes should be dealt with as early as
possible and at the appropriate level in each organisation, so that they can be resolved
quickly and effectively. The solution should be critically considered by someone who has
an understanding not only of the immediate context of the dispute, but also of the broader
possible consequences of the solution adopted.
A crucial role for the contract director is to try to ensure, through early intervention and
management, that formal protracted disputes are avoided. These early intervention and
management strategies should encourage negotiation between the parties and provide
incentives for the parties to discover a solution themselves rather than pursuing formal
dispute resolution mechanisms. In seeking to resolve disputes through informal means, the
contract director should consider the commercial context of the dispute as well as the
contractual context, as both are important in the early stages of a dispute. The contract
director should also consider seeking appropriate advice (if required). If a party escalates a
dispute unnecessarily, or resorts to an inappropriate dispute resolution process, this can
further damage the relationship.
If a dispute cannot be resolved in the short term, it is important that it is promptly dealt with
through a formal dispute resolution process set out in the project deed. Commercial
principles in relation to dispute resolution are outlined in the National PPP guidelines:
commercial principles and the Partnerships Victoria standard project deed guidance notes.
The parties should be required to undertake various informal dispute resolution processes
prior to accessing more formal dispute resolution processes, as formal dispute resolution
processes are costly, do not lend themselves to an early or negotiated outcome and are
damaging to the relationship.
The parties should review the formal dispute resolution procedure and consider whether it
is appropriate to agree on a process for dealing with disputes before the formal procedure
is invoked. Alternatively, it may be desirable for the parties to agree on a process for
invoking the contractual dispute resolution procedure if this process is not detailed in the
project deed. More recent project deeds require negotiation between senior management
before any more formal resolution procedure can be commenced. The dispute resolution
procedure should be set out in the contract administration manual.
Department of Treasury and Finance’s role in issue management and dispute

resolution
The Partnerships Victoria group in DTF is available to assist government parties to
manage issues and resolve disputes. Where there is an emerging potential difficulty with
State budgetary implications, or the sustainability of the project’s contractual and
commercial arrangements are at risk, DTF must be informed.

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5. Contract management planning

5.1 Introduction
Planning, information collection and analysis are key foundation elements of effective
contract management for Partnerships Victoria projects. Proper planning of the project’s
contract management strategy will, in itself, reduce the risk of the project being poorly
managed. Comprehensive information collection and analysis will assist the contract
management team to understand the risks involved in the project and to develop effective
contract management strategies. Through proper planning, the contract management team
establishes what information should be collected and its source. The information collected
then helps them refine the overall contract management strategy.
The contract management plan is developed following contract execution, and outlines the
key steps that need to be taken, including preparing a contract administration manual.
5.2 Developing a contract management plan

To be effective, contract management planning must start early in the procurement phase
of a Partnerships Victoria project. Contract management builds on the risk allocation
framework outlined in the relevant National PPP guidelines: commercial principles and the
Partnerships Victoria standard project deed guidance notes. While the procurement phase
places a strong focus on risks, especially those being transferred to the private sector,
contract management planning must place a strong focus on the project risks retained by
the government party and on the risks associated with managing the contract.
The contract management plan should outline the key steps and responsibility for
developing a contract administration manual. Precedent documents developed for other
projects may be helpful to guide a contract director unfamiliar with these processes.
The contract management plan is a relatively high-level document outlining the key steps
that are proposed to develop an effective contract management regime for a Partnerships
Victoria project.
Template A provides a recommended structure and included content for the contract
management plan.
Developing a contract management plan is a key activity for the government party during
the procurement phase and early construction phase of the project. Aspects of the plan will
be relevant to the construction phase.

The contract management plan should include:
 internal governance arrangements, identifying the key persons responsible for
management of the project and related contractual arrangements and associated
committee and reporting arrangements. These apply to the construction phase and the
service delivery phase, and how to transfer responsibilities between these stages;
 budgetary and staff position allocations for contract management, and whether
supplementary funding and/or additional positions are sought. This covers staffing and
funding for consultancy, administrative and systems support;
 proposed contents of the contract administration manual and timing and process for its
preparation and implementation; and
 proposed knowledge management arrangements.
Identify significant risks

Identify (in broad terms) the significant risk issues raised by contract management (for
example, Inadequate monitoring of private party performance). As discussed in Chapter 2
of this guide, the significant risks may include:
 risks allocated to the government party in the project deed (and associated project
contracts);
 risks arising from issues not resolved at contract execution;
 the process for managing risks arising from issues not resolved at commercial
acceptance;
 residual risk to the government party of risks contractually allocated to the private
party;
 risks arising from ineffective public sector management; and
 risks associated with proposed changes to the contractual arrangements.
Analyse the risks

Ask the following questions:
 What strategy will be used to control that risk? For example, ‘Develop and implement a
performance monitoring framework for the project’.
 What is the date by which the government party needs to deliver and implement the
strategy for control of that risk?
 What contract management tools or processes will be used as part of the strategy and
incorporated in the contract administration manual?
 Who will be responsible for implementing the contract management plan? If appointed
during the procurement process, the contract director will typically lead the
development and implementation of the contract management plan. However, the
project director, the procurement team’s legal adviser and the procurement team’s
commercial adviser will have the strongest knowledge of many of the issues to be
addressed and should therefore provide input into the contract management tools and
processes and prepare the relevant sections of the contract management plan and
contract administration manual.
 What process of review should be applied throughout the project lifecycle?
Refine the plan

Refine the contract management plan as further information is gathered, the contract
administration manual is developed, and the project moves through different lifecycle
phases.

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Obtain senior management sign-off

Obtain sign-off from senior management of the government party in relation to:
 the completed contract management plan, as soon as practical after financial close so
that the plan can be submitted for approval; and
 an updated contract management plan, and the contract administration manual, prior
to commencing the service delivery phase.
These tasks should be started as early as possible in the procurement phase, and should
be completed during the transition from the procurement phase to the construction phase.
5.3 Approval of the contract management plan

The contract management plan must be approved by the portfolio Minister, in consultation
with the Treasurer within 60 days of financial close to inform government of the proposed
contract management strategies.2
Assistance with the contract management planning process is available, on request, from
the Partnerships Victoria group within DTF. Before submitting the government party’s
contract management plan to the portfolio Minister and the Treasurer, the government
party should provide a copy to DTF so that it can review its consistency with this guide and
best practices identified by DTF.
The Partnerships Victoria Requirements, state that the contract management plan must be
updated and the contract administration manual (or equivalent tool) must be completed
before the transition from the construction phase to the service delivery phase.
5.4 Information collection and analysis

Planning, information collection and analysis are also ongoing processes. Thr oughout the
lifecycle of a Partnerships Victoria project, the risk profile of the project will change.
Sources of change in the risk profile include:
 the natural progression of the project through its lifecycle stages, such as construction,
commissioning, service delivery and contract termination or expiry;
 internal factors such as changes in the relationship between the parties, State -initiated
modifications or a change in law specific to the project; and
 external factors, such as technological change, a fundamental change in financial
markets or a change in law of general application.
As changes occur, the government party will need to:
 gather and analyse further information on the impact of the changes on the project’s
risk profile and contract management strategies; and
 if appropriate, revise or develop new contract management strategies.
Collecting and analysing information plays a central role in developing and maintaining
contract management tools and processes, as illustrated in Figure 5.1.
2
Partnerships Victoria Requirements (November 2016), p. 20.

Figure 5.1: The role of information collection and analysis in contract management
Procurement team Contract documents Advisers
Other information
sources
Step 1: Information collection
Step 2: Analysis and management of Risk analysis and

information contract performance
Step 3: Implementation and evolution of Identify need for

contract management tools and processes additional information
Ongoing contingency
Performance reporting
review
Other tools and

processes
Contract administration manual
Sources of information
When initially collecting information during the procurement phase, major sources of
information for contract management purposes will include:
 the business case for the project;
 the project risk analysis conducted by the procurement team for the purpose of
developing the contractual allocation of project risk between the parties. Note that this
will not necessarily identify all risks to government during subsequent stages of the
project, and it will not necessarily reflect the risk allocation agreed in the final project
deed;
 the project contract documents (typical contracts in a Partnerships Victoria project are
listed in Appendix A), including the output specification, the services specification,
returnable schedules and draft contract;
 interviews with the procurement team and their advisers; and
 existing risk management tools within the government party.

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During the construction phase, additional sources include:

 final project deed (and associated project contracts);
 the published project summary (to be released by government within 60 days of
financial close);
 associated financial, structural and organisational details of the private party;
 notes and minutes from regular meetings with the private party under the contractual
governance arrangements; and
 materials prepared by the procurement team during the construction phase.
Throughout the project lifecycle, the government party will collect further information
relevant to the contract management strategy.
It is important to treat the information gathered in relation to the project as a whole.
Information collected to establish a performance reporting regime for the project during the
service delivery phase, for instance, may also influence contract administration generally
and affect other specific contract management issues such as contingency planning.
Analysing the information

The government party will need to establish and maintain systems for recording and
analysing the information collected.
A recommended tool for collating risk information is a risk matrix or risk register. Each
material risk is described in the risk matrix, together with an assessment of its likelihood
and severity, and a summary of the relevant controls and mitigants.
By collating risk information in one place, a picture of government’s overall risk exposure
resulting from the project can be developed. The risk matrix should be a dynamic
document, reviewed and updated regularly throughout the project lifecycle, to ensure it
accurately reflects the risks faced. The example in Template E shows a basic risk matrix,
which can be tailored as required.
In addition, the contract management team may create issues logs to keep a record of
risks, obligations and other issues that it must manage. The example in Template F shows
a basic issues log, which can be tailored as required. As discussed in section 4.3, it is
common for the contract management team to keep two issues logs: a joint issues issue
log for sharing with the private party, and a State issues log.
Managing the information

Information collected to develop contract management tools and processes must itself be
managed, along with the substantial volume of other information relating to the project.
Information management issues are discussed in Chapter 7.

6. Contract administration

6.1 Introduction
Building on Chapter 5, this chapter outlines a framework and relevant matters to be
considered for developing a contract administration manual.
The contract administration manual is a living document used throughout the life of the
project and should reflect the specific contract to be managed and meet the needs of the
individual contract director and the contract management team.
Contract administration is about the contract director and the contract management team
working with the private party and relevant government parties to achieve the
government’s project objectives. Effective and efficient public sector contract
administration is essential to the delivery of project and government objectives (including
the value for money outcomes agreed at contract execution).
The National PPP guidelines: practitioners’ guide3 sets out five key tasks for contract
administration throughout the project lifecycle. For completeness, six further tasks have
been added for the purposes of this guide to produce the following list of key tasks:
1. Formalise management responsibilities for transition between the project stages.
2. Monitor project delivery.
3. Manage variations.
4. Monitor the service outputs.
5. Maintain the integrity of the contract.
6. Monitor contract performance.
7. Maintain strong working relationships with the project parties and service providers .
8. Resolve project issues and disputes fairly and efficiently.
9. Work with government colleagues to identify potential service delivery and other
change events that may impact the project.
10. Ensure that standards of probity, governance and compliance are adhered to.
11. Conduct regular contract and project reviews to ensure continuous improvement.
3
National PPP guidelines, Volume 2: Practitioners’ guide.

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The processes and tools described in Parts 2 and 3 of this guide will aid the contract
director and the contract management team in monitoring contractual and financial issues
with a view to identifying emerging risks to the project and government.
The key output is a contract administration manual or similar set of documents. The
contract administration manual should, on a rolling basis, list government’s project
objectives, summarise the project to date and related key decisions, highlight immediate
and critical actions to be taken in administering the contract and align the available
resources with the most time-critical and materially significant risks at the various stages
during the project lifecycle.
6.2 Purpose of the contract administration manual

The contract administration manual identifies:
 project overview and strategic context – lists the government’s project objectives,
summary of project to date and related key decisions, details of the private party, and
any outstanding issues that will require management by the contract management
team;
 service delivery KPIs and payment mechanism – references the contracted service
delivery, and other deliverables, and details of the payment mechanism and abatement
arrangements. Records any key matters including abatements made;
 what needs to be done, by whom and when – assigns accountabilities, identifies the
government party’s obligations, and mitigation and control of risks. It lists the private
party’s reporting arrangements and how the government party will monitor these
(performance monitoring during the service delivery phase is discussed in detail in
Chapter 11 of this guide).
 how government's role will be performed – outlines the government party’s proposed
approach to managing the project. Identifies the resources, delegations and
authorisations required for government to perform its obligations, and available
budgetary and staffing position allocations. If required, it may also outline the approach
to servicing government sector customers, detailing the roles and responsibilities of
each party which may be detailed in a separate agreement such as service level
agreement (SLA);
 interface arrangements with the private party – identifies key private party counterparts
and communication arrangements, including formal meetings and shared knowledge
management arrangements;
 stakeholders and communications – outlines key stakeholders directly impacted by the
project, or with a strong interest in the project, and arrangements for communication
with these stakeholders; and
 contract rights – the ramifications of any non-performance or default by the private
party or the government party, and how these should be addressed. Identifies the
contingency framework and issue and dispute resolution mechanisms.
The contract administration manual collects the document references for all of the tools
and processes used in managing the project.
The contract administration manual is not a substitute for the terms of the project deed. It
reflects the project deed and, when using the contract administration manual, the contract
director should refer back to the project deed whenever this is appropriate to give a full
understanding of the content of the contract administration manual.

The foundation of contract administration manual is a strong understanding of the
contractual arrangements. Contract directors need to be familiar with the government
party’s obligations, both express and implied, to minimise the risk of default by the
government party, hindering of the project by actions of government party, and inadvertent
take-back of risk. After identifying these obligations, contract directors must ensure that
these obligations can be fulfilled and the project deed can be managed efficiently and
effectively. A contract director needs to:
 understand how government’s obligations will be met, the consequences if they are not
met and their time sensitivity; and
 ensure that there are resources available to undertake these obligations , and that
relevant staff have appropriate authority.
The contract administration manual is a key tool to enable contract directors and the
contract management team to carry out these tasks. It is part of a dynamic system to
ensure the outputs sought by the government party through the Partnerships Victoria
process are delivered by the private party. The contract administration manual should
assist the contract director and the contract management team to understand the project
deed and the environment in which the project deed must be administered.
Where other public sector entities are the end users of the contracted services or other
services provided in relation to the project assets, the contract administration manual also
informs those entities of the government party’s rights and obligations.
The contract administration manual should provide answers to the key questions:
 What needs to be done, by whom and when?
 What are the ramifications of any failure to deliver contracted services, or default by
the private party or government party, and how should these be addressed?
 What are the service delivery requirements and payment arrangements?
 Who are the key stakeholders and what are the communication arrangements?
It should also provide the historical context and address strategic issues, such as:
 How will the government party's role be performed?
 What is the strategy for managing the project and for dealing with the private party?
 What was the rationale for key decisions made in the project to date, and what lessons
have been learnt?
6.3 Assumptions underlying contract administration manual development

framework
The framework for developing a contract administration manual is assumes:
 the project director and the procurement team will manage the project during the
construction phase and are therefore responsible for developing the contract
administration plan;
 there will be a contract director appointed who will be ultimately responsible for
managing the project during the service delivery phase and, therefore, for developing
the contract administration manual;
 the contract administration manual is designed to be used during the service delivery
phase and the contract expiry or termination phase;
 there will be a succession of staff during the life of the project;
 the life of the project contract period may be up to 25 years or more; and
 public officers are likely to require the support of external advisers to manage the
project and issues that arise.

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Where these assumptions are not valid for a specific project, the contract director should
develop the contract administration manual with the alternative environment in mind.
Provided the content of the contract administration manual is arranged in an accessible
and useful format, it is not necessary for the contract administration manual to be a single
consolidated document. It may consist of a number of discrete documents that together
serve the objectives set out above.
6.4 Content of the contract administration manual

The content of the contract administration manual should be arranged in an accessible and
useful format. A recommended template and a methodology for developing the content of
the contract administration manual using this template is outlined in Template B. The
contract administration manual needs to build on the contract management plan, and be
practical and relevant to both the day-to-day and the longer term management of the
project deed. Therefore, it should:
 provide a strategic context – the contract administration manual should provide a
brief historical summary of the project to date, including the service delivery context,
the rationale for key decisions and discussion of key issues with the private party, and
outline key elements of the private party. It should also outline the strategy for
achieving the government party’s project objectives. The contract administration
manual should include a summary of ‘the deal’ that illustrates the intent behind the
project deed and its key provisions, rather than simply repeating or describing the
meaning of contractual clauses. In this sense, it should capture what the project deed
is trying to achieve and whether it is in fact being achieved;
 highlight actions – the contract administration manual must highlight, on a rolling
basis, the most immediate and critical actions that must be taken by the contract
director to administer the project deed. These actions need to be set in the context of a
clear understanding of the commercial intent of the parties, and the relevant
commercial, legislative, regulatory and policy background. These actions should be
included in an obligations register (see below for further details). Actions will extend
beyond those listed in the project deed, and should include matters such as the need
to undertake gateway reviews during the service delivery phase and prior to contract
expiry;
 align resources – the contract administration manual must enable the contract
director to identify the resources required to perform necessary tasks and manage the
most time-critical and materially significant risks at various stages during the project
lifecycle;
 support governance – the contract administration manual must support public sector
governance practices, including communications, accountability and decision -making
processes. It should outline internal reporting processes, including to the senior
responsible owner and DTF;
 collate contract management tools and processes – the contract administration
manual must provide a cohesive set of contract management tools and processes.
Some of these tools and processes may be developed separately from the contract
administration manual. For example, the government party’s communications strategy
for the project may be integrated with the government party’s agency-wide
communications strategy. The contract administration manual needs to outline
processes for:
– identifying, monitoring and reviewing a risk analysis for contractual and other risks;
– understanding service obligations, obtain reports, monitor performance and have
clear payment arrangements; and

 ongoing review and development – the contract administration manual must be a
dynamic document, updated regularly so that it remains relevant throughout the project
lifecycle. The contract director should implement procedures for reviewing and
updating the contract administration manual at regular intervals.
The contract administration manual should include an obligations register which clearly
outlines the key actions of the contract management team, and includes:
 the specific action;
 the individual responsible for the action; and
 the time or date by which the actions will be done (including whether the action is
required once only, recurrently, or in response to specific events).
The contract director may find it convenient to set out this information in tabular form.
Template C shows a sample obligations register.
6.5 Collecting information for the contract administration manual

The information to be gathered for preparing the contract administration manual should
answer the question ‘What does government need to know in order to administer the
contract effectively?’
What information needs to be gathered?

In collecting relevant information, the contract director should understand the distinction
between the project deed obligations, but also the many requirements that sit alongside
the project deed (e.g. relationships and stakeholders).
The project deed will set out a range of processes that may be followed by the parties, but
it will not detail the internal steps within government that must be undertaken. To properly
administer the project deed, the contract director must understand these internal steps.
What are the best sources of this information?

The best sources of information are commonly:
 people, such as:
– the project director;
– members of the procurement team;
– the procurement team’s advisers (including legal, commercial, technical and,
where applicable, operational);
– the government operator (in ‘availability’ Partnerships Victoria projects);
– the senior responsible owner;
– end users;
– independent assessors/reviewers;
– Partnerships Victoria; and
– fellow contract manager practitioners.
 documentation, such as:
– the project deed (and associated project contracts)
(Appendix A lists typical project contracts in a Partnerships Victoria project),
including:
(a) service KPIs and payment mechanism;

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(b) plans required to be submitted by the private party under the project deed
(some at financial close and others by commercial acceptance); and
(c) annotated comments by the procurement team and contract management
team;
– internal reports;
– minutes/actions from government steering committee and working groups and from
meetings with the private party;
– documents relating to approvals obtained during earlier stages of the project ;
– the risk matrix developed to allocate project risk under the project deed (and
associated project contracts);
– the public sector comparator for the project (for the allocation of risk and
quantification of retained risk);
– the public interest test (as documented in accordance with the Partnerships
Victoria Requirements); and
– input from the project control group, management committee or similar forum
relevant to the project.
While much of this documentation will be available at financial close, the further the project
deed extends into the service delivery phase, the more important information generated
during the contract period becomes to effectively manage the project.
6.6 Risk analysis for contract administration

Risk analysis plays an integral role in contract administration.
In order to administer the project deed, the contract director needs to identify the potential
risks, and to assess the likelihood of each material risk eventuating and the magnitude of
possible consequences. The relationship between service delivery, risk and contract
management generally, and the categories of risks relevant in the Partnerships Victoria
contract management context, are discussed in Chapter 2 of this guide.
During the procurement phase, a risk analysis is carried out to determine how project risks
should be allocated under the project deed and other project contracts. In preparing the
contract administration manual, the government party, contract director and contract
management team will need to further develop this risk analysis to:
 identify the project risk allocation under the project deed and other project
documentation;
 identify pre-existing or new risks that may not have been considered or dealt with in
the contractual risk allocation process and incorporate in the existing risk analysis;
 assess the likelihood of the risk occurring and the magnitude of the consequences, to
the extent that these issues have not been addressed previously;
 develop risk and contingency management processes and tools as listed
in Appendix G for the most critical risks (see Chapter 8 of this guide for details on
developing a contingency framework); and
 determine whether the fact that a risk event occurs should trigger a review of the
Contract risk analysis should be undertaken regularly, at least annually during both the
construction phase and service delivery phase, and risk registers and/or issues logs should
be updated accordingly.

6.7 The relationship between contract administration and performance
monitoring
Contract administration includes the steps necessary to monitor the performance by the
private party of its service delivery obligations.
Contract administration involves monitoring the performance by the private party of its
service delivery obligations. The contract administration manual should include actions
required to implement the performance monitoring and reporting strategy developed
according to Chapter 11.
To ensure appropriate monitoring of the project and the private party’s performance, the
government party should:
 review the project deed and other relevant project contracts in order to:
– confirm the reporting obligations on the private party; and
– identify the timeframes in which these obligations must be undertaken;
 identify obligations of the private party under the project deed and other relevant
project contracts that are not subject to specific reporting obligations but need to be
monitored by the Government and identify how the government party will monitor these
obligations; and
 identify any obligation which should be implied into the project contracts by law or
through the private party’s conduct.
The above should be captured in the contract administration manual.
The contract director will have responsibility for signing off on payment of the service
payment invoices submitted by the private party, after satisfying themselves that the
private party has fully met their service delivery and other KPI requirements.
Service delivery under the project deed will also support the government party meeting its
output performance targets under the Victorian Government’s output funding model, and
the contract director will need to also sign off on whether or not performance targets have
been achieved in this respect.
In some projects, other members of the private party’s consortium will have obligations to
the government party through a direct contract with the government party (for example, a
tripartite agreement or a guarantee). The government party must review the relevant
party’s obligations to the government party under these documents in the same way it
reviews the private party’s obligations under the project deed. These obligations should
also be included in the contract administration manual.
6.8 Managing unresolved issues

In administering a contract, the government party must manage any issues left unresolved
at contract execution or commercial acceptance.
When the contract is executed there will remain matters to be agreed between the parties
and the contract will outline the processes and timing (e.g. equipment selection). The
contract management team will need to devote sufficient resources to resolve issues
during the construction phase as robustly and expeditiously as possible. For instance,
planning matters can be very complex and time consuming on some projects (further
construction issues discussed in Chapter 10).
Similarly, there may be some outstanding issues to resolve as at commercial acceptance.
For example, at commercial acceptance if an independent reviewer confirms that the
works under a project deed criteria have been substantially completed, apart from minor

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defects and the facility is capable of being used for its intended purpose, the Government
party may enter into an agreement to allow the private party to begin performing the
contracted services and receive partial service payments, until the outstanding defect item
is rectified.
The project director and/or the contract director (as applicable) should:
 identify and record any compromises made by the parties as the deal was negotiated
in the procurement phase;
 identify and record aspects of the deal that have been left intentionally for future
development;
 identify and record aspects of the deal which will be subject to other processes (for
example, subject to the conditions of a planning approval or permit);
 consider whether there are any matters that have been unintentionally forgotten; and
 determine the likely ramifications of these unresolved matters.
Typically, such unresolved issues will be added to the issues log that is maintained jointly
by both parties.
6.9 Reviewing and updating the contract administration manual

A contract administration manual must be regularly reviewed and updated to ensure its
ongoing relevance to the project.
A Partnerships Victoria project generally involves the delivery of contracted services to or

on behalf of government under a long-term contract. Each party’s obligations and the risks
if these obligations are not fulfilled vary at different points in the project lifecycle.
An effective contract administration strategy must recognise and reflect the current stage
in the project lifecycle but also include forward looking processes (e.g. planning for
reviewable services periods.) The contract administration manual needs to be regularly
reviewed and updated. There should be a formal review:
 at pre-determined milestones; and
 in response to significant events affecting the project.
A review of the contract administration manual should assess any variations to the project
deed and the environment in which the project deed has been managed. Any review
should critically assess the contract administration manual and determine whether it is
adequate to manage the project risks and any changes in the contract environment.
The need to maintain an up-to-date contract administration manual was an express
recommendation made by the Victorian Auditor-General’s Office in its 2013 report,
Operating water infrastructure using private public partnerships.
If a contract management tool or process is developed separately from the contract
administration manual, the contract director should ensure they are also kept up-to-date as
the tool or process develops over time.
In reviewing the contract administration manual, the contract director may need to consider
complex issues that arise under the project deed. It is likely that the contract director will
need access to ongoing legal advice to assist. The contract director should ensure there is
an adequate budget for this ongoing legal advice and representation.

7. Knowledge and information management

7.1 Why manage knowledge and information?

Effectively managing knowledge and information is essential to:
 ensure the continuity and availability of project knowledge and information assets
throughout the project lifecycle; and
 meet legislative, policy and contractual requirements.
In order to meet a government party’s governance and compliance obligations (see
Chapter 3), it is essential to have effective knowledge and information management
processes. This chapter is about developing an integrated project knowledge and
information management strategy.
 Information is data in context that can be used for decision making.

 Knowledge is a body of facts, information or skills acquired through experience or
education. It provides theoretical or practical understanding of a subject.
 Information management is the means and processes by which an organisation
manages the creation, collection, storage, retrieval and distribution of information
resources. It is technically part of a larger continuum of managing knowledge in an
organisation or project.
 Knowledge management is a multidiscipline approach to achieving organisational
objectives by making the best use of knowledge.
 Records management is a component of information management and is concerned
with corporate records that document and verify business activities.4
4
Definitions adopted or adapted from those contained in Standards Australia International Ltd, Australian Standard
AS 5037 2005, Sydney.

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Figure 7.1: The relationship between knowledge management and information management
Knowledge management
Making the best use of
knowledge by applying it in the
collective interests of users
Information management
Processes for managing the
creation, storage, retrieval and
distribution of information
Initially, the contract management team should identify the government party’s knowledge
assets and, where possible, use an electronic recordkeeping system to monitor and record
key project performance and activities. It is most useful when the information management
system records ‘tacit’ knowledge 5 in addition to explicit knowledge and key project
decisions.
Knowledge management is an important part of succession planning to ensure a seamless
transition when contract management personnel change.
7.2 What are knowledge assets and knowledge activities?

Knowledge assets can be classified into two basic types:
 explicit knowledge, which has been physically embodied or recorded in a document,
image or some other medium; and
 tacit knowledge, which resides in a person’s mind and may include aspects of culture
or ‘ways of doing things’.
Knowledge assets include:
 electronic documents such as word documents, spreadsheets, correspondence,
presentations;
 emails;
 hard copy records such as signed project contracts, submissions, briefings and
correspondence;
 web-based information;
 corporate memory (the sum of individual memory and expertise relevant to the
project); and
 records of conversations, meetings etc.
5
Tacit knowledge is that which resides in a person’s mind, and may include aspects of culture or ‘ways of doing
things’: Standards Australia, Interim Australian Standard AS 5037 (int)-2003, op. cit.

Knowledge activities involve:
 discovering, creating and receiving knowledge;
 capturing and storing knowledge;
 presenting, distributing and sharing knowledge; and
 reviewing, maintaining and disposing of knowledge.
7.3 How do I manage knowledge and information effectively?

Managing knowledge and information effectively requires:
 a system – use an electronic document and records management system to organise
project information. The government party should seek to use existing technological
systems or products, and avoid bespoke or customised products that have high upfront
or ongoing costs. The system needs to be adaptable for the project lifecycle phase and
project specific circumstances. The system should comply with the government party’s
departmental/agency records management framework and obligations under the Public
Records Act 1973, and enable access to the information as required over and beyond
the life of the project;
 appropriate tools and processes – develop and use knowledge and information tools
and processes such as protocols, guidelines, policies and procedures that reflect the
project lifecycle phase. Many public sector agencies have policies on managing
information, records and documents. These should be used as a starting point in
developing consistent contract management information processes; and
 an appropriate culture – the contract management team needs to have a culture that
values the processes and tools to manage knowledge and information. Fostering an
appropriate culture is also useful to ensure that tacit knowledge and expertise is
transferred to and retained by the government party. This will facilitate effective change
management and maximise the continuity of contract management information when
there are changes in contract management personnel.
7.4 Developing a knowledge and information management strategy

When developing a strategy to manage knowledge and information effectively and
identifying appropriate systems, processes and cultural levers, the government party
should consider the following issues:
1. Discovering, creating and receiving knowledge and information
 Who creates the information?
 What information will be collected?
 What types of documents and information are there, and what are their attributes
and relationship with other information?
 Who owns and controls the information?
 What specific provisions must be included in the project deed to ensure that the
knowledge and information requirements are legally enforceable between the
parties?
 How will information that may be difficult to collect – such as emails, outcomes of
conversations or meetings – be captured?

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2. Capturing and storing knowledge and information

 How will knowledge and information be stored and maintained (both
electronically and physically)?
 What metadata6 will be attached to the information to assist with its retrieval?
 What are the security requirements for the information?
 How should the information be classified when it is stored? Does the project
justify the cost of a barcoding or other sophisticated identification system?
 Will different types of documents and information have specific storage
requirements? For example, copies of disaster recovery and business continuity
plans, and copies of difficult to replace documents (such as land titles, technical
plans and certificates of insurance) should be stored onsite and in other locations
offsite. There may be different requirements for formal or commercially/legally
sensitive documents compared to informal emails.
3. Presenting, distributing and sharing knowledge and information
 What are the purposes for which the information is likely to be used by the
contract management team or by others during the different project phases?
 Are there common tasks (such as document, communication and version control)
for all phases of the project?
 How will the information be accessed and by whom? Will it be shared with the
private party?
 Are there types of information maintained by the private party (for example,
operating and maintenance manuals, design, engineering and survey plans) that
the government party will need to access? If so, in what stages during the
project? In what form?
 How will the information be transmitted between team members, stakeholders
and contractors, and in what form?
 What internal records, document and information management policies,
procedures and guidelines should be adhered to?
 What information or documents will the government party need to share regularly
with stakeholders (for example, contact lists and organisational charts)? In what
format? How will the information or documents be transmitted?
 Are stakeholders clear on their information provision responsibilities?
 What information does the government party need to satisfy stakeholders’
performance reporting requirements?
 In what electronic and/or hard-copy format is this information required? How will
the information be transmitted?
 What agreed information formats should be established between parties to
reduce double handling of information and resource duplication?
4. Reviewing, maintaining and disposing of knowledge and information
 How will the quality of the information be monitored over the life of the project (for
accuracy, consistency and currency) and during the various phases of the project
and transitions between phases?
 Who will be responsible for the various processes of information management?
How will they know the scope of their responsibilities?
6
Metadata or metatags are keywords or information about the information. For example, using a tag or label like
‘lifecycle’ or ‘risk’ that enables other information about lifecycle or risk to be retrieved.

 How can the relationship between electronic and physical records be maintained
effectively?
 How will the information be disposed of? Under whose authority?
 What knowledge, information, tools and processes need to be delivered to the
government party on termination, step-in or expiry of the project?
 What access restrictions (internally and between the parties) are appropriate?
 How can the government party best meet its governance, compliance and
legislative responsibilities (for example, obligations under Freedom of Information
legislation)?
7.5 Measuring the success of a knowledge and information management

plan
The government party should regularly review whether its knowledge and information
strategy is effective. The government party can measure the success of its information and
knowledge management strategy by evaluating whether:
 relevant personnel have ready access to information and documents are easy to
identify and retrieve;
 the quality of information is accurate and current and relevant;
 the information satisfies legislative and policy requirements;
 double handling of information is effectively minimised;
 the tools and processes for managing knowledge and information have been designed
to fit a particular project phase, while also catering for common tasks within all project
lifecycle phases;
 information and documents are submitted and transferred between stakeholders in the
appropriate form and at the appropriate time;
 the project deed enshrines into legally enforceable rights those components of the
knowledge and information management strategy that require the cooperation of the
private party throughout each project lifecycle phase; and
 it makes change of contract management personnel and succession planning easier.
7.6 Regulatory and compliance requirements

The government party should:
 have useable records of the knowledge and information created, received, retrieved
and used in conducting contract management activities; and
 protect the integrity of those records for as long as they are required.
This support will enable the government party to comply with regulatory requirements for
retaining records, outlined below and in section 7.7. The government party should integrate
the records management requirements into its contract management knowledge and
information management strategy. The contract director should ensure that these
processes, however they are documented, are included in the contract administration
manual.

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Record-keeping obligations
The contract director should be familiar with the record keeping obligations set out in the
Victorian Auditor-General, Managing public sector records (March 2017) and Records
management in the public sector (March 2008). Adequate and accurate contract records
are required for scrutiny of the contracting process. They support effective contract
management, including appropriate performance monitoring. Relevant records include:
 records of contract negotiations;
 changes to the agreements;
 agreed performance measures;
 ongoing performance data and management reports; and
 complaints or dispute documents.
Project records are divided between contract records and contractors’ records:
 Contract records document the process of establishing and managing a project deed
and other relevant project contracts.
 Contractors’ records are generated by the private party while performing the
contract.
The government party’s ability to efficiently and effectively manage the project deed
depends upon accurate, up-to-date and easily accessible records. Government agencies
are required to manage records in a manner that is consistent with open and accountable
government, while protecting the integrity of records and maintaining appropriate security
and confidentiality. Full and accurate records and recordkeeping are a prerequisite to
government agencies being able to meet their statutory and legal obligations.
Poor recordkeeping practices contribute to organisational inefficiencies, affect the ability of
staff to make reliable business decisions and weaken government’s accountability. A
records management strategy is key to the knowledge management and information
strategy.
Protocols for creating documents

As part of its information management strategy, the government party should establish
internal protocols for creating documents. Protocols should include guidance on:
 ensuring the documents accurately reflect discussions etc. and, where the document is
not a final document, its stage in the process (for example, drafts);
 ensuring documents that record confidential discussions or information obtained in
confidence are appropriately identified;
 ensuring that documents subject to Cabinet in Confidence or legal professional
privilege are appropriately identified, and that separate protocols for dealing with such
documents are adhered to;
 noting that documents may be subject to a court discovery process or a Freedom of
Information request; and
 document naming conventions.

7.7 Access to information and the Freedom of Information Act 1982
A contract director for a Partnerships Victoria project should have an understanding of the
obligations in the Freedom of Information (FoI) Act. Appendix E of this guide discusses
some of the issues relevant to this area of public sector compliance. The contract director
should seek advice from the FoI or legal units within the government party when
developing its knowledge and information management strategy. The contract
management team should also receive specific training on FoI, with advice from the FoI or
legal units, to ensure that the contract management team complies with FoI requirements.
The contract director will need to:
 manage FoI issues when they arise;
 achieve an approach to records management that complies with the project knowledge
and information management system;
 record information in a way that supports operation of the FoI Act; and
 ensure that the project deed (and associated project contracts) reflects government
policies to maximising public access to project information.
7.8 Intellectual property and confidential information

Intellectual property includes various classes of rights protected by legislation (such as
copyright, patents and registered designs), together with confidential information and trade
secrets protected at common law or under contract. In any Partnerships Victoria project,
there is a possibility of intellectual property passing between the government party and the
private party. Section 13.5 of the National PPP guidelines: practitioners' guide discusses
the intellectual property issues that arise during the procurement process. Appropriate
provisions should be included in the project deed to govern intellectual property rights after
contract execution. Intellectual property can be a source of complex issues, as such
contract directors should refer to the whole-of-Victorian Government IP policy
<http://www.dtf.vic.gov.au/Victorias-Economy/Victorian-Government-intellectual-property-
and-data-policies/Intellectual-Property-Policy> and seek further legal advice, if required.
Managing intellectual property

As part of its knowledge and information management strategy, the government party
should identify and manage the intellectual property relating to the project.
The contract director should have an understanding of the nature of the intellectual
property that the government party may hold or receive in relation to the project, and
should also understand the legal principles applying to the protection of that intellectual
property. The project deed may require the private party to provide a register of intellectual
property for the project.
Section 13.5 of the National PPP guidelines: practitioners’ guide presents an overview of
the identification and treatment of intellectual property in Partnerships Victoria projects and
outlines the interaction of the FoI Act and the protection of trade secrets.

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The appropriate intellectual property management strategy will depend on the nature of the
intellectual property and the contractual provisions applying to it. Both the National PPP
guidelines: commercial principles 7 and the Partnerships Victoria standard project deed
guidance notes set out the government’s preferred contractual position in respect of
intellectual property. The contract director should ensure that the contract administration
manual specifies the actions necessary to fulfil the government party’s intellectual property
obligations under the project deed. Actions and processes that may be relevant include:
 ensuring confidential information in any intellectual property is kept in secure s torage
and personnel are aware of its confidential nature;
 restricting access to particularly sensitive information held by the government party so
that only a select group of personnel can access it;
 identifying confidential information in any intellectual property in the government party's
information management systems;
 maintaining a register of all intellectual property used in relation to the project; and
 ensuring any licences and sub-licences of intellectual property are reviewed and
renewed when necessary.
The private party’s intellectual property management

In monitoring the service performance, the government party should monitor the private
party's compliance with any obligations that relate to its possession and handling of the
government party's intellectual property.
Private sector confidential information held by the government party

The protection the law provides to confidential information depends on whether the
information is private or public sector information. Confidential information in the private
sector will generally be protected if disclosure would be detrimental to the owner of the
information. In contrast, confidential information in the public sector generally will not be
protected unless the relevant government party can establish that disclosure is likely to
injure the public interest. However, if the government party in a Partnerships Victoria
project receives information from the private party, and the government party has a
contractual obligation to keep that information confidential (for example, the information is
‘commercial in confidence’), the government party must comply with that obligation unless
it is subject to an overriding disclosure obligation.
Confidential information and overriding disclosure obligations

The different levels of protection for confidential information in the public and private
sectors do not detract from the private sector’s concern that doing business with the
government will result in public disclosure of information that the private party would
otherwise keep confidential. This is partly because of government policy and partly
because a contractual obligation to keep information held by government confidential can
be overridden through various statutory means.
Contract disclosure policy and project summary requirements are set out in Section 17 of
the Partnerships Victoria Requirements. Current government policy is to publish the
executed project deed on the Victorian Government tenders website within 60 days of
financial close. The private party should be given the opportunity to mark-up parts of the
project deed it believes should not be disclosed on the grounds of ‘commercial-in-
confidence’. The contract management team will need to review these mark-ups to ensure
that only material that is genuinely ‘commercial-in-confidence’ is redacted. More recent
7
National PPP guidelines, refer to: Volume 3: Commercial principles for social infrastructure, Chapter 37 and Volume
7: Commercial principles for economic infrastructure, Chapter 36.

project deeds may contain a schedule of commercially sensitive information which sets out
the ‘commercial-in-confidence’ information in the project deed or other project contracts
that must be redacted prior to any public disclosure.
The government's policy in relation to contract disclosure (discussed in Appendix E of this
guide and in Section 17 of the Partnerships Victoria Requirements) allows ‘commercial-in-
confidence’ information to be withheld from the versions of the project contracts that are
disclosed. However, such information may be made public as a result of an application
under the FoI Act (see Appendix E of this guide for a detailed discussion of the mechanism
for disclosure). The Auditor-General, the Ombudsman, the Independent Broad-based Anti-
corruption Commission and parliamentary committees, under their statutory powers and
functions, can also access and publish what would otherwise be ‘commercial-in-
confidence’ information.
For contract managers, the status of commercial-in-confidence information may change
over the lifecycle of the project. Requests for information may prompt a review of the
original redactions to ensure they can be substantiated.
Auditor-General access
Where private sector entities take on expenditure of public funds, it is reasonable that they
be subject to public sector transparency expectations which may be greater than in the
private sector. In May 2016, the Integrity and Accountability Legislation Amendment Act
2016 was passed to amend the Audit Act 1994. These reforms now provide the Victorian
Auditor-General’s Office with follow-the-dollar powers for performance audits (i.e. the
capacity to consider the effectiveness, efficiency and economy of public sector services or
functions that are delivered through contracts with the private or not-for-profit sectors). This
enables the Auditor-General to obtain information about private parties’ activities in respect
of their expenditure of public funds.
As confidential information may be made public through the FoI Act, or by the Auditor-
General, the Ombudsman or parliamentary committees, a contract director should avoid
giving the private party absolute assurances about the confidentiality that will be accorded
to information the private party provides to the government party.
Further information
Further information on creating a knowledge and information management strategy,
incorporating a records management strategy, is available from:
 Chapter 10 of A guide to the project management body of knowledge, 2000 edition,
Project Management Institute, Newtown Square, USA;
 the UK Office of Government Commerce website
<www.ogc.gov.uk/sdtoolkit/reference/deliverylifecycle/delivery.html>;
 AS ISO 9001 Quality Management Systems;
 Interim Australian Standard AS 5037 (int)-2003, from Standards Australia;
 AS ISO 15489.1 Australian Standard Records Management Part 1: General; and
 AS ISO 15489.2 Australian Standard Records Management Part 2: Guidelines.
The government party can find further information on the use of electronic document
management systems on the Victorian Electronic Records Strategy website
<https://www.prov.vic.gov.au/recordkeeping-government/a-z-topics/vers>.
The Public Records Office of Victoria records management standards
<https://www.prov.vic.gov.au/recordkeeping-government/about-standards-framework-
policies> set out general requirements for records management standards.

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8. Contingency planning

8.1 Introduction
Contingency planning is vital to a Partnerships Victoria project to ensure the government
party is prepared in the event of service failure by the private party. While the private party
is financially accountable and the first point of redress, the government party retains
ultimate accountability to the community and may need to act to manage the
consequences of a service failure.
The contract management team needs to regularly assess current risks and issues, and
scan for potential new risks and issues.
Specific planning for some potential contingency events can be warranted, such as a
private party default leading to a partial or full loss of services. However, given the range of
possible major events that could cause a loss of services or other material concern, it is
likely to be more effective (and efficient) to develop a contingency management framework
that can be applied to any event.
If unexpected events do occur, there may be a need to add resources to the contract
management team at short notice, including bringing in external advisers. It is critical that
budget funding for such resources can be readily accessed, as necessary.
8.2 Contingency framework

The elements of a contingency framework may include:
 a list of key stakeholders dependent on the contracted services, or which may be
affected by a service failure, and up-to-date contact details including out-of-hours
details;
 a list of other government stakeholders that should be advised of contingency events
(on a ‘need to know’ basis) and up-to-date contact details including out-of-hours
details;
 the basis of a communication strategy;
 a plan for accessing alternative sources of service;
 a plan for accessing additional budget funding; and
 a plan for engaging expert advisers, as needed, at short-notice.

This contingency framework should link to the government party’s wider business
continuity and disaster recovery plans, if these exist. This contingency framework should
be appended to the contract administration manual, be regularly updated and should
address the following types of events:
 events that interrupt service delivery but do not involve default by the private
party – for example, force majeure events;
 events that interrupt service delivery and involve a default by the private party –
for example, the private party fails to maintain the project assets as required by the
project deed, and consequently fails to meet the services specification; and
 private party defaults that do not result in an interruption to service delivery –
such defaults could include failure by the private party to maintain professional
indemnity insurance as required by the project deed, and subsequent insolvency of the
private party because of a negligence claim.
There may be merit in the government party identifying the range of significant potential
contingency events in a Partnerships Victoria project. This will inform the contingency
management framework that can be applied readily should any specific event occur.
8.3 Planning for contingency events

There are three primary (and overlapping) contingency processes relevant to Partnerships
Victoria projects:
 service interruption response planning – to prepare for any interruption to service
delivery during the service delivery phase;
 step-in planning – to prepare for the exercise of any step-in rights in the Partnerships
Victoria contract, whether as a result of an interruption to service delivery, a default by
the private party, or another event negotiated as a step-in trigger; and
 default planning – to prepare for any default by the private party in either the
construction phase or the service delivery phase.
Service interruption response planning
Service interruption response planning in a Partnerships Victoria project is a tool to

mitigate the impact of an interruption on the public, government party and other key
stakeholders.
The private party will generally bear the financial consequences of an interruption in the
contracted services that it provides. The government retains ultimate accountability to
customers and the community, and must therefore have appropriate plans in place to
appropriately respond to such interruptions. For example, a government health services
authority overseeing multiple hospitals will operate and maintain hospitals directly as well
as via a PPP. Therefore the project specific service interruption response plan can build on
the common elements in existing facility business continuity and disaster recovery plans.

Par tnerships
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Developing a service interruption response plan

A service interruption response plan should be short, clear, easily understandable and
easily available, given it could be activated at short notice in circumstances in which the
personnel responsible for the plan’s implementation may be under significant pr essure.
The key issues to consider in developing and maintaining a service interruption response
plan in the context of a Partnerships Victoria project include the following:
 What are the potential events that may trigger activation of the service interruption
response plan?
 What immediate actions should be taken to respond to an interruption to service
delivery, before taking steps to stabilise or restore critical services?
 How should various components of the services be prioritised under the service
interruption response plan?
 What are the roles and responsibilities of the government party personnel responsible
for activating and implementing the service interruption response plan? Do these
personnel understand their roles and responsibilities? Do they have appropriate
delegated authority for their roles and responsibilities?
 Who is authorised to activate the plan?
 What communications are required to activate and implement the service interruption
response plan?
 What communications to stakeholders, the public and the private party are required
when the service interruption response plan is implemented? A proactive
communication strategy can prevent the government party becoming inundated with
incoming queries from concerned end users, the public and the media, and can
prevent a loss of public confidence in the government agency.
 Is the service interruption response plan available to the people who need to invoke it?
 Is the service interruption response plan integrated with business continuity plans for
core or similar services provided by the government party?
 How and when will the service interruption response plan be tested? Testing is
essential to ensure the plan can be implemented as planned and personnel are
familiar with its operation.
 What are the private party’s contingency plans and are the private party’s contingency
plans consistent with the government party’s contingency plans?
When a service interruption occurs, the initial priority should be to mitigate any immediate
safety risks. To this end, it may be necessary for the contract management team to take
action, make decisions, or approve action by the private party without having the
opportunity to fully consider the contractual implications. Where possible this should be
done in consultation with the senior responsible owner and, once the immediate danger
has been averted, the contract management team should promptly revert to operating
within the contractual framework. Within this framework, the specific tasks required to
further respond to the service interruption will significantly depend upon the nature and
circumstances of the service interruption. In this context, the following issues should be
considered:
 What are the time periods or targets for stabilising or restoring critical components of
the services?
 During the period of service interruption will replacement services be provided by the
government party, will the private party provide the services to the extent that it is able,
or will a combination of these solutions be used?
 What resources are required to restore delivery of each critical component of the
services? How will these resources be mobilised?

 What service specifications and service level targets should be set for each critical
component of the services during the response period? Have relevant stakeholders
been informed that these service specifications and targets will apply during the
response period? In some cases during such temporary operating conditions,
acceptable service specifications and service levels may be less stringent than those
imposed on the private party in the relevant project deed.
 What information is required when implementing the service interruption response
plan? These information requirements should be considered when developing the
government party’s knowledge and information management strategy, discussed in
Chapter 7.
 How will the government party exit from the service interruption response plan? This
may be by the private party restoring services, consistent with the services
specification, or by establishing an ongoing source of alternative services.
The private party’s contingency plans

A project deed should oblige the private party to maintain its own contingency plans. The
allocation of risk to the private party also provides commercial incentives for the private
party to develop its own contingency framework. It is important that both parties have a
basic understanding of one another’s plans for these events. This way, should services be
interrupted, they are not working at cross-purposes in seeking to restore the services or
mitigate the effects of an adverse event. Where a degree of coordination appears
necessary, the parties should also cooperate in testing their contingency plans.
Step-in planning
Most project deeds give the government party a right to ‘step in’ in certain circumstances
and temporarily enter or take control of the project assets used to provide contracted
services. Careful planning is required to put the government party in a position to
effectively exercise step-in rights should the need arise, and then step out.
Step-in rights are clearly documented in a project deed, however exercising those rights is
complex and requires careful planning. Contractual issues in relation to step -in are
discussed in detail in the National PPP guidelines: commercial principles for social
infrastructure (Chapter 27) and National PPP guidelines: commercial principles for
economic infrastructure (Chapter 26) (as applicable) and the Partnerships Victoria
standard project deed guidance notes.
It is unlikely that a detailed step-in plan covering all circumstances can be developed prior
to a step-in event occurring. Where step-in rights exist in a project deed and a situation
arises in which step-in may be an appropriate response, a step-in plan should be finalised
in conjunction with (and possibly as part of) the service interruption response and default
plans for the project. The final details of the plan will significantly depend upon the nature
and circumstances of the event triggering the step-in.
For example, step-in rights may be available if a force majeure regime relieves the private
party from its obligation to deliver the contracted services, and the government party is in a
position to restore or maintain the contracted services but the private party is not able to do
so.
If step-in rights are available where there has been a default by the private party, step-in
planning overlaps with default planning.
A critical part of step-in planning is planning how and when to step out without creating
legal problems. Contract directors should seek legal advice in this instance.

Par tnerships
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Developing a step-in plan

Issues to consider in developing a step-in plan include:
 What events have occurred that can trigger the government party’s step-in rights?
 What contractual conditions must be satisfied before the step-in rights can be
exercised?
for activating and exercising step-in rights? Do these personnel understand their roles
and responsibilities? Do they have appropriate delegated authority for their roles and
responsibilities? What are the limits within which step-in rights are exercisable?
 What internal authorisations are required before exercising step-in rights?
 What third-party acknowledgements or consents might be needed to enable the
government party to effectively exercise its step-in rights? Should those consents be
obtained in advance of any step-in situation arising?
This should be discussed with the government party’s legal advisers at the time the
step-in rights are negotiated. Should a step-in situation arise, the government party
must act quickly. Consequently, the government party may wish to seek an
acknowledgment of the existence of the step-in rights from those landlords and
suppliers, together with any necessary consent, before any step-in situation arises.
 What obligations and liabilities may be incurred in exercising step-in rights? Is
adequate insurance in place? Has the risk of public sector employees being deemed to
be directors of the private party for Corporations Act 2001 (Cth) (Corporations Act)
purposes been considered? The Corporations Act provides that certain people
involved in the management of companies may be deemed to be directors of the
company. The risk to individual should have been addressed during the procurement
phase and may need to be confirmed at the time of step-in.
 What are the taxation consequences of exercising step-in rights? Step-in may have
significant taxation consequences for the private party. These consequences may
affect the future of the project or result in taxation costs being passed back to
government. Advice should be sought from government’s tax advisers at the time the
step-in rights are negotiated.
 What resources are required to implement the step-in plan? Does the government
party have access to sufficient skilled personnel to enable it to effectively exercise its
step-in rights? How will resources and personnel be mobilised? For example, if the
private party abandons the project site and the government party steps-in, the
government party may need to hire a security company to secure the site.
 What information is required when implementing the step-in plan? The information
requirements should be considered when developing the government party’s
knowledge and information management strategy, discussed in Chapter 7.
 What communications are required to activate and implement the step-in plan?
 What communications to stakeholders and the public are required when step-in rights
are exercised? A proactive communication strategy can reduce the incoming queries
from concerned end users, the public and the media.
 How will the government party ‘step out’? Is step-out possible or feasible in this
project?
 Can the government party step in and not step out? If so, can it (from both legal and
practical perspectives) re-tender the project? Should the government party step in and
not step out?
 Is the step-in plan available to the people who need to invoke it?

If a significant unexpected event triggers a need to step-in, it may be necessary for the
contract management team to take action without having the opportunity to fully consider
the issues above. Where possible this should be done in consultation with the senior
responsible owner and, once the immediate need for action has been met, the contract
management team should promptly review any outstanding issues associated with the
step-in.
Generally, it is not possible to fully test a step-in plan. However, consideration should be
given to ‘walking through’ a range of step-in scenarios as a means of testing the plan’s
validity.
Default planning
A Partnerships Victoria project deed generally gives the government party the right to
invoke a default provision if the private party fails to meet its contractual obligations in a
material way.
While it is fundamental that a Partnerships Victoria project be treated as a mutually
beneficial relationship between the parties, the government party must adequately prepare
for any default by the private party.
Default processes are clearly documented in project deeds, however exercising those
rights is complex and requires careful planning. Contractual issues in relation to default are
discussed in detail in the National PPP guidelines: commercial principles for social
infrastructure (Chapter 24) and National PPP guidelines: commercial principles for
economic infrastructure (Chapter 23) (as applicable) and the Partnerships Victoria
standard project deed guidance notes.
If a situation arises in which activating the default process may be an appropriate
response, a default plan should be developed, if appropriate in conjunction with (and
possibly as part of) the service interruption response and step-in plans for the project. The
details of the default plan will significantly depend upon the nature and circumstances of
the default event.
Developing a default plan

In developing a default plan the plan should be short, clear, easily understandable and
available.
The key issues to consider in developing and maintaining a default plan for a Partnerships
Victoria project include:
 What are the potential default events?
 To what extent does each default event affect the provision of the services, both
immediately and in the longer term?
 What time periods must expire before the government party can act in response to the
default? What is the timeframe for the cure periods available to the private party (or its
financiers)?
 What remedies are available under the project deed? What are the potential
consequences of each remedy?
for activating and implementing the default plan? Do they understand their roles and
responsibilities?
 What resources are required to implement the default plan? How will these be
mobilised?

Par tnerships
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 What information is required when implementing the default plan? The information
requirements should be considered when developing the government party’s
knowledge and information management strategy, discussed in Chapter 7.
 What communications are required to activate and implement the default plan?
 What communications to stakeholders, the public and the private party are required
when the private party is in default? A proactive communication strategy can reduce
the incoming queries from concerned end users, the public and the media.
 How will the government party exit from the default process? This may be through a
return to ‘business as usual’ service provision by the private party, a negotiated
outcome, termination of the project deed (and associated project contracts), or another
outcome specified in the project deed.
 Is the default plan available to the people who need to invoke it?
 What notices have to be given to clear away any estoppels or waivers which have
arisen in contract management?
 Are there any duties of good faith applicable? If so, what notices do these duties
require the government party to give before it can take further action?
Responding to default events

A contractual default may not always affect performance of the project activities therefore
the action taken under the default plan needs to be determined in light of the overall
relationship with the private party.
In some instances, it may be appropriate to take no direct action in response to a particular
default, such as a private party not getting consent for a change of control. However, in
doing so, the government party should be careful not to give up its right to act freely in
respect of future defaults of the same kind or of any other kind, or in respect of other
existing defaults. It should avoid informal waivers. The government party should seek legal
assistance in preparing a written waiver letter. If the government party wants to be able to
act freely in respect of future defaults, the waiver letter should clearly communicat e to the
private party that:
 the private party was in default under the project deed;
 in this particular instance, the government party has chosen not to take action;
 the private party will be expected to fully comply with the project deed (and associated
project contracts) in future; and
 future defaults may result in the government party taking any action available to it
under the project deed.
If the government party is willing to give up the right to take any action relating to similar
future defaults, this should be documented as a variation to the contract or waiver of the
right to act in that instance.

9. Ongoing review

9.1 Introduction
Contract management processes must change and adapt throughout the lifecycle of a
Partnerships Victoria project, as the project will be subject to:
 divergence between original expectations and actual project outcomes;
 changes in the project itself – through change events reflecting different demand, or as
a result of contingency events, or as a result of the project moving from one phase in
its lifecycle to another; and
 changes in the external environment in which the project operates (including financial
markets, technology and the labour market).
As part of its overall contract management strategy for the project, the government party
should establish a process for ongoing review of its contract management tools and
processes.
The government party should be looking at ways to continually improve its contract
management tools and processes. Some project deeds have an explicit objective, and
related mechanisms, to identify opportunities that can provide win-win outcomes for both
parties. However even where a project deed does not contain such provisions, contract
managers should be open to continuous improvement opportunities.
9.2 Keeping knowledge and information up to date

Knowledge and information gathered through the project lifecycle should be used in
conducting regular reviews of the project’s risk profile. Keeping information up to date and
continually analysing information is a necessary foundation for ongoing review of the
project’s contract management framework.
A regular review of the government party’s knowledge and information management

strategy should consider:
 whether new risks have emerged – this requires a consideration of the entire project
context, including the business and policy context;
 whether the likelihood or severity of existing risks has changed significantly;
 whether new standards or best practice approaches have emerged, for insta nce
updated KPI regimes;

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 whether there has been any intended or unintended shift in the allocation of a risk ;
 whether existing risk controls and mitigants remain effective; and
 whether any new risk controls and mitigants should be implemented.
It is important that contract managers keep abreast of changes in the external environment
and the latest industry or sector developments that may impact their Partnerships Victoria
project. To keep up to date, contract managers may take a number of actions, including
attending relevant industry conferences and events, regularly interacting with fellow
practitioners and participating in communities of practice, such as the Partnerships Victoria
Contract Management Forum or National Contract Management Forum.
9.3 Review and testing of existing plans, processes and tools

Using up-to-date knowledge of the project’s risk profile, the government party should
regularly review and test (where appropriate) its individual contract management
processes and tools.
Issues to consider in reviewing contract management processes and tools include testing
the original principles together with the following:
 Do assumptions remain correct? Have there been any changes in the underlying
assumptions on which the process or tool was based? For example, while it may be
correct to assume that the private party has a strong incentive to fulfil its maintenance
obligations early in the contract term, this assumption may not hold toward the end of
the contract term, and closer monitoring of maintenance performance may be
appropriate at that time.
 Are resources adequate? What resources are required to effectively implement the
contract management process or tool should a risk materialise in the future? Does the
government party have these resources?
 Have contract management tools and processes been effective? If risks have
materialised and were managed using the process or tool, how effective was it? See
the discussion below in relation to ‘lessons learned’.
A useful part of the ongoing review process is a regular stocktake of issues to identify
trends, reassess risks, and review the effectiveness of processes for dealing with those
issues.
9.4 Identifying and recording ‘lessons learned’

Identifying and recording ‘lessons learned’ is both an information collection process and a
contract management review process. By identifying risks that have materialised and their
consequences, the government party deepens its understanding of the likelihood and
severity of the risk. By examining the contract management strategies used to control and
mitigate that risk, it can assess the effectiveness of that strategy and identify potential
improvements.
It is recommended that procurement teams, and contract management teams, formally

undertake a lessons learnt review at various stages throughout the project lifecycle.

For contract managers, this review should be informed, in part, by a review of contract
management documentation – including notes annotated on the government party’s
electronic copy of the project deed, where such technology is used. This review can
identify matters for improvement in the current project, provide specific matters for
consideration in future Partnerships Victoria projects in that sector or identify matters that
may benefit Partnerships Victoria practitioners more generally. DTF will assist in
communicating lessons learned across government, through the Contract Managers
Forum.
Figure 9.1: The ongoing review process
Review and Review and test

update knowledge processes, plans
and information and tools
Communicate
lessons across
government
Identify lessons
learnt
9.5 Formal review of the project performance

A formal review of the project performance, including the appropriateness of the KPIs,
should be completed in the first year after commercial acceptance. The review should start
as early as possible, to take advantage of the availability of the procurement team.
The formal review may establish that the actual project circumstances differ from the
circumstances jointly expected by the parties at the time of project deed execution. If so,
the government party should consider:
 whether the consequences of the unexpected circumstances should be borne
according to the contractual allocation of project risk; or
 whether an amendment to the project deed (or other project contracts) should be
negotiated to better ensure the achievement of the project objectives.
For example, it may be appropriate to recalibrate the KPIs documented in the project deed
to ensure they are meaningful and relevant to the project. In recent projects, the project
deed provides that a function of the project control group (see section 4.2) during the
service delivery phase is to discuss the application of the payment mechanism and agree
to any changes to the regime if required.

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Further formal reviews should be undertaken at various stages throughout the proje ct
lifecycle to assess whether the project is delivering value for money. Determining value for
money can be informed by comparing outcomes against the target benefits articulated in
the full business case, and as expanded into more detail in the contractu al KPIs, and
against the estimated costs.
The gateway review benefits evaluation review (gate 6) provides a high-level qualitative
framework. Where a review happens later in the project lifecycle, it will need to consider
the changes made to the project deed (and associated project contracts) over time to
reflect evolution of government requirements. Gateway reviews are arranged by the
gateway review Team in DTF and are applicable to all high-value high-risk projects.
Government parties may also wish to commission their own more specific reviews on
project matters through their own internal audit group or engagement of a specialist
independent third party.
To obtain the most value from such reviews, it is recommended that they be undertaken by
independent parties and report to the senior responsible owner.

Part 3: Contract performance
Part 3 (Chapters 10–11) outlines the key elements of effective contract performance for
Partnerships Victoria projects, expanding on the information provided in the National PPP
Guidelines8. In particular, it addresses the range of issues applicable to each of the construction
and service delivery phases of the project lifecycle and provides both principles to underlie actions
and practical guidance.
Chapter 10 Construction phase
Chapter 11 Service delivery phase
8
Infrastructure Australia 2015, National PPP guidelines: Practitioners’ guide, section 7.3.

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10. Construction phase

Construction phase Chapter 10
Service delivery phase Chapter 11
10.1 Introduction
In Partnerships Victoria projects, sound contract management is essential to ensure that
project objectives are met, contracted services are delivered to an appropriate standard
and that value for money is achieved over the life of the project.
This chapter addresses the unique contract management challenges that arise during the
construction phase of a project. It covers the key phases of design development,
construction management and commissioning. All of these processes are guided by the
project’s contract management plan. This chapter provides a contract management
perspective on the construction issues covered. It does not provide guidance on project
management during the construction phase.
Figure 10.1 shows the timing of the key processes in the construction phase of a typical
Figure 10.1: Timing of processes in a typical project
Financial close
Technical
completion
Commercial
Design development acceptance
(9 months)
Construction management Commissioning

(24 months) (3 months)
10.2 Governance and relationship management

Governance
From the date that a project deed is executed, effective contract management will ensure
that the project objectives are delivered. As section 3.2 outlines, the project director during
the procurement phase will generally remain engaged on the project during the
construction phase to manage the design and construction process. Usually the project
director role transitions to the contract director role, once commercial acceptance has been
achieved and the project is in steady-state operations.
A reference to the project director in this chapter should be taken as a reference to the
person responsible for managing the project on behalf of the government party during the
construction phase, whether that means the project director or a separate person in the
role of contract director.

The project’s advisers and the commercial manager from the procurement phase should
be available to the procurement team in the construction phase to clarify contractual
matters. Additionally, the project director should be aware of the delegations relating to the
project and that relevant parties are adhering to these delegations.
Governance structures, such as the steering committee, are likely to remain in place
throughout the project, including during the construction phase. The contract administration
plan must be prepared and approved by the portfolio Minister in consultation with the
Treasurer within 60 days of financial close.
Establishing relationships
At the core of a successful contract management framework is a strong working
relationship between the project director (and contract management team) and the
consortium (including both the private party and its subcontractors).
The construction phase of any project can involve a fast-moving, high-pressure work
environment. Deadlines, unforeseen design issues, accountability requirements, and
pressure from stakeholders are common issues faced by project directors.
It is important for people with contract management responsibilities to ensure that the
relationships between the government party and the private party teams begin and remain
professional and productive at all times. This will not happen by chance, and requires
active effort and monitoring to build and maintain a solid relationship.
Project directors need to balance short-term imperatives during the construction phase
with long-term service objectives. In particular, it may be important to remind procurement
team members that during the construction phase, which has a limited duration, hard
tactics and destructive personal styles that may produce short-term benefits in negotiations
are likely to be counterproductive in the longer term.
The project deed outlines the contract management protocols and expectations for regular
meetings between the parties, the private party’s reporting requirements and dispute
resolution mechanisms. In addition to these contractual processes the professional
conduct of the government party during the construction phase, particularly in working
through disagreements constructively, may assist to develop a successful working
relationship with the private party throughout the life of the project.
The role of the private party

The private party is the contracting party responsible for the delivery of the project and is
the primary interface with the project director. Throughout the construction phase, the
private party will interact frequently with the builder, and as commissioning approaches,
typically the facility management subcontractor and other operators will become more
involved.
In a Partnerships Victoria project, the builder is subcontracted by the private party, not by
the government party. As the builder’s contract is with the private party, contractual and
commercial issues should not be resolved directly between the government party and the
builder. The government party relies on private party employees and representatives of the
equity providers (who are independent of the builder) to manage contractual and
commercial issues with the builder directly. It is not acceptable for the private party to
delegate its management role to its subcontractors, as a subcontractor’s decision making
and behaviours reflect their shorter time horizons and higher risk profile in projects.

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Partnerships Victoria projects are usually financed by the private party through a mix of
debt (in the form of bank loans or bond finance) provided by lenders, and equity (also
known as risk capital) often provided by project sponsors or other investors. Typically, as
in most businesses, equity investors are likely to take a more active role than debt
financiers as variations in business performance are felt directly by equity investors, while
debt providers are indirectly affected (usually only if the variation is relatively large and
results in an inability for the private party to service its debt).
Equity providers may take either an active role in managing the project, or they may take a
more passive approach by engaging a specialist management company to manage the
project on their behalf. The differing degrees of involvement of active and passive equi ty
providers can influence their behaviour and decision making in a project. Therefore, it is
important for the project director to be aware of the approach being taken by a project’s
equity providers, in order to understand these parties’ value drivers.
Equity finance serves an important purpose in providing the private party with adequate
capital to absorb any negative financial consequences arising from construction risks or
from abatements arising from poor performance in delivering the services specified. In
addition, this ‘skin in the game’ also reduces the debt providers’ risk profile, which may
reduce the cost of the debt.
As such, the project director should set an expectation that equity providers (or their
appointed specialist managers) will need to be involved in project decision making and
coordination during construction.
10.3 Risk management

Understanding and maintaining risk allocation
Partnerships Victoria projects are structured to achieve optimal risk allocation between the
government party and the private party. Achieving project objectives, service delivery and
the agreed value for money depends on the management of risks allocated to each party.
As such, the project director must ensure all key stakeholders understand and maintain the
project’s contractual risk allocation. Primarily, the project director will actively manage the
government party’s retained risks. However, they will also need to understand and monitor
how the private party is managing its contractual risks.
As decisions made on issues that arise during the construction phase can impact on later
stages of the project, it is important for the project director to inform and educate
government party stakeholders about the risk allocation for the project, and to ensure that
project delivery decision makers understand and respect the contractual risk allocation.
The project deed and the contract administration manual, as well as the various plans and
reports submitted by the private party, will be the primary references on risk management
and allocation. The procurement team should hand over sufficient material to the contract
management team to ensure a full understanding of the risk allocation and intensions of
the project deed.
The importance of these documents reinforces the need for the project director to ensure
there is effective knowledge transfer during the transition between the procurement team
and the contract management team.
Contingency planning
Risk events during the construction phase can cause a delay in the date for commercial
acceptance, the beginning of the service delivery phase. It is important that contingency
planning is in place should such delays occur to enable the government party to manage
the impact on service delivery. The project deed will usually contain extensive provisions
about managing delay and the consequences of delay.

Lessons learned from the procurement phase
There is often a period after financial close and before significant project activity occurs
which provides an opportunity for updating the commercial principles matrix approved prior
to the release of the request for proposal. This work will reflect the commercial principles
set out in the final project deed (and associated project contracts), capturing lessons
learned and outstanding issues from the procurement phase. This review can help inform
contract management in the construction phase as well as for future projects.
10.4 Design development

The National PPP guidelines: commercial principles for social infrastructure 9 states that
‘the private party must develop the basic design proposed in its bid (and set out in the
project agreement) in accordance with an agreed consultative process and submit all final
design documentation (and any amendments) to the government party for comment.’
The project director must be familiar with the design development process set out in the
project deed, and ensure that the procurement team and stakeholders are providing timely,
useful and constructive comments about the design in accordance with the cont ractual
process. The other challenge for the project director is to avoid having the procurement
team and stakeholders stepping into or intervening in the private party’s design role and
thereby taking back risk. The general rule is that the procurement team and stakeholders
can comment, identify and highlight any concerns or potential issues with the proposed
design, but should not propose solutions, as this is the private party’s responsibility.
As there is significant workload for the project director and government party in the design
renew and user group process, the procurement team will often use proprietary workflow
management software to manage this activity in a timely way.
It is important for the government party to adequately plan for and resource the design
renew process, because this process is often the final opportunity to refine requirements
regarding the functional design of the facilities and how they will be built.
In conjunction with the coordination role played by the procurement team, the project
director plays an important role in the design process, in ensuring that the design
documentation reflects what was bid by the private party and what is set out in the project
deed. The project director should guard against pressure from the private party to depart
from the project deed when it comes to design requirements. Significant departures from
those documents can have probity and value for money implications for the State. Material
departures are effectively contract variations, and should only be accepted with adequate
value for money justification, proper documentation and authorised approval of the
variation (additional information is provided in section 14.4).
10.5 The independent reviewer

Typically, the independent reviewer during the construction phase is jointly appointed by
both the Government and the private party under an independent reviewer deed of
appointment. The procurement process for the independent reviewer may differ between
projects. If the independent reviewer has not been appointed prior to financial close, which
only typically occurs on ‘social infrastructure’ projects, the project director and procurement
team will be responsible for engaging the independent reviewer based on the process set
out in the project deed.
9
National PPP guidelines, refer to: Volume 3: Commercial principles for social infrastructure, Chapter 37 (page 23).

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The independent reviewer’s role varies from project to project. On ‘linear infrastructure’
projects, typically the role of the independent reviewer includes a role for general overview
and reasonable checking in relation to project activities, reviewing design documentation,
reviewing certifications and reviewing claims (e.g. extensions of time). On ‘social
infrastructure’ projects, typically the role is limited to reviewing the construction program
progress, reviewing and determining claims for extensions of time and other 'time-related'
issues and reviewing commissioning tests to certify completion.
Responsibility for payment of the independent reviewer is typically shared equally between
the government party and the private party. Exceptions to this general rule are where a
party requests the independent reviewer to prepare a report not otherwise required by the
project deed or the independent reviewer deed of appointment, in which case the party
requesting the report is responsible for the relevant costs.
The project director has an important part to play in ensuring that the government party’s
representatives (including the procurement team) respect the independent reviewer’s role.
In particular it is important to ensure that the project director does not attempt to step into
the role of independent reviewer, which may cause the transfer of some level of
performance risk to revert back to the government party.
10.6 Contract variations or amendments

The project director is responsible for ensuring that the private party meets its contractual
obligations during the construction phase. Variations to the contract or waivers of rights
have the potential to undermine the contractually agreed project risk allocation.
During the construction phase, variations to the contract or waivers of rights may be
required. However, these must be documented, and approved at the appropriate level
(such as a steering committee or Ministerial level for material variations).
The Partnerships Victoria team within DTF must be consulted when considering any
material modifications proposed to vary or depart from the project deed. Contract
variations impacting the project’s budget, liabilities, or overall affordability will need to be
referred to the responsible Minister, Treasurer and/or the relevant Cabinet subcommittee
for approval. For non-financial contract variations which may have a service delivery or
public interest impact, e.g. changes to KPI regimes, it is the project director’s responsibility
to brief the Minister.
The project deed can never be detailed enough to anticipate every circumstance that may
arise during the construction phase of a project. Nevertheless, it should contain processes
to enable contract amendments to be made (if required). Some items may need to be
resolved during the construction phase using these processes. As such, the project
director should ensure that any amendments are clearly documented so that the intention
and reasoning behind them are understood during later stages of the project. This is
important to ensure that the government party follows the correct procedures to avoid later
disputes and ensure that their conduct has followed due process.
If an issue has the potential to affect the project’s risk allocation, cost, scope, or timelines,
appropriate approval should be sought before committing to any resolution reached with
the private party. In these circumstances, the Partnerships Victoria team within the DTF
should be kept informed of potential and emerging risks to the project.

10.7 Modifications and design departures
Developing and refining design documents in accordance with the design review process
set out in the project deed will not themselves constitute a modification or design
departure. However, as design and construction progresses, stakeholders may raise ideas
for additional project assets to be constructed, or for changes to be made to the design
brief included in the project deed. In general terms, modifications refer to changes to the
project’s requirements. For example, a hospital PPP project design which included a
requirement to install a magnetic resonance imaging machine were adjusted to align the
operators desk with the equipment, after feedback from hospital staff indicated a more
efficient way to operate the equipment in accordance with their standard operating
procedures. This design departure did not involve a change to the project’s requirements,
but rather a change in the means by which requirements are met.
In Victoria, typically the government party will compensate the private party for
modifications or design departures initiated by the government party, where there is a
resultant cost increase. If such a modification or design departure results in a cost
reduction or saving, the government party will reduce its payment to the private party.
Conversely, modifications or design departures initiated by the private party that increase
costs will not usually be covered by the government party. However, if the private party
initiates a modification or design departure that offers cost savings for the project, while
still meeting the project requirements, the two parties will generally share the cost saving
resulting from a modification or design departure in the percentages set out in the project
deed.
Introducing modifications and design departures during the construction phase can
introduce new risks to the project, for example:
 Making changes to the project assets detailed in the project deed may have
consequences for other elements of the project deed (or other project contracts), such
as the relevance and usefulness of key performance indicators and service standards.
 Giving direction on how the design should be changed can mean that the government
party may take back part of the performance risk for the project assets.
 The private party may attempt to take advantage of the lack of competitive tension
during the construction phase to recoup costs for risks it had previously accepted. To
counter this possibility, the government party should strictly adhere to the value for
money safeguards in the project deed. These safeguards include prior agreements on
the magnitude and type of costs and margins related to modifications that the private
party can claim.
 Delays to commercial acceptance have consequences for project cash flows, private
party cash flows, commencement of service payments and the delivery of services to
end users. Therefore, the project director must be aware of a modification's impact on
the project's critical path.
Throughout the construction phase, either the government party or the private party may
request modifications. These will usually be considered by the project steering committee
in the context of their expected effect on the project’s lifecycle costs. It may be that due to
design integration and construction cost savings, the proposed modifications should be
undertaken. Alternatively, the modifications may be delayed until construction is
completed. Importantly, the project director should ensure that there is no unapproved
‘scope creep’ that may undermine the project’s value for money.

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10.8 Funding of modifications

The risk allocation negotiated for each project will result in a set of risks being retained by
the government party. The project’s funding allocation will recognise the price of these
retained risks by setting aside a budget for ‘retained risks funding’ which can be called
upon at any time during the project’s life in the event that these risks materialise. In
practice, for most Partnerships Victoria projects, some level of funding is set aside for
construction phase retained risks only.
The project director must recognise the purpose of the retained risk funding, and guard
against the idea that it should be treated as a construction phase contingency fund. The
project’s governance structure should monitor the use of retained risk funding for risks
which eventuate. Access to retained risk funding should require prior endorsement by the
steering committee.
Pressure can arise for the retained risks funding to be used to fund scope changes,
including modifications initiated by the government party. However, this funding should not
be used for that purpose. Scope changes and design departures need to be funded by
offsets or additional funding should be sought through the existing budgeting processes.
10.9 Claims for relief events and compensation events

During the construction phase, the private party may claim to be entitled to an extension of
time due to a relief event (often referred to as an ‘extension event’), or to an extension of
time and compensation due to a compensation event (often referred to as a ‘compensable
extension event’). A claim by the private party is usually a result of the builder making a
similar claim to the private party, however the fact that the builder may have a claim
against the private party does not necessarily mean that the private party has a claim
against the government party. If the builder makes a claim against the private party, the
private party is usually required to take reasonable steps to ensure that the claim made by
the builder is bona fide, prior to making any related claim against the government party.
The project director should ensure that any claims are appropriately analysed.
Construction of a project is complex, and consequently it can be difficult to separate the
impact of a relief event or compensation event from other factors affecting the project. The
Independent Reviewer is responsible for determining extension of time claims during the
construction phase. However the project director should consider whether any additional
expert advice is needed to consider the private party’s entitlement in respect of the claim .
If a claim is valid, the project director should ensure that the relevant contractual processes
are followed to confirm the private party’s entitlement. Usually there are a number of
conditions precedent to the private party’s entitlement to an extension of time, including
that the private party has submitted the claim within a specified period and that the delay
caused by the relief event or compensation event has or will actually cause a delay to
activities on the critical path.
In addition, usually the government party’s liability to the private party for a valid claim will
be reduced to the extent that the relief or compensation event was caused or contributed
to by the private party or the private party fails to mitigate the effects of the relevant relief
or compensation event. The project director should always consider whether the private
party’s entitlement should be reduced. If the claim is wholly or partly invalid or the private
party’s entitlement should be reduced, the project director should seek legal advice on the
appropriate form of response to the private party, and should develop an appropriate
management strategy if it is expected that the private party will persist with the claim.
Claims for extensions of time or compensation should be reported via the steering
committee to the government party’s senior management and to DTF through the project
governance arrangements.

10.10 Transition to operations
The original business case used to initiate the project should have identified requirements
and strategies for the transitioning the project assets into operational readiness. There will
be different strategies based on whether the project is for a replacement asset or a new
additional asset. Irrespective there is likely to be significant change management planning
required. These plans should include the hiring of staff and purchasing of equipment, and
also outline the change management effort (including training and potentially restructuring)
needed to capture the efficiency gains the new project assets are designed to achieve. The
transition planning will need to commence early in the construction phase.
This is not generally a task led by the procurement team. Instead, the ‘transition for
operations’ activity is usually the responsibility of the contract management team , working
in conjunction with operational subject matter experts and the private party.
The project director should ensure that the government party and the steering committee is
aware of its respective responsibilities for planning and carrying out this a ctivity, and that
this activity begins early enough. The steering committee should request a transition plan
from senior operational staff. The plan should forecast the resources needed, and should
factor in the need for coordination between the government party and private party teams.
The project director is responsible for ensuring there is alignment between the private
party’s transition plan and the provisions under the project deed and that the interface is
effectively managed.
In a fully outsourced PPP, the private party is responsible for operating the project asset,
and typically will have appointed an operations subcontractor for this purpose. During the
construction phase, the project director should ensure that the private party and its
operations subcontractor are planning for the transition to operations, and that this activity
begins early enough.
10.11 Common issues at completion and commissioning

Template G lists some of the main aspects to be covered during commissioning and
handover. Two areas in particular need attention during completion and commissioning:
the asset maintenance plan, and commercial wrap-up.
The asset maintenance plan

The asset maintenance plan is one of many plans that must be submitted, and accepted,
by the government party prior to commercial acceptance. The private party is required to
provide an asset maintenance plan that sets out the planned frequency of routine
preventative maintenance and refurbishment activities over the life of the project.
The asset maintenance plan is usually prepared by the builder, with responsibility for
subsequent updates resting with the facilities management subcontractor and it should be
a detailed and highly project-specific document.
As such, it is important for the project director to carefully review the draft asset
maintenance plan before accepting it, to ensure that the scheduled activities address the
full range of assets for which the private sector party has maintenance and lifecycle
responsibility, and to ensure that any assumptions and exclusions mentioned in the plan
are consistent with the project deed. Generally, the asset maintenance plan should also
provide detail on the facilities management system to be used, the detailed reporting
templates to be used and the frequency that these will be provided to enable the contract
director and contract management team to monitor project assets over the project term.
There is a tendency for builders to leave preparation of the asset maintenance plan until
too late, and not have it ready at commercial acceptance. This is not acceptable. Given the
importance of the asset maintenance plan to ongoing fitness for purpose of the project

Par tnerships
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assets, the project director should set a clear expectation early in the construction phase
that the asset maintenance plan must be delivered in a timeframe that allows sufficient
time for review by the procurement team – and specialist advisers, if required – and
resubmission as necessary prior to the expected date for commercial acceptance.
Commercial wrap-up
The commercial issues to be dealt with at commercial acceptance commonly include
variation claims from the builder and adjustments to be made to the financial model at
commercial acceptance. Resolving these issues may require analysis, negotiation, and
assistance from external legal, technical and commercial advisers.
Achieving commercial acceptance at the conclusion of the construction phase is a
significant milestone in a Partnerships Victoria project. At this stage of the project, there
will be intense focus from both the builder and procurement team on completing last-
minute construction-related tasks and planning for transition to the service delivery phase
and demobilisation from site.
The project director has a key role to play in ensuring that the commercial wrap-up of
issues are given proper attention at this time, and that the outcome of any negotiations
maintains the project’s value for money standing. The project director is responsible for
developing and implementing budgetary and service payment arrangements in time for
commercial acceptance.
At commercial acceptance there are budgetary, commercial and reporting arrangements
within the government party and between the agency and the Partnerships Victoria team
within DTF that need to be agreed. The project director is responsible for ensuring that
these arrangements are developed and in place in time for the start of the service delivery
phase and commencing service payments to the private party.
10.12 Handover to operations contract management team

The project director is responsible for ensuring that the private party is held to its
contractual obligations and risk allocation. Failure to do so may jeopardise the value for
money of the project.
The transition between the construction phase and the service delivery phase of the
project is one point where lack of continuity between procurement team and the contract
management team can put value for money at risk. Therefore, a thorough handover
between these teams is vital and should include:
 the transfer of all project contracts detailing:
– any unresolved issues with financial estimates of their impact (if available);
– any contract variations to date; and
– any extra contract items agreed during the construction phase;
 provision of full details of expenditure to date; and
 detailed discussions to convey the intention of various elements of the project
contracts.
The transition period places many demands on the departing procurement team, at a time
when team members may be tired and ready to move on to the next project. For this
reason, the government party’s senior management help should be enlisted to ensure that
the handover task is prioritised and thoroughly completed before the procurement team
moves on. A key factor in successfully managing the private party during the service
delivery phase is an effective transition and handover.

11. Service delivery phase

Construction phase Chapter 10
Service delivery phase Chapter 11
11.1 Introduction
This chapter focuses specifically on the contract management activities relating to the
service delivery phase in order to ensure the State achieves its broader project objectives,
contracted services are delivered to the contracted standards to ensure that value for
money outcomes are achieved over the life of the project.
As outlined in section 3.2, responsibility for a Partnerships Victoria project typically
transfers to the contract director after commercial acceptance has been achieved and the
project enters steady-state operations. At this time, the contract director becomes the
person responsible for managing the project on behalf of the government party during the
service delivery phase.
Partnerships Victoria projects are pay-for-service contracts. Typically, no payments are
made to the private party until service delivery commences. Full service payment in each
payment period depends on full service provision in accordance with the project deed.
Partnerships Victoria projects, like all long-term contracts for service delivery, can be
affected by changes to the broader economic and business environment. If the
government party’s contract management team is to effectively manage this dynamic
situation sensibly, it is important it has access to adequate information on which to base its
‘control’ actions. The government party must therefore effectively monitor the health of the
project as an integral part of its overall contract management strategy.
Contract performance during the service delivery phase must focus on both:
 regular provision of contracted services (daily, weekly, monthly, quarterly basis),
monitoring performance, authorisation of related payment invoices, as appropriate, and
addressing related performance risks and issues; and
 broader performance management issues by monitoring the financial health of the
private party and its sponsors, looking ahead to identify risks and emerging issues and
how they might be mitigated, and identifying and progressing ways to maintain or
improve value for money outcomes for the government party.
In the context of Partnerships Victoria project, the role of performance monitoring and
reporting is to:
 confirm that the performance requirements in the services specification are being met
by the private party; and
 ensure long-term service continuity by enabling the government party to understand
the sustainability of the project.
Performance monitoring and reporting provide the government party with information on
which to authorise service payments and to base ‘control’ actions.

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11.2 General framework for performance monitoring and reporting

The government party’s ability to monitor the performance of the private party largely
depends on the private party being required to report appropriately under the project deed.
Consequently, it is essential that reporting requirements are considered early in the
procurement phase, are written into the request for proposal and the draft project deed
provided to bidders, and are retained in the executed project deed.
In developing an appropriate performance monitoring and reporting strategy, the

government party needs to consider the following issues in the context of the particular
project:
 the timescale for monitoring and reporting – the government party must consider
how its monitoring and reporting activities should change over time. In a Partnerships
Victoria project, the level and type of monitoring and reporting that was appropriate
during the construction phase is likely to be quite different from that required during the
subsequent service delivery phase, where the reporting requirements may even differ
between initial service delivery and mature steady-state service delivery;
 the nature of the monitoring and reporting – the type of project and any external
regulatory controls influence monitoring and reporting requirements. A reliance
(partially or fully) on self-reporting by the private party, combined with random review
or auditing by the government party may be appropriate in some PPPs (e.g. waste
water treatment facilities) whilst in others (e.g. hospital) self-reporting by the private
party may be combined with more regular hands-on monitoring and reporting by the
government party. Monitoring may be undertaken fully by the contract management
team or delegated in part to the government party customers (e.g. Melbourne
Convention and Exhibition Trust);
 the range of reporting information – the information to be reported and monitored
will vary for different projects and sectors. Requirements for a hospital project are
different from the requirements for a waste water treatment project. Monitoring
requirements also depend on the project delivery structure and project documentation.
For example, appropriate financial reporting for a special purpose vehicle may be
different from financial reporting where the private party is a substantial publicly listed
company undertaking the project based on the strength of its own balance sheet; and
 level or type of action envisaged based on monitoring and reporting – the
government party’s monitoring and reporting should enable it to effectively focus
control on key areas. The authorisation of regular service payments is one such key
area. Therefore, the monitoring system needs to supply relevant information in relation
to the payment mechanism (including the service standards that underpin the payment
mechanism).
Contract management team members who perform these tasks should understand the
private party’s business and have experience in performance monitoring of service delivery
projects. The government party should set expectations for reporting from day one,
consistent with the level and form of reporting that needs to be provided in line with
contractual requirements. This reinforces the importance of appropriate reporting.

The purpose of performance monitoring and reporting
Monitoring, reporting and subsequent control actions can only be really effective if the
government party can relate them to project objectives. The government party can then
implement control actions to ensure the private party delivers the required project
outcomes in the future.
Monitoring and reporting should be ongoing activities that feed information into an
assessment process and provide a coherent basis for exercising control actions. In the
context of Partnerships Victoria projects, these control actions are, broadly:
 assurance that services are available and being provided as anticipated;
 decrease the quantum of service payments (abatements for under-performance);
 change management (discussed in detail in Chapter 12);
 increase monitoring and/or reporting requirements;
 trigger default scenarios and consequent government party actions under the project
deed (including remedies, such as the replacement of a specific service provider)
(discussed in detail in Chapter 8); and
 contingency planning for ensuring continuity of services and potential government
party step-in under the project deed (discussed in detail in Chapter 8).
In some instances, circumstances may change over the life of the project so that a
specified baseline for performance monitoring (e.g. a required level of service) becomes
difficult or impossible to achieve, resulting in a persistent failure of the private party’s
performance to meet the baseline. Depending on the underlying reason for persistent
failure, the government party may consider whether the baseline remains an appropriate
measure of performance, or whether it should be modified to reflect a differen t level of
performance in the changed circumstances. A modification will only be appropriate if the
private party’s failure to meet the existing baseline is not detrimental to the end users of
the services.
As the service delivery requirements have been extensively considered and agreed to by
the private party and the government party during the procurement phase, the contract
director should only consider modifying the service delivery requirements set out in the
project deed where the State receives an offsetting benefit, such as a reduction in the
quantum of service payment, to maintain or improve the government party’s value for
money outcome for agreeing such modification.
Figure 11.1 is a flowchart illustrating the role of performance monitoring.

Par tnerships
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Figure 11.1: The performance monitoring process
Known baseline
Monitoring
Performance
meets baseline
Compare performance
against baseline
Performance fails
to meet baseline
Is the failure a Yes

persistent long term
issue?
Is the failure
No because the baseline
is no longer
appropriate?
No
Yes
Identify and implement

Modify baseline
control action
Contract management actions taken in the early days of the service delivery phase set the
basis and expectations for later behaviour. The contract director therefore needs to
appropriately implement the service performance monitoring arrangements from the
beginning of the service delivery phase.
The contract director is responsible for ensuring that services are delivered in accordance
with the project deed. This responsibility requires the contract director to use the steps
available within the project deed to incentivise the private party to improve their
performance, if the agreed standards are not being met. The abatement arrangements are
a central part of these incentive arrangements.

Information required
The government party should ensure that it collects adequate information to confirm that
the output specifications and services specification in the project deed are being met by
the private party; and to ensure long term service continuity by enabling the government
party to understand the sustainability of the project.
Performance monitoring in a Partnerships Victoria project should focus on what the private
party is required to achieve, rather than how it achieves it. However, from the government
party’s perspective, monitoring outcomes is unlikely to be sufficient to provide all the
information needed to assess the full range of control actions that may be appropriate. If
the government party only monitors the private party’s short-term performance against the
output specification and services specification, it may not alert the government party to
longer term issues that may eventually result in project failure, such as the private party
experiencing financial distress.
As discussed in section 2.2, the government party carries the ultimate risk of non-delivery
of services under a Partnerships Victoria project. It is therefore essential that the
government party has access to information that goes beyond short-term monitoring of
service performance standards, and attempts to understand the long-term sustainability of
the project (e.g. gathering information about the financial health of the private party may
provide signs that the party is in financial distress, potentially placing ongoing contract
performance at risk).
The information required may include information related to subcontractors and/or
investors in the private party. In identifying and gathering such information, there may be
efficiencies for the contract director in taking a collaborative approach with contract
directors for other Partnerships Victoria projects that involve the same project sponsors,
subcontractors and/or investors.
Hard and soft data

The information the government party needs to effectively monitor a project is likely to
contain both ‘hard’ and ‘soft’ data:
 Hard data is quantifiable and measurable data available that can be compared against
past performance or benchmarks.
 Soft data is qualitative data that is not easily quantified. Monitoring soft data relies on
the skills, training and experience of the contract director.
More recent project deeds require the private party to provide regular performance
reports. These reports should be in a form that enables easy analysis by the contract
director and/or contract management team. The ‘hard’ information that the private party is
required to provide is generally quite comprehensive. However, a sole focus on process
(that is, contract reporting of hard data) does not and cannot replace good contract
management skills and experience. Good contract management does require reporting,
but it also requires experienced contract directors and contract managers who are capable
of identifying soft information, interpreting it and implementing effective control actions.

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Information obtained outside the contract
In addition to the information collected through reporting processes specified in the project
deed, the contract director should look outside the project deed for information relevant to
performance monitoring.
The private party is obliged by the project deed to provide information on performance
against the services specification and output specifications.10 However the contract director
also needs to separately obtain and analyse additional information on project. This
additional information will often be ad hoc, may not be neatly presented and absolute, and
will usually be highly dependent on the contract director’s experience. The process of
identifying the information to be collected must start with three fundamental questions:
1. What is known or measurable and can be used?
2. What is unknown and potentially immeasurable, and needs to be clarified and
obtained?
3. What are the best sources of information (outside the contractual reporting
requirements) to validate project objectives?
As the answers to these questions are likely to be project-specific, a number of different
approaches have been adopted on different Partnerships Victoria projects to obtain
information outside the project contracts.
11.3 Service standards and the payment mechanism

As outlined in Chapter 2, both risk allocation and service delivery are the core of a
Project deed appendices or schedules will usually set out the services to be delivered by
the private party, the standards (or KPIs) for each service (including the quality, quantity,
timing and location) and related abatement criteria. These standards should be as simple
as possible, relevant to the government party’s underlying service requirement, and readily
measurable.
The services provided by the private party may be of a full service nature (e.g. a road
project) or an availability nature (e.g. school facilities ready for use by t he government
party to provide teaching services to students), or may combine full service and availability
type outputs (e.g. the Victorian Desalination Plant project).
The project deed will also set out the payment mechanism, outlining the payment levels for
delivery of specific services and related arrangements for determining abatement
calculations. Some payment mechanisms can be quite complex and it is critical that they
are fully understood by the contract director. The contract director should consider the
need for expert advice on the operation of the payment mechanism, and should institute
quality assurance processes to ensure that payments are correctly calculated. In many
projects, the calculation process can be made significantly more rigorous and efficient by
using a spreadsheet model of the payment mechanism prepared by expert advisers.
10
The private party’s willingness to provide information may be conditional on appropriate protection of confidentiality
in the project deed. The extent of the confidentiality protection for the private party will have been considered during
the procurement phase as part of the public interest test. The public interest test is discussed in detail in Section 14
of the Partnerships Victoria Requirements (2016). The confidentiality provisions in the project deed will reflect the
balance between transparency and confidentiality inherent in the public interest test.

At the conclusion of each specified payment period (usually monthly or quarterly), the
private party will submit a claim for payment for the services delivered. The contract
director will need to consider the self-reporting provided by the private party in accordance
with the project deed (reinforced by government party audits) and direct monitoring by the
contract management team and/or the government party end users to assess whether the
private party has provided the services in accordance with the requirements of the project
deed for which it has claimed payment.
Abatements
Abatements are a reduction in a service payment due to underperformance relative to a
specific key performance indicator (KPI). If an abatement issue arises, the contract director
should advise the senior responsible owner of any proposal to abate, or not to abate, and
the rationale for the decision before processing the payment.
If an abatement has been triggered and is applied to the service payment, the abatement
process usually requires the contract director to document and advise the private party in
writing. It is good practice to discuss the abatement issue with the private party to
understand the issue, and how the private party plans to meet the required service
standards in future.
If an abatement has been triggered and is not applied to the service payment, the contract
director will need to have a good rationale, consistent with the overarching contract
management strategy. This should be documented and communicated to the private party.
Before a decision not to abate is reached, consultation should occur with any government
party end users or third-party stakeholders directly affected by the service delivery failure.
In economic or user-pays PPP projects, such as toll road projects, the private party will
have an in-built incentive to improve its revenue performance. In these projects where the
private party receives revenue solely from private users, without a government party
service payment, the project deed will usually include contractual service standards that
need to be met. If there is no abatement regime for a project, the project deed will usually
contain other incentive regimes such as penalties or bonuses to incentivise the private
party to meet its service requirements.
KPI recalibration
Key performance indicators (KPIs) contained in the project deed are carefully calibrated
and informed by experience in the relevant service delivery area.
During the service delivery phase, where the service standard KPIs have been set at a
level that is not readily achievable by the private party and are above the level required by
the government party, it may be mutually beneficial to recalibrate these KPIs. In return for
changes to any KPI requirements, the government party should seek to achieve an
offsetting benefit, via a reduction in its regular service payment, to maintain or improve the
government party’s value for money outcome.
During the service delivery phase due to changes in practice or new requirements,
additional KPI’s may be identified and negotiated with the private party.
11.4 Broader contract performance monitoring and reporting

As outlined above, in addition to the regular monitoring of service delivery outputs, the
contract director also needs to review the project from a broader perspective, by looking
ahead to identify risks and emerging issues that may impact service delivery,
understanding how these risks and issues might be mitigated, and identifying and
progressing ways to maintain or improve value for money outcomes for the State.

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The Victorian Auditor-General’s Office emphasised the importance of paying sufficient

attention to the broader aspect of contract performance monitoring in the 2013 review of
Operating water infrastructure using public private partnerships.11 The review found that
there was scope for all water corporations with operational Partnerships Victoria projects to
‘improve monitoring of service providers’ financial health and broader project risks ’.
The government party’s monitoring of the project must also provide the information
necessary to enable appropriate reporting to senior management and to DTF. Appendix C
contains guidance on issues to consider in developing a service delivery phase regime for
such reporting. Templates H and I contain templates for these reports, and Template J
contains templates for supporting reports from any government operator of the facility.
Framework for broader performance monitoring

A framework for broader performance monitoring and reporting for Partnerships Victoria
projects can be built around three essential steps:
Step 1: Understand the private party’s business (that is, understand the factors that will
influence the private party’s strategic and project-level performance).
Step 2: Analyse the underlying quality of the project measured in terms of:
 financial health of the project ‘business’;
 management quality;
 government party’s relationship with the private party;
 service performance trends; and
 asset maintenance.
Step 3: Determine the reporting requirements for the project, including both hard data and
soft data. The sources of this data should be identified.
These steps should be taken early in the procurement phase to enable the private party’s
reporting requirements to be included in the draft project deed provided to bidders in the
request for proposal. As discussed above, not all the data of interest to the contract
director will be provided by the private party under the project deed. The contract director
will also need to collect some data (particularly soft data) from other sources.
Step 1: Understanding the business

Contract directors need to understand the business environment and the government
party’s objectives in entering into the project deed. Performance measures lie at the heart
of performance management. It is important that performance measures are linked to
strategic objectives, or to desired outcomes. Understanding the business requires the
contract director to have a good appreciation of the government party’s service, its place in
the broader service network (if applicable), the customers and other key st akeholders, the
project deed (and other project contracts), the contract administration manual, the request
for proposal, and the private party, including its contractual structure.
The contract director needs to identify those processes most critical to delivering business
success. Doing so will create a clearer picture of what needs to be measured (which
should be embedded in the project deed).
11
Victorian Office of the Auditor-General, Operating water infrastructure using public private partnerships, 2013,
p vii.

Strategic and project-level performance
To fully understand the business, the contract director needs to consider performance at
both a strategic and a project level. Strategic performance is primarily concerned with
outcomes. In contrast, project-level performance is primarily concerned with outputs.
Each project will have different strategic outcomes and project outputs (in particular, cash
flows and the impact of risks are highly project specific).
Cash flows
Cash flow is central to the private party’s success in a Partnerships Victoria project. The
project must have clear and defined revenues to cover its cost structure and debt service
obligations, which are likely to comprise:
 project costs –
– management and operating costs (including materials and labour);
– maintenance and replacement capital expenditure (lifecycle costs);
– insurance premiums;
– tax costs;
 debt service obligations –
– interest expense;
– principal repayments; and
– fees and charges.
In addition, investors will expect to receive a return on equity commensurate with the
development and long-term project risk they have taken.
In order to monitor the underlying business health of a Partnerships Victoria project, the
contract director must have a deep understanding of cash flows and, in particular, the
drivers for revenue streams. A user-pays revenue stream (used in a toll road project) is
significantly different from an availability payment mechanism (used in government party
availability project). The user-pays system transfers demand risk to the private party (so
the private party will only receive payment if the project assets are used), whereas the
availability mechanism transfers performance risk and not demand risk (so the private
party will receive payment provided the project assets are available for use, and the private
party has performed in accordance with the performance requirements). In projects where
the private party takes the demand risks (and benefits), it has some ‘blue-sky’ revenue
potential, whereas in an availability PPP, upside revenues are very constrained. As a
result, the private party’s drivers are likely to be different for each of these two types of
project.
Cash is the key driver of business health and vitality. By monitoring the cash flow impacts
on the project, the contract director will be in a better position to identify the early warning
signs of a project potentially in financial stress.
To fully understand the cash flows, the contract director needs to consider both past
performance and projected future performance of each of the elements in the cash flow.
The financial model

The financial model forms a critical component of a Partnerships Victoria project
throughout its lifecycle. The private party develops its financial model during the
procurement phase. This model sets out in detail the specific cash flows required by the
private party to deliver its proposal. It is usual in Partnerships Victoria projects for the
model to be updated at financial close, becoming the ‘base-case financial model’ for the
purposes of the project deed.

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The financial model continues to be used throughout the life of the project, particularly as a
key input to the calculation of the financial consequences of change events and
compensation events. The project deed will include specific processes for updating the
model to reflect changes. In user-pays projects such as toll roads, the financial model is
also an important input to various demand risk-sharing mechanisms, such as the
government party sharing in additional revenue generated by the private party, and
adjustment mechanisms to deal with the impact on demand of changes in the surrounding
road network.
Given the complexity of the financial model, the contract director should consider obtaining
expert advice from external financial advisers and/or Treasury Corporation of Victoria on
its use and interpretation. The contract manager should also institute quality assurance
processes (such as version controls) to ensure that any updates to the model are correctly
recorded.
Risks
The nature of the contract management risks to be managed through the lifecycle of a
Partnerships Victoria project is discussed in detail in Chapter 2. Effective contract
management requires an understanding of all the material risks, analysis of their changing
impact on the project and the formulation of dynamic contract management strategies.
From a performance monitoring perspective, it is most useful to distinguish between risks
that are borne by the government party and risks that have been transferred to the private
party. As discussed in Section 2.2, the risks borne by the government party include:
 risks contractually allocated to the government party;
 the residual risk to government of risks transferred to the private party;
 risks arising from issues not resolved at commercial acceptance;
 the risk of private party failure; and
 the risk of ineffective public sector management.
Effective contract management requires an understanding of the project risks that have
been transferred to the private party. Understanding these risks is essential to
understanding the private party’s business.
Understanding the business throughout the project lifecycle

The factors affecting project-level performance, including cash flows and risks – and how
they influence the private party (and its management, sponsors or parent company) – will
change over the project lifecycle. For example:
 the release of performance bonds or guarantees at particular stages in the project
lifecycle can significantly alter the risk profile of the project from the private party or its
parent’s perspective; and
 towards the end of the project term, the private party may have reduced incentive to
fulfil maintenance and replacement capital expenditure requirements. As a result, if the
government party takes ownership of the asset at the end of the contract term, the
contract manager must understand, monitor and enforce any handback requirements
outlined in the project deed to ensure that the State receives a properly maintained
asset.
The contract director should maintain an up-to-date understanding of the factors that may
influence project-level performance. When these factors change, the contract director
should consider how the change affects the performance reporting and monitoring regime
for the project, and make any necessary changes to this regime.

Step 2: Analyse the underlying quality of the project
Financial health
A review of the private party’s internal operating environment is a crucial step towards
understanding the underlying credit-worthiness (or solvency) of the business. By reviewing
this environment, the government party can derive an awareness of the private party’s
financial strengths and weaknesses. A financial health review should be undertaken
annually.
The availability of information can also change through the project lifecycle. For example, if
a special-purpose vehicle (SPV) (or its parent company) is listed on a stock exchange, it
will have public disclosure obligations as a result of that listing, and its stock exchange
announcements can be a valuable source of information. If it ceases to be listed on the
stock exchange, this source of information will no longer be available. As detailed in
Chapter 16, the contract director should monitor such changes, and respond as necessary
to ensure the performance reporting and monitoring regime continues to provide adequate
information.
Indicators of financial health will vary from project to project. To identify appropriate
indicators for a project, the government party should review the private party’s
organisational structure and financial position, including gearing. It is important to monitor
the financial health of not only the private party but also its parent companies. For
instance, the voluntary administration in 2012 of the Wodonga Wastewater Treatment
Plant PPP private party’s parent company led to the early termination of this PPP contract.
The contract director should consider whether to also monitor the business health of key
subcontractors. The need to monitor subcontractors will depend on:
 the extent and nature of the obligations subcontracted;
 the ease with which the subcontractor could be replaced by the private party if
required; and
 the size, financial standing and experience of the subcontractor.
The government party’s personnel responsible for analysing the private party’s financial
position need a strong understanding of the private party’s cash flows. Expert advice may
be required from external financial advisers and/or Treasury Corporation of Victoria.
Management quality
In a Partnerships Victoria project, the government party’s primary contractual relationship
is with the private party which is usually an SPV. The project deed will generally stipulate
that the private party must nominate a person to be its representative with this appointment
(and any subsequent replacement) requiring the approval of the government party. It is
important also that the private party representative is adequately supported by an internal
SPV team. In the early days of Partnerships Victoria projects, there was a tendency by
some SPVs to under-resource their SPV teams and attempt to have the government party
deal directly with subcontractors. However, in more recent times, the private parties have
understood the need to appropriately resource their SPV team and have it perform the key
interface role with the government party.
As most of the SPV’s obligations under the project deed are subcontracted, in more recent
Partnerships Victoria projects it is common for the project deed to identify key people
within key subcontractors to the private party, who cannot be replaced without the
government party’s written approval. During the service delivery phase, these key people
may include senior operator personnel (in a full-service PPP) and senior facilities
management personnel.

Par tnerships
Victoria
While the government party may wish to monitor a subcontractor as part of its monitoring
of the overall health of the project, the contract director must remember that it is the private
party that is obliged to provide the services, and has the direct contractual relationship with
the government party. As a general rule, the government party should not involve itself in
the private party’s management of its relationship with its subcontractors.
Beyond its direct role in appointing key people, monitoring management quality is difficult
and largely falls into the ‘soft’ indicator category. Nevertheless, an experienced contract
director should regularly monitor the quality of the private party’s management and
operating personnel, looking for weaknesses or trends that may provide an early warning
signs for future issues.
Monitoring the government party’s relationship with the private party

Monitoring of the government party’s relationship with the private party is discussed in
Chapter 4.
Service performance trends

In addition to regular monitoring of service performance for the purposes of calculating the
service payment and any abatements, the contract director should regularly review trends
in the quality of the service as measured against the KPIs and the services specifications.
A review of trends may indicate areas of potential service performance risk.
Asset maintenance
In Partnerships Victoria projects, there is an inherent incentive for the private party to
adequately maintain the project assets so that it can continue to meet its KPIs and the
services specifications. The private party will also appreciate that a backlog of
maintenance can result in a need to undertake costly repairs later. However, the contract
director cannot rely on these incentives alone to ensure an adequate level of asset
maintenance.
A failure by the private party to allocate necessary expenditure to asset maintenance can
be an indicator either of financial ill-health or a propensity to run down the asset, and
perhaps have it fail the condition test on contract expiry (if applicable).
More recent project deeds generally require sufficient reporting (including on private party
expenditures on asset condition and on service performance) by the private party to allow
effective monitoring of asset maintenance, and may include KPIs related to the
performance of planned maintenance activities. They may also include government party
rights to audit asset quality, at its expense. In older project deeds, where such reporting
and audit rights may not exist, it may be necessary for the government party to negotiate
provision of this information from the private party to enable it to obtain sufficient comfort
on this matter.
Step 3: Reporting requirements

The government party’s reporting requirements need to be articulated in the request for
proposal and draft project deed provided to bidders during the procurement phase and set
in the executed project deed. The reporting requirements necessary to enable ‘broader’
performance monitoring (beyond that necessary to approve service payments) should have
regard to the matters that are to be monitored, as set out in step 2. These reporting
requirements should be captured in the contract management plan and detailed in the
While additional reporting may be negotiated during the service delivery phase, this can
take significant time and effort.

11.5 Broader project management
In addition to monitoring service delivery performance for each period, and risks to delivery
over the longer-term, contract directors also need to assist in achieving broader project
objectives. These may include:
 identifying opportunities to improve value for money outcomes under the project deed;
and
 developing proposals for major change events, such as a change to the service
requirements under the project deed arising from an increase in demand or a policy or
legislative change, and their implementation if approved.
The pursuit of endeavours to achieve these broader project objectives may not require
constant application of resources but may need to be prioritised at times. Such activities
can be resource intensive for significant periods, and are likely to involve working with
other parts of government. The contract management team will need flexibility in
resourcing levels and skills to enable allocation of sufficient attention and resources to
these broader objectives as well as undertaking day-to-day contract management
activities. Contract management activities related to specific change events are addressed
in Part 4 of this guide.

Par tnerships
Victoria
Part 4: Specific contract management

events
Part 4 (Chapters 12–17) addresses a number of specific contract management events for
Partnerships Victoria projects, expanding on the information provided in the National PPP
Guidelines12. It focuses on how to manage these events if they occur during the service delivery
phase, in order to minimise any adverse impact on project objectives and value for money
outcomes. As contract management events may occur at any time during the contract term, the
general principles outlined are applicable during both the construction phase and service delivery
phase. In particular, Part 4 addresses a range of issues applicable to each of these significant
contract management events and provides both principles to underlie actions and practical
guidance.
Chapter 12 Change management and innovation
Chapter 13 State-initiated modifications
Chapter 14 Reviewable services
Chapter 15 Refinancing
Chapter 16 Change of ownerships/control
Chapter 17 End of term arrangements
12
Infrastructure Australia 2015, National PPP guidelines: Practitioners’ guide, section 7.4

12. Change management and innovation
Part 4: Specific contract management events

Change management and innovation Chapter 12
State-initiated modifications Chapter 13
Reviewable services Chapter 14
Refinancing Chapter 15
Change of ownerships/control Chapter 16
End of term arrangements Chapter 17
12.1 Introduction
During the lifecycle of a Partnerships Victoria project, there are likely to be a number of
change events to be carefully managed. These change events may have been
contemplated during the procurement phase and provided for in the project deed, or may
relate to new matters such as an operational innovation which may benefit service delivery.
Chapters 12–16 address specific contract management events for Partnerships Victoria
projects that may occur during the service delivery phase. These specific change events
have been selected because of their potential to impact project objectives and value for
money outcomes, their relatively common occurrence and specific lessons learned on
other projects.
This Chapter addresses a number of common issues and processes across change
events. In the context of a long term Partnerships Victoria project, change management
involves planned or unplanned change events impacting the ongoing service provision.
This includes innovations that have the potential to offer the State additional benefits or
better value for money service provision.
12.2 Change events

A key feature of Partnerships Victoria projects is the focus on the delivery of services
according to an output specification or services specification. The project deed defines the
type and level of services upfront. However over the lifecycle of the project there is likely to
be a need to manage changes to service delivery.

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Events provided for in the contract

A project deed may provide for a variety of change events, including:
 transition from one project phase to the next:
– construction phase to service delivery phase, with associated changes to payment
and performance reporting;
– end of contract term, which may involve ceasing services, extending service
delivery under similar or different arrangements, or other outcomes;
 changes defined in the project deed, such as reviewable services; and
 changes contemplated under the project deed, the timing of whose occurrence may
not be predictable, e.g. change in ownership.
Events not provided for in the contract

Given the long-term nature of Partnerships Victoria projects, it is to be expected that, from
time to time, either of the parties will seek an amendment to the project deed.
By negotiating and agreeing to appropriate amendments, both parties can increase the
likelihood that the partnership will adapt to changing circumstances and continue to
provide mutual benefits. In some instances, the private party may propose amendments to
the contractual arrangements to introduce innovative service delivery processes or facilit y
enhancements. Any proposed changes may fall within the change management
mechanisms in the project deed or an alternate change mechanism via:
 modifications;
 augmentations; or
 market-led proposals (initiated by the private party solely or with other parties)
The modification process contained in the project deed of early Partnerships Victoria
projects may not provide the flexibility required to accommodate significant changes to the
project or project assets. If this is the case, the proposed change may fall within the
Market-led proposals guideline 13, and the contract director should seek further advice from
DTF as to whether this is the case and how to proceed. In the Partnerships Victoria
standard project deed, a regime for significant changes (referred to as augmentations) has
been included to allow for such changes to occur under the project deed and not under the
Market-led proposals guideline.
13
Market-led proposal guideline (2015) available at http://www.dtf.vic.gov.au/Publications/Infrastructure-Delivery-
publications/Market-led-Proposals-Guideline/Market-led-Proposals-Guideline.

12.3 Change control procedures
Changes in a Partnerships Victoria project, whether initiated by the private party or the
government party, will be easier to deal with if appropriate procedures are in place. In the
case of changes provided for in the project deed, appropriate change control processes
should be included in the contract administration manual (as discussed in Chapter 7). In
the case of other changes, similar contract management issues arise and similar
processes are required and should also be incorporated in the contract administration
manual.
The issues that need to be considered in preparing any change management p rocess for a
Partnerships Victoria project include:
 Who can request a change?
 Who should be involved in assessing the impact of the change?
 Who can authorise the change?
 How is the change prioritised?
 How is implementation of the change controlled and tested?
 How is the change documented?
The change management process should establish a central point through which all
changes are coordinated.
Who can request a change?

This question has two parts:
 Does the party wishing to initiate the change have power to do so under the
contract? If the answer is ‘yes’, then the change control procedure in the project deed
should be followed. If the answer is ‘no’, the party wishing to initiate the change can
still raise the proposed change with the counterparty, but the change will only proceed
if the counterparty is willing and able to initiate the change through an acceptable
change control procedure, or is willing to agree to the change as a variation of the
project deed.
 Does the individual requesting the change have the authority to do so on behalf
of the relevant party? The government party should ensure that changes are only
requested by authorised personnel under the project’s governance arrangements (as
detailed in Chapter 3), and that change requests received from the private party
comply with any contractual requirements specifying which of the private party’s
personnel can request a change.
The flowchart below (Figure 13.1) illustrates the steps in determining whether a change
can be made through a contractual change control process, and who can request the
change.

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Figure 12.1: The process for initiating a change
Change proposed
Does the party

The party requesting the
wishing to initiate change cannot use the
the change have the contractual change
power to do so under No
process
the contract?
Yes Is the party willing

and able to initiate
Yes the change under
the contract?
Contractual change
No
control process applies
Are the parties

willing to negotiate
a contractual No
Does the amendment?
individual Advise party that change
requesting the must be requested in
change have the No accordance with the Yes
authority Change has been
contractual requirements
to do so? rejected
Yes
Is a
contractual
amendment No
agreed?
Yes
Change is approved or
Proceed with
rejected through the
change as a formal
contractual change control
contract amendment
process
If change proceeds, ensure that:

 change is appropriately authorised;
 stakeholders are consulted; and
 change is prioritised, tested and documented.
In managing changes, the government party should be aware of the level of work involved
by the private party in responding to change requests. Most change requests should only
be submitted by the contract director. However, it may be appropriate in some instances
for other personnel (for example, managers of the end users of the services) to have
limited authority to submit and manage change requests within specified budgetary and
technical constraints, as agreed by the contract director.

Who should be involved in assessing the impact of the change?
There is likely to be may be a range of individuals within the government party or other
stakeholders who should be consulted to fully assess the impact of a proposed change. In
addition, it may be appropriate to work jointly with the private party to assess the potential
impact of the change.
In assessing any change request, careful consideration should be given to the impact of
the change. For example, some performance measures may become irrelevant if one
performance requirement is changed. In these circumstances, the government party
should consider whether an amendment to the project deed to introduce a new
performance measure would be appropriate. The contract administration manual should
also be updated to take account of each change. Furthermore, variations in performance
requirements which increase costs can lead to price variations and compromise the
original value for money outcomes.
Who can authorise the change?

Contractual changes may have to be authorised or approved by a person other than the
person who requested the change. Responsibility for authorising different types of change
may rest with different people. In the case of project deed amendments, the amendment
should be authorised by each party in accordance with relevant legislative and governance
requirements (as detailed in Chapter 3). However, where a project deed has been given
the effect of force of law through legislation (for example, the Melbourne City Link Act
1995), changes to the project deed may only be made by Parliamentary amendments of
the relevant legislation unless the legislation provides some other change mechanisms.
Managing change processes under such contracts requires special consider ation.
Wherever possible, the legislation should incorporate contractual change mechanisms (for
example, provisions for regulatory change) to give effect to what can be classified as
essentially ‘housekeeping’ or non-substantive events (for example, increasing prices in line
with indexation provisions).
Material project deed changes that create budgetary or risk allocation issues need to be
approved by the Treasurer (through DTF) before being implemented.
How is the change prioritised?

Some changes may require significant work and outlay to implement. For example, a
change may mean the private party has to alter the project assets used to provide
services. There must be some means of determining how the change is prioritised with
other work carried out by the private party. A variety of methods can be used to prioritise
appropriately, depending on the nature of the change. Possible methods include:
 setting a time limit for implementing the change;
 specifying that it be given priority over certain other responsibilities of the private party;
and
 providing financial incentives for implementing the change.
How is implementation of the change controlled and tested?

What was intended to be a minor change to services may, if not properly implemented,
compromise the delivery of the services as a whole. For example, if a private party
provides communications services, a poorly implemented upgrade to the communications
hardware used to provide those services may cause the hardware to cease functioning.
The implementation of changes should be carefully controlled and, where appropriate,
changes should go through a rigorous testing process before being fully implemented. Any
control and testing process specified in the project deed (or associated project contracts)
should be highlighted in the contract administration manual.

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For major change processes, including transfer of the project assets back to the
government party at the end of the contract term (as detailed in Chapter 17), the parties
should jointly develop and agree on a detailed implementation plan for the change (in
some circumstances referred to as a transition plan). Developing the plan should
commence well in advance of implementation.
Suitable testing processes will depend on the nature of the services concerned. Any
acceptance testing procedure used for commissioning the project may be a useful guide.
For change control processes within the project deed (or associated project contracts), the
process should specify the appropriate testing process.
How is the change documented?

Both the specifications of the change itself, and correspondence and discussions with the
private party in relation to the change, should be fully documented and kept in order to
avoid subsequent disputes as to what was agreed. This is an aspect of appropriate
communication planning and management (as detailed in Chapter 4).
It is vital that changes modifying a project deed are documented as formal amendments
using an appropriate version control process. Any change negotiated between the parties
should not be effective unless and until it is formally agreed. The parties should not rely on
informal agreements for noncompliance with the terms of the project deed. However,
occasionally a proposed amendment will impose no new or additional obligations on the
government party, and will not relieve the private party of its existing obligations. In these
circumstances, it may be appropriate for the parties to agree to treat the amendment as
being effective before the formal documentation is executed.
As noted above, major change processes require a detailed implementation plan, which
should be documented in advance of implementation.
12.4 Change and contractual risk allocation

It is important that contractual changes do not inadvertently undermine the original risk
allocation established during the procurement phase. Changes over time to the project and
its external environment may result in attempts by the private party to shift the overall risk
allocation or transfer particular risks. For example, if changed circumstances necessitate a
change in performance requirements for services, the private party may ask the
government party to approve its proposed method of meeting those changed
circumstances. If the government party gives such an approval, it may inadvertently take
back the risk that the private party’s service delivery methods are unable to meet the
performance requirements. Approvals of such changes should not be given.
An adjustment in risk allocation is an acceptable outcome of a change process in some

circumstances. For example, the private party may be able to offer the government party a
better value for money proposition if a risk borne by the private party is reallocated to the
government party. However, this reallocation should entail a corresponding reduction in the
service payment or some other offsetting benefit. Any proposal of this type should be
carefully analysed by the government party in conjunction with representatives from DTF.
A cost–benefit analysis can assist in analysing such a proposal.
Material changes that create budgetary or risk allocation issues need to be approved by
the Treasurer (through DTF).

12.5 Change and resource planning
Continuity of key personnel is particularly important during the major change processes of
a Partnerships Victoria project lifecycle. These processes can significantly increase
demands on the government party’s contract management team, as well as temporarily
increasing the level of risk inherent in the project. Consequently, future change
management activities for a project should be factored into the resourcing and succession
plan for key government party personnel.
12.6 Service delivery innovations

Using the change management principles discussed in this chapter, a Partnerships Victoria
project is able to accommodate a range of change events that occur during the
construction phase or the service delivery phase.
New service delivery innovations may provide potentially important change events that
could provide both the private party and government party with benefits, including
improved value for money outcomes for the project.
Under the outputs-based service model used by Partnerships Victoria, there is some
flexibility for the private party to introduce service delivery innovations to more efficiently
achieve the contractually agreed output requirements. As a result, the private party is able
to realise the total benefit of these innovations.
However, if a new service delivery innovation presents a material change or requires a
contract modification to meet the contractual output specification or services specification,
the private party will be required to work with the government party to propose, evaluate
and potentially implement a service delivery innovation. As a result, the benefits of such an
innovation may be shared between both the private party and the government party.
As it is complex for the private party to work with the government party to implement
innovative service delivery proposals, it is important that a contract director provides an
environment that does not inhibit private sector innovation. A number of good cont ract
management practices and principles outlined in this guide may be useful to assist to
develop the right environment, including:
 developing a solid and transparent working relationship between the government party
and the private party (which includes regular meetings) to promote a well-developed
understanding of each parties needs and drivers;
 a cultural willingness to embrace innovation, where it is expected that a contract
director will ask for new service delivery innovations, and the private party will actively
look for and consider their service delivery innovations options;
 a contractual structure that supports (or at least does not inhibit) the private party from
introducing new service delivery innovation proposals; and
 the contract director to consider providing incentives (such as cost reimbursements or
a gain sharing mechanisms) to encourage the private party to invest in innovations.
The importance of encouraging innovation in Partnerships Victoria projects is
demonstrated by including innovation clauses in a number of recent Partnerships Victoria
projects and in the Partnerships Victoria standard project deed. These provisions are
designed to encourage the private party to introduce new service delivery approaches that
may potentially benefit both the private party and the government party. The private party
may potentially improve its internal rate of return on the project, while the government
party may potentially improve the value for money outcomes of a specific project (or across
a wider portfolio of projects). This approach is being used on the Ravenhall Prison project
to encourage best practice service delivery innovations. In this project, the private party is
required to report to the State annually on potential innovations. Introducing innovations or
changes is subject to developing a business case, which will allow the government party to

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analyse the project specific or wider service delivery benefits offered. This may result in
the government party choosing to invest in a proposed innovation on the Ravenhall Prison
project or across the wider portfolio of prisons operated by the Department of Justice and
Regulation.
Barriers to innovation
There are a number of barriers to innovation that may stifle introduc ing service delivery
innovations, these include:
 the lack of positive obligations in existing project deeds incentivising the private party
to introduce service delivery innovations – this barrier has been addressed in recent
projects and the Partnerships Victoria standard project deed; and
 risk averse approaches that may be adopted by both the private party and the
government party that can make it difficult to introduce new service delivery
innovations, where –
– the contract director is focused on ensuring that the government party receives the
contractual outputs, agreed upfront over the project term. As such introducing a
new service delivery innovation may be seen as something that is unusual, may be
difficult to understand, assess and implement;
– the private party is focused on providing the project outputs as contractually
agreed. The private party may not look at any innovative service delivery options
given that risk adverse equity investors may want to maintain their known project
risk allocation.
Due to the inherent barriers to innovation, it is important for the contract director to
encourage (or at least not inhibit) innovation. The contract director may consider using
incentives such as cost reimbursements or a benefit sharing mechanism to encourage the
private party (via equity, facilities managers or operators) to invest in innovations that can
demonstrate value for money benefits for the project.
When considering any proposed service delivery innovations, the contract director will
need to evaluate the benefits of the proposed changes along with any incentives offered. If
the proposal is still able to demonstrate a value for money outcome, then the government
party may use a State-initiated modification (as detailed in Chapter 13) to implement the
required changes in conjunction with the private party.
Opportunities for innovation

During the service delivery phase, there are a number of change events that may provide
opportunities for the government party to encourage private party innovation in service
delivery, including:
 reviewable services processes (as detailed in Chapter 14), which present an
opportunity for the contract director not just to seek an updated price for these
services, but to seek innovations from the private party. Service providers should be
encouraged not only to provide a price using the current methods of delivering these
services, but to look at innovative ways to provide the service for the State, potentially
providing a less expensive or superior quality service for the State. An example of this
is provided by a security service review undertaken by an operational Partnerships
Victoria project. The government party used the reviewable services mechanism to
request different service provision options. In response, the private party proposed a
new approach to staff rostering that provided better service to facility users during the
peak periods, while using the same number of staff hours. This simple innovation
provided the government party with better service delivery during the peak period and
provided better value for money for the project; and

 refinancing and change of ownership/control processes (as detailed in Chapters 15
and 16). As both of these events usually require State consent, they can also present
opportunities for the government party to benefit from private party innovation
associated with how the service delivery is financed. If the private party introduces an
innovative method to finance the project debt and/or equity, the State is typically
obliged to consider and assess any new structure – which may provide benefits such
as less expensive service delivery, or potentially reducing risk for the State. Typically,
Partnerships Victoria projects will have a refinancing gain-sharing mechanism to
ensure that any gains from the refinancing be shared between the State and the
private party. An example of this was provided by a private party project sponsor that
approached the State seeking to restructure ownership of a number of projects with an
injection of funds from overseas institutional investors. While this was a new approach
to funding the projects, as the projects were in a mature steady-operating state, there
was no additional risk or costs to the government party. On this basis, the government
party provided its consent. This approach however had other benefits, including
providing opportunities for new investors to participate in the Australian PPP market ,
and enabling the project sponsor to sell down its holdings in mature projects to less
risk-averse investors, potentially enabling the sponsor to invest in future projects.

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13. State-initiated modifications

Change management Chapter 12
State initiated modifications Chapter 13
Re-financing Chapter 15
Change of ownership/control Chapter 16
13.1 Introduction
This chapter aims to assist contract directors to plan for and implement an effective
process when considering modifying the project assets or the services of an existing
project in the service delivery phase. Any such change initiated by the government party is
referred to as a State-initiated modification.
As Partnerships Victoria projects are long-term service-focused projects, it is not
uncommon for a changing service requirements to trigger a State-initiated modification. For
example, continued growth and changing health service requirements led to expansions
(via modification) of the Casey Community Hospital, with the addition of a special care
nursery (2010), a 30-bed subacute redevelopment (2014) and 128 multi-day beds in 2017.
The focus of any proposed modification must be on its ability to meet changing service
requirements. This chapter details a range of issues a contract director should consider if
they are considering a modification to the project assets or services. It also provides a set
of principles and tools to support the modification process.
Key contract management tasks during a modification process include the:
 the government party clearly specifying the change in service requirements sought and
clearly articulating any other requirements that may impact how the private party
responds to the request;
 the private party responding and developing a proposal for the modification;
 confirming design requirements (if applicable), including that the proposed design can
meet the government party’s service requirements;
 undertaking independent review;
 confirming value for money (following the contractual processes, if required);
 confirming funding arrangements;
 assessing the impact on existing services (interface issues); and
 documenting the modification.
Most State-initiated modifications will be managed under the change management
framework in the project deed. However, depending on the nature and extent of a
significant modification (or augmentation), these may need to be managed under the under
the Market-led proposals guidelines or, in Partnerships Victoria projects procured after
2017, under the augmentation schedule in the project deed.

13.2 Specifying a State-initiated modification
Partnerships Victoria projects with significant capital assets usually operate over 25–30
year terms. These long-term projects provide the government party with transparent,
predictable, long-term pricing for public sector infrastructure-related services, and a
consistent standard of maintenance of the project assets over this period.
As discussed in Chapter 12, it is inevitable that change events will occur during the
contract term. As such, the value for money rationale underpinning each project may be
undermined if these long-term contracts cannot incorporate changing public sector needs
or innovations resulting from changes in technology. For example, if the demand for a
facility changes or current equipment cannot meet higher level service needs, it is possible
that the government party will not achieve value for money over the longer term without
changing the project assets or services.
It is not only unplanned changes in service needs that lead to State-initiated modifications.
In some cases, the State-initiated modification is considered as part of the original design,
but is not built at the time due to affordability constraints. In others, scope for specific
modifications are set out in the request for proposal, and built into the design, allowing for
future modifications to occur. For example, both original project deeds for the Victorian
County Court project and the Melbourne Convention and Exhibition Centre project included
requirements for future facility expansion.
Usually the framework for managing a State-initiated modification will be outlined in the
project deed. As with construction works in the original request for proposal, State-initiated
modifications should, to the extent possible, be framed in terms of changes to the output
specifications or services specification, which will in turn affect the project’s performance
regime, key performance indicators and the payment and abatement provisions.
Typically, the project deed will also provide for minor asset and technology upgrades at
certain points during the contract term, and also provide mechanisms to either benchmark
or market test certain services. Unless these changes require a material modification to the
project assets or services, they are not within the scope of this chapter.
Partnerships Victoria projects are structured to achieve optimal risk allocation between the
government party and the private party. One of a contract director’s main roles is to ensure
that the risk allocation negotiated for the project is maintained. This is particularly important
when State-initiated modifications are being implemented. Without good contract
management processes, the private party may use the change process to attempt to
recoup the cost of risks that it had previously accepted, or to transfer risks back to the
government party.
Successful State-initiated modifications begin with a carefully developed scope and clear
output specifications. The output specifications should be developed in conjunction with
users and other stakeholders to ensure a thorough understanding of what changes are
required, and what will be delivered.
In addition to clarity of what needs to be delivered, the contract director needs to ensure
that users, stakeholders and decision makers have realistic plans for delivery timeframes ,
a realistic expectation of the cost of construction, and an understanding of the likely
impacts on the cost of service delivery. In particular, plans for delivery timeframes (if
changes to the project assets are contemplated) should allow for statutory processes that
are outside both the government party’s and private party’s control, such as the process for
gaining planning approval. Modifications to project assets during the service delivery phase
may experience more lengthier development processes due to contractual and resource
constraints.

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Making changes to the project assets or services may have flow-on consequences for
other elements of the project deed, such as the relevance and usefulness of key
performance indicators and service standards. As well as agreeing on the price and
timeline of any State-initiated modification, the contract director should agree with the
private party upfront (i.e. before approving the private party’s proposal) on the new
contractual arrangements, including, new output specifications, services specifications,
performance standards, and key performance indicators that will apply to the new services
and project assets. The contract administration manual should also be updated to take
account of any changes.
Prior to issuing a formal request for modification, the government party should consult the
private party with respect to the potential State-initiated modification. This interaction will
clarify possible issues arising from a modification, while fostering greater understanding of
both the government party’s and the private party’s needs and concerns.
13.3 Developing a proposal

A modification request triggers significant activity within the private party consortium,
because many parties must be consulted. Even before issuing a formal request for
modification, the government party should consult with the private party, who will in turn
consult with members of their consortium, with respect to the potential State-initiated
modification.
After the government party lodges a request for a State-initiated modification with the
private party:
 the private party’s representative will refer it to either an established or a new project
team responsible for design and construction. The size of the project team will depend
upon the scale and complexity of the proposed modification;
 typically, within a defined period after the government party’s request, the private party
must provide to the government party a quote for the cost of preparing a proposal for
the State-initiated modification. If the government party accepts the quote, the private
party must prepare the proposal and the private party will only be entitled to recover
from the government party the amount quoted for preparing the proposal. If the
government party rejects the quote, it may require the private party to submit a further
quote, or advise the private party that it will not proceed with the modification;
 after assessing the modification, the private party’s project team will refer the request
to private sector contractors for conceptual design development and pricing (if
applicable);
 the project team will also seek the views of the facilities management subcontractor as
a modification is likely to impact maintenance and asset management activities (in a
full-service PPP, the operator will also be consulted);
 the project team will deliver a proposal (including conceptual design, assumptions,
pricing and impact on service requirements) to the private party, which will pass this
work on to the project’s financiers and facilities management subcontractor and
operator (if required) to review. The facilities management subcontractor and operator
(if required) will estimate the change in lifecycle costs and operating costs (if required),
as a result of the modification; and
 finally, the financiers, facilities management subcontractor and operator (if required)
will respond to the private party, which will pass the consolidated information in the
form of a proposal to the government party. Where the government party decides not
to proceed with a modification after receipt of a proposal, but has accepted a quote for
the preparation of the proposal, the government party must pay the private party the
amount accepted for preparation of the proposal even if the modification will not be
implemented.

13.4 Design development
As is the case in the project’s construction phase, it is important for the government party
to adequately resource the design development activity of a State-initiated modification
process (if applicable), because this process is often the final opportunity to fine tune
requirements relating to the modification. It is particularly important that the contract
director is confident the private party’s proposed design solution will meet the State’s
changed service delivery requirements.
Depending on the scale of the State-initiated modification, the contract management team
should be assisted by technical specialists (such as architects, engineers and quantity
surveyors) along with user groups and stakeholders, to review the detailed designs. The
contract director has an important role to play by ensuring that experts, users, and
stakeholders are providing useful and constructive comments about the design, without
intervening in the private party’s innovation and design role. Such interference may result
in the government party assuming performance risk and potentially some occupational
health and safety risk. This re-allocation of risk may undermine the project’s value for
money.
13.5 The need for an independent reviewer

During the construction phase of a project, it is usual for an independent reviewer to be
engaged jointly by the government party and the private party. As discussed in section
10.5, the independent reviewer’s role varies between projects – it can be limited to
confirming that all commissioning tests have been done and passed, or could be as broad
as reviewing all detailed designs for compliance with standards and specifications. If the
State-initiated modification occurs during the construction phase, the independent reviewer
will still be engaged and the modification should be included in the commissioning tests.
During the service delivery phase, in the event of a State-initiated modification or larger
augmentation requiring capital works the need for an independent reviewer should be
considered on a case-by-case basis. The value of the capital works, the materiality of the
works to the service delivery, and how the works are funded/financed are relevant
considerations.
13.6 Confirming value for money

A 2008 UK study14 found that State-initiated modifications in some UK projects have
historically provided poor value for money. Contributing factors include the lack of a
competitive tendering process, the impact of overheads and mark-ups on small changes,
insufficient resources, and a lack of contract management skills.
Modifications initiated during the construction phase and service delivery phase may not
benefit from the competitive tension that existed before the project deed and associated
contracts were signed, and there is a risk that the pricing of a State-initiated modification
may reflect a non-competitive margin.
14
Making changes in operational PFI projects, report by the Comptroller and Auditor-General, National Audit Office,
17 January 2008.

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Competitive tendering for State-initiated modifications is one method to alleviate this risk.
Contracts developed in accordance with the National Public Private Partnership guidelines
(2008) typically give the government party tools to achieve competitive pricing. The
contract director should understand the tendering requirements in the relevant project
deed. In some projects, the project deed requires the private party to provide the
government party with a price for the works together with ‘evidence that it has used
reasonable endeavours’ to obtain competitive funding for the cost of the works or services.
If the government party is not satisfied with the proposed cost, it has the right to request a
competitive tender for the works, which will be conducted by the private party, and it has
the right to have the works delivered by the tenderer that offered best value for money. In
other projects, the project deed requires that the private party carries out a tender process
where the cost of the works or services is likely to exceed an agreed threshold, unless
otherwise agreed by the State.
Contract directors may be reluctant to require competitive quotes or to run a competitive
tender process, either due to time constraints, the cost of the tender process, or concerns
about the risk of integrating assets built by a third party with existing project assets.
However, any decision not to evaluate the proposal’s costs using competitive processes
should have sound justification, and should be based on a robust consideration of how
value for money can best be tested and achieved.
Even if the private party uses some form of competitive quoting in developing its proposals,
the contract director should be aware that the private party’s incentives might not be
aligned with the government party’s in seeking best value for money. The private party
may be concerned to ensure that the State-initiated modification will not put at risk its
ability to meet its contractual obligations and service standards, and so might be inclined to
favour quotes that offer higher standards than the government party might consider ‘fit for
purpose.’ Furthermore, because the private party may be charging a margin (refer below)
for managing delivery of a State-initiated modification, it may not have any incentive to
minimise government party costs.
Some elements of pricing for State-initiated modifications are inherently unsuited to
competitive tendering – for example, changes to the remuneration of existing staff for
changed duties, or changes to existing software systems. In these circumstances, the
contract director should seek to use benchmarking and negotiation to achieve value.
Compensation payable for a State-initiated modification

The price paid to the private party for State-initiated modifications includes:
 the base cost of the materials and labour of the subcontracted builder to construct the
changed project assets (if any);
 a margin element to cover overheads and provide profit to the subcontracted builder
undertaking the change;
 the lifecycle cost – the facility management subcontractor’s additional cost of replacing
any part of the changed project assets during the remainder of the service delivery
phase;
 the maintenance cost – the facility management subcontractor’s additional base costs
to maintain the changed project assets or provide the changed services during the
remainder of the service delivery phase;
 a margin element to cover overheads and provide profit to the subcontracted facility
management subcontractor undertaking the change;
 in a full-service Partnerships Victoria project, the price may also include the operator’s
additional base costs and profit margin for providing the additional services ; and
 possibly a management margin charged by the private party for large State-initiated
modifications – it is expected that the private party’s business-as-usual functions

include managing unexpected events and changes in respect of the project, and
therefore should be appropriately resourced to manage most modifications. Therefore
any management margin should only be payable on large State-initiated modifications.
In more recent Partnerships Victoria projects, the margin that may be charged by the
builder and facility management subcontractors and the private party (if any) for
undertaking a State-initiated modification have been specified in the project deed, usually
on a sliding scale depending on the cost of the State-initiated modification. The margin is
usually levied in the form of a percentage on top of the base costs.
The private party has overall responsibility to the government party and will usually be the
party coordinating the process, however the facility management subcontractor or another
subcontractor will implement most of the changes involved in a State-initiated modification.
It is recommended that in projects where there is likely to be a steady pipeline of State-
initiated modifications, and the project deed does not already specify the amount of any
margin, that the contract director negotiates a schedule of fees in advance, to avoid delays
and disputes at the time that the State-initiated modifications are eventually requested.
Prior to any such negotiation, the contract director should contact DTF to get an indication
of the levels of margin that have been negotiated for recent projects.
The lifecycle cost of a modification can also be a subjective measure. Determining a
lifecycle cost requires a judgment of how often equipment or facilities will be replaced
during the service delivery phase, as well as an estimate of how much it will cost at the
time. There can be debate about which items will need to be replaced at all, particularly if
routine preventative maintenance is carried out. As such, expert knowledge and
experience is recommended to make these judgements. Smaller items such as knobs,
hinges, taps and data points may, in practice, be treated as consumables by the facility
management subcontractor and therefore be absorbed in its maintenance budget, not
needing lifecycle funding.
Contract managers need to fully understand both the scope and costs of any proposed
State-initiated modification. The contract managers should also be willing to question the
private party about all cost items included in a proposal, and not allow the threat of
possible delays due to disagreement with the private party lead to unreasonably high
pricing.
13.7 Funding the State-initiated modifications

The National PPP guidelines: commercial principles and the Partnerships Victoria standard
project deed guidance notes outline several options for the government party in paying for
the State-initiated modifications, including:
 where the State-initiated modification involves capital works, making a lump sum
payment (on completion of the works) through a one-off capital expenditure payment;
 requiring the private party to initially fund the works, with the government party then
paying the cost through an upwards adjustment of the service payment over the
remainder of the project; or
 with the private party’s agreement, extending the service delivery phase of the project.
Other options for payment include paying periodically in arrears, paying milestone
payments (where capital works are involved), or as an adjustment to the service payment.
The project deed may or may not include a list of payment options. It is always possible to
negotiate a form and timing of payment for State-initiated modification that is not included
in the project deed, however care must be taken to ensure that value for money can be
demonstrated.

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In assessing various payment options, it is important to consider the broader budgetary

context, the impact on the specific project deed and the ability to negotiate with the private
party.
The option to extend the term of the project deed should be carefully considered. There
can be justification for the government party agreeing to the extension of the project,
particularly where extending the term will enable the State to secure future services at
currently contracted prices that may be cheaper than those available in the future. Contract
extension may offer best value for money for relatively large modifications undertaken well
into the contract term. However, changing community expectations and emerging
technology can create uncertainty around the need for existing services in fu ture, and
difficulty forecasting future costs can make it challenging to evaluate whether such an
extension offers value for money. Therefore, the government party should carefully assess
both the benefits and risks relating to any suggestion that the project deed term should be
extended in order to pay for current State-initiated modifications. Any decision to extend
should be taken on operational and value for money factors. The government party should
not extend the original contract term unless doing so would have been justified on a
separate stand-alone basis. Extending the project deed term to ease a possible
affordability constraint cannot be justified as an end in itself.
Deciding between paying upfront or through an adjustment to the service payment should
be done on a case-by-case basis, as the relative cost of these options can be influenced
by any difference between the State’s discount rate and the private party’s cost of funds.
When making this decision, the government party should consider the service payment
adjustment principles particular to each project, which may determine which funding option
will provide better value for money. The impact of each option on any subsequent
abatement calculation should also be reviewed and understood before deciding on a
funding method.
Finally, contract managers should be wary of pressure to use a project’s ‘retained risk
funding’ to fund State-initiated modifications. As outlined in section 0, the risk allocation
negotiated for each project will have resulted in a set of risks being retained by the
government party. The project’s funding allocation will recognise the price of some of these
retained risks by setting aside a budget of ‘retained risk funding’ which can be called upon
at any time during the project, in the event that these risks materialise. It is important for
contract managers to recognise that the retained risk funding should only be used if the
risk for which such funding is allocated eventuates, and that it should not be treated as a
State-initiated modifications fund.
13.8 Impact on existing services

State-initiated modifications are generally prompted by a need to expand or improve
services to users. However, contract managers need to be aware that there can be short -
term impacts on existing operations as a result of the State-initiated modification process.
As part of its proposal to carry out the State-initiated modification, the private party should
indicate whether implementing the modification (e.g. the construction of new project
assets) will negatively impact on its ability to maintain service standards and availability of
existing project assets. The contract director should consider whether these claims are
reasonable and valid, and should document the government party’s performance
expectations for existing project assets and services during the period in which the
modification is being implemented.
If the State-initiated modification will result in a material ongoing change in the private
party’s service delivery responsibilities, it may be appropriate to require private party to
meet a set of operational commissioning tests in respect of the revised services, as well as
the commissioning tests for the physical assets.

13.9 Documentation
It is vital that changes modifying a Partnerships Victoria project, including State-initiated
modifications, are documented formally.
In the first instance, contract managers should be aware of the provisions in the project
deed relating to State-initiated modifications. Contract managers should use the provisions
that are contained in the project deed to manage the State-initiated modifications process,
rather than just ‘running with it’. Following the processes set out in the project deed helps
to maintain the project’s risk allocation, ensures that the government party has access to
robust information for decision making, and ensures decisions are adequately documented
to reduce the likelihood of later disputes.
Internal project documentation

The contract director should ensure that appropriately updated insurance, warranties,
manuals and plans are in place to reflect the scale and scope of the State-initiated
modification or augmentation. Updated documents should be a condition before finalising
the State-initiated modification.
The contract director must also ensure that details of the modification or augmentation are
captured and clearly documented within internal contract management documents,
processes and tools by the contract management team. The modification or augmentation
needs to be reflected in updates to at least the;
 contract administration manuals;
 updated asset management plans;
 updated payment models;
 updated key performance indicators;
 updated abatement regimes;
 updated risk matrices; and
 updated obligations registers.
External documentation requirements

If a modification or augmentation is considered to be a material change there may also be
a number of external documents the contract director may be required to update to comply
with contract disclosure and the Partnerships Victoria project summary requirements. DTF
is able to available to assist the contract director meet these requirements.

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14. Reviewable services

This chapter provides assistance to contract directors to plan for and implement an
effective process when undertaking a re-pricing of reviewable services.
14.1 What are reviewable services?

Reviewable services are services that are subject to repricing at pre-agreed points during
the life of a Partnerships Victoria project.
For most Partnerships Victoria projects, only ‘soft’ facility management services are subject
to repricing. These services are predominately labour-based services like cleaning,
gardening or waste management. As the costs of ‘soft’ services change over time in a
manner that cannot easily be predicted over the life of a Partnerships Victoria project, it is
not value for money to lock in the pricing of the service for the entire project term. A formal
review of the pricing of these services is typically undertaken at regular pre -determined
points throughout the life of the project.
In contrast, ‘hard’ facility management services relate to physical asset services like
building mechanical and electrical services. These hard services are usually linked to the
design and construction methodology adopted by the private party, and are typically
included in asset lifecycle, maintenance and refurbishment costing for an asset over the
life of the project. Consequently, these services are not suited to price reviews.
Reviewable services included in current Partnerships Victoria projects, include:
 cleaning services;
 security services;
 information technology support services;
 grounds and garden maintenance;
 pest control services;
 waste management services; and
 carpark and traffic management.

14.2 Why are service reviews undertaken?
Reviewing and re-contracting the cost of reviewable services is undertaken to ensure that
service costs paid by the government party over the life of the project are competitive, and
continue to provide value for money during the project term. The review enables the
private party’s subcontractors to adjust their service costs based on a range of cost
factors, such as movements in the wage price index. It also allows the government party to
ensure the agreed rates reflect the actual costs of service provision. For example, if there
have been technological innovations during the previous reviewable services term, the
service review provides the private party with an opportunity to introduce innovations that
may improve the service and/or lower the cost of services for the benefit of both the private
party and government party.
The contract director also has the opportunity to review the service specifications and
performance regime with a view to identifying any changes that could improve value for
money for the government party. For example, services specifications and/or KPIs can be
clarified, and abatement levels could be more closely aligned with service impacts to
potentially enable a reduced service cost. For the contract director, a key consideration in
applying the reviewable services regime, is how it can be used to incentivise the private
party to provide future innovations and/or efficiencies for the government party. While the
reviewable services regime provides an opportunity to clarify or align services
specifications and/or KPIs, the review process should not be regarded as a mechanism for
general changes to the scope of services under the project deed. The appropriate
mechanism for making changes to the scope of services is via the State-initiated
modification regime (see Chapter 13).
14.3 Planning for reviewable services

The project deed outlines the intervals and processes for reviewing and recontacting of
reviewable services. Typically, this will occur every five, seven or 10 years. Contract
directors should ensure the review and re-pricing commences early enough for a full and
proper process to occur. It may take up to 12 months to complete the services review
process which can be impacted by a number of factors, including:
 the number and type of services that are being reviewed;
 the processes used in the review; and
 the current relationship between the government party and the private party.
In the first instance, contract directors should refer to the processes outlined in the project
deed and the contract administration manual, and consider the level of complexity
involved. The private party may also be reluctant to provide information to the government
party as the review process approaches, and a contingency should also allow for
unexpected delays in the process. Good communication with the private party will minimise
the risk of drawn-out negotiations. Appropriate planning can also prevent delays in
government party approvals which might result in the current reviewable services term
being extended for a short transition period.
(a) Understanding the reviewable services process contained in the contract
The approach to reviewable services must be undertaken in accordance with the project
deed. The project deed will outline which services will be reviewed (if any), and at what
time intervals this must occur. It will also detail the processes to be used in the services
review, which may involve:
 a submission to the government party by the private party;
 benchmarking against other comparable services; or
 market testing by way of a competitive tender.

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If there are insufficient details in the project deed, the process should be agreed upfront by
the government party and the private party. However, before engaging with the private
party, the contract director should have established an agreed State position on the
desired process, and considered any desired changes to the services specifications or
payment regime to ensure the government party’s position is achievable and represents
value for money.
As the review may be a complex process, contract directors should seek legal, commercial
and technical advice to assist with understanding key issues, such as how subcontractor
margins are provided for in the current service payment. Previous experience indicates
that the use of a specialist facilities management adviser firm is highly recommended, as
they understand the current facility management services markets, have access to current
market rates, and will be able to assist with the benchmarking and market testing (which
can be difficult in non-comparable markets), if required. In a full-service PPP project, it may
also be necessary to engage other advisers to advise on service delivery and cost
implications of operational aspects of the project.
The contract director should also undertake early discussions within the government party,
in terms of the funding implications of the services review. As the cost of services in the
next reviewable services term may increase rather than decrease, the contract director
should start engaging with the finance area and/or DTF to provide early notification of
potential changes to the project’s funding requirements, and to agree on funding
strategies.
(b) Reviewing the services specification and performance regime
In order to understand the level of performance that the government party will request as
part of the services review, the contract director should engage with the key project
stakeholders and user groups to understand their future service requirements , and to
ensure these are aligned with the level of performance requested. The government party
should form a working group of key stakeholders and user groups to review the current
performance requirements, and to find out if they are appropriate to meet the future service
requirements. If not, the government party may need to make changes to the performance
requirements, which may include:
 changes to performance targets for existing KPIs;
 changes to the abatement amounts applicable to existing performance targets;
 introducing new KPIs where these are necessary to ensure a satisfactory level of
service; or
 removing existing KPIs where these are unnecessary to ensure a satisfactory level of
service.
The review should also consider whether any aspects of the existing service requirements
are unclear or ambiguous, and identify any clarifications or changes required to the
services specification.
The review may identify changes in the scope of services to be provided by the private
party. Changes to the scope of services that require a material change to the project
assets or the services should be implemented through the State-initiated modification
regime. However, it may be appropriate to plan the timing of such modifications to
coordinate them with the repricing of reviewable services.
(c) State’s position on the reviewable services
Based on the agreed service requirements, the facilities management adviser will devel op
a revised service specification, payment regime and service costs that should be
benchmarked with industry standards. This will form the basis of the government party’s
evaluation and negotiations with the private party.

(d) Engaging with the private party
Once the government party’s initial position has been established, the contract director
should engage with the private party as early as possible. This is important as the private
party may interpret the requirements of the reviewable services processes outlined in the
project deed differently to the government party, and it may take some time to come to an
agreement on the actual processes to be followed.
Ultimately, for the services being provided, the government party and the private party will
need to agree on:
 the actual processes to be followed in the services review;
 the service level requirements (and any associated KPIs);
 an appropriately calibrated abatement regime; and
 the cost of the services for the next reviewable services term (and how the change in
cost will be paid).
The private party may seek other variances based on their practical service delivery
experience which the government party will need to carefully consider including:
 clarification of the services requirements or changes to the performance regime;
 any recommendations for innovations, service improvements or efficiencies;
 provision of additional services, which raises a range of issues for the government
party (e.g. Are the additional services required? Can they be funded? Will they affect
the delivery of other services such as ‘hard’ maintenance?). If these changes are
acceptable to the government party, they should be implemented through the State-
initiated modification regime; and
 provision of services by a new subcontractor(s), in which case the contract director
should have regard to the provisions in the project deed concerning the engagement
and replacement of subcontractors.
The contract director should seek to ensure that the private party does not change the risk
allocation or introduce new margins as part of the review. This will require assistance and
advice from the legal and technical advisers.
Approval of the new reviewable service contracts will be required from a number of
different entities on both the private party and the government party sides. Therefore, in
planning the timing of the process, the contract director should ensure that there is
adequate time allowed for all approval processes to be undertaken.
14.4 Benchmarking – key issues

Where the review is to take the form of a benchmarking process, the key issue for the
government party is to obtain comprehensive comparable information on the cost of
delivering the relevant services. The private party and its subcontractor are likely to have
extensive industry information, but the contract director needs to be in a position to
validate and, where appropriate, challenge this information. The key sources of data to
inform the contract director include specialist facilities management advisers and any other
recent contracts entered into by the government party for similar services (including other
Partnerships Victoria projects).
Where an integrated service provision model is in operation on a project, it may be
necessary to disaggregate overhead costs and allocate these across individual services,
for example by splitting out helpdesk costs for hard services. In light of this, the contract
director needs to be particularly careful about how overheads are treated by the private
party, and that the right level of overhead is applied to the right cost. This may involve a
detailed analysis of the financial model, possibly with the help of modelling specialists and
the specialist facilities management adviser.

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14.5 Market testing – key issues

Market testing involves the private party conducting a competitive tender for the
performance of the reviewable services for the next reviewable services term. The
successful tenderer will provide the services as a subcontractor to the private party for the
next reviewable services term.
The project deed will typically provide for the government party and the private party to
agree the procedures for market testing, but it will be the private party that undertakes (at
its cost and risk) the market testing. The government party has the right to observe the
process. The contract director must ensure that the process is run in a manner consistent
with good procurement practices to ensure transparency and a value for money outcome.
The incumbent subcontractor has a significant advantage in the tender process, having
delivered the existing services and possessing a strong understanding of the project. Other
service providers competing in the market testing process may have strong service
delivery capability and efficient businesses, but will not have such a strong understanding
of the specific project and may price in a risk premium to account for their lack of detailed
knowledge of the project. To ensure a strong competitive outcome, the process should be
structured to address this information asymmetry by making as much relevant and useful
information available as possible.
In some projects, the private party may be required to obtain approval from its financiers to
replace a subcontractor. In these cases, it is advisable for the both parties to engage with
the financiers prior to conducting the competitive tender to ensure that the financiers’
requirements are addressed through the process.
14.6 Ongoing knowledge management

The contract director should make sure to fully document the outcome of the services
review, and capture it as required within the project deed.
It is also recommended that the contract director update the contact administration manual
to capture the key details and lessons learned from undertaking the reviewable services
process in order to prepare for the next review.

15. Refinancing

End-of-term arrangements Chapter 17
15.1 Introduction
Partnerships Victoria projects are financed by the private party through a mix of debt (in
the form of bank loans or bond finance) provided by lenders and equity (also known as risk
capital).
The term ‘refinancing’ refers to any changes in a projects debt finance arrangements,
related to the; type, amount, pricing, tenor, terms for payment, or repayment, or hedging of
financial accommodation.
The private party is responsible for refinancing, however ultimately if the private party is
unable to secure replacement financing or is unable to service its debt, under the
provisions of the project deed this may trigger a default event that will usually give rights to
the government party to act to ensure the project’s viability.
As refinancing has the potential to change a Partnerships Victoria project’s agreed risk
allocation, it requires advance government party consent (although the consent rights may
differ according to the materiality of the refinancing). Contractual provisions relating to
refinancing have evolved over time, in response to changing financial market conditions .
The original financial structure of a Partnerships Victoria project (which reflects the market
conditions during the procurement phase) will significantly influence the likelihood of
refinancing occurring, and the potential issues that may arise. For example, where long-
term debt financing is procured for the full project term, refinancing will not be required. As
such, contract directors must carefully examine the refinancing provisions in each project
deed, understand the project’s financial structure, and consult with DTF in relation to any
proposed refinancing.
The project’s financial structure

The specific mix of financing arranged for each project is determined by:
 the size and complexity of the project;
 the financial market conditions at the time of financing;
 whether or not government makes up-front funding contributions (via State capital
contributions or some other alternative financing structure);
 the credit reputation and rating of the borrower;
 the skills and knowledge of the project sponsor; and
 the project’s risk profile.

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Debt finance
The debt finance for a Partnerships Victoria project is generally comprised of either bank
loans or bonds (or a combination) for a specific term.
Debt finance is usually provided on a limited recourse basis under a finance agreement
between the project company and the lender(s). This means that the lender is dependent
on the cash flow from the project and typically has security or encumbrances over the
project specific assets and cash flow. The lender has no right to call on any other assets of
the sponsors or related parties activities, other than any project specific bonds or
guarantees provided by the private party.
The debt provided for a Partnerships Victoria project is generally known as ‘senior debt’. It
is distinguished from any loans that equity providers may have made to the private party,
which are a form of ‘subordinated debt.’ If the private party becomes insolvent, senior debt
has a higher ranking, and must be repaid before other lending parties receive any
payment. There is typically an inter-creditor document (as part of the finance documents)
that governs the repayment hierarchy.
Through the restrictions and conditions associated with the loan, debt providers impose
financial and management discipline on borrowers, which helps to encourage both initial
due diligence in capital structure decisions, and ongoing incentives for good performance.
The costs associated with debt finance, whether in the form of bank debt or bonds,
generally comprise the base interest rate, the credit or interest rate margin (margin), and
fees.
Equity finance
Equity finance is usually provided for the full project term, through a combination of
ordinary shares in the private party, and subordinated debt provided by sponsors and
sometimes external investors.
The involvement of equity finance in a project’s financing mix creates significant incentive
for the private party to deliver high performance, particularly where a material proportion of
the equity is comprised of ‘active equity’ (equity contributed by one or more of the key
private party entities that is in a position to influence the private party’s performance).
Equity investors receive a return on their investment over the life of the PPP project. In
many PPP projects, much of the equity investors’ return is only received in the later years
of the project. This provides a strong performance incentive – equity investors will be
motivated to ensure that the project performs so that they receive these strong returns in
the later years.
Equity finance serves an important purpose in providing the private party with adequate
capital to absorb negative financial consequences arising from risks materialising. Many
risks will have been transferred to subcontractors, however if that risk transfer is ineffective
(for example, because a subcontractor becomes insolvent or because the risk transfer is
poorly documented) the financial consequences will flow through to the equity investors.
Some other risks are generally retained by equity, and are not transferred to
subcontractors.
In addition, equity’s involvement reduces the risk shouldered by the debt providers , as the
equity providers in the consortium are in a first loss position. As a result, the providers of
equity finance risk losing some or all of their investment if the project does not go well .
However, they also expect to earn a higher return on their investment than the providers of
senior debt finance, if the project is successful.

In some projects, finance may also be provided in the form of mezzanine debt (ranking in
priority between senior debt and equity) or through a hybrid financial instrument (which ca n
have some characteristics of equity and some characteristics of debt, depending on the
specific terms agreed with the financiers). As such, the government party should ensure
that it understands the nature of such instruments and how they are treated in the project
deed and related contractual documentation (whether it is treated as debt or equity).
What is refinancing?
As stated above, refinancing refers to any change to a project’s debt financing
arrangements. Such changes might include one or more of the following:
 increasing the term of the bank loan;
 changing the lender (although the original financing documents may allow some
changes in the lenders that will not constitute refinancing);
 changing the ‘margin’ used to determine the amount of interest payable on the loan;
 changing the hedging arrangements used to fix interest rates;
 increasing the size of the loan (sometimes done to enable the equity providers to be
repaid some of their equity or to enable early repayment of subordinated debt);
 removing or easing constraints on dividend payments to shareholders;
 removing or easing conditions on the loan such as the requirement to hold money in
reserve accounts; or
 replacing bank debt with bond finance, or vice versa.
Scheduled and unscheduled refinancing events

Refinancing events may be undertaken as either a scheduled or unscheduled event.
A scheduled refinancing event is detailed in the project deed and is scheduled to occur at a
specific point in time (expiry of initial finance term).
An unscheduled refinancing event is undertaken on an ad hoc basis for a specific purpose.
An unscheduled refinance usually occurs when the private party can take advantage of
favourable market conditions. Another common trigger for an unscheduled refinancing is
as a result of a ‘change in control’ of the legal or beneficial ownership of the private party
(from the original parties at contract execution) which requires a change to a project’s
original debt financing arrangements. Changes in control are discussed in Chapter 16 of
this guide. Partnerships Victoria projects typically require the private party to seek the
government party’s prior approval for any change in control. If a refinancing occurs in
conjunction with a change in control, the private party must satisfy the contractual approval
requirements in relation to both the change in control and the refinancing.
Base interest rate risk allocation

In most cases since the Global Financial Crisis (GFC), the government party accepts the
risk associated with fluctuations in the base interest rate (as this is not within the private
party’s control), from the first refinancing. Partnerships Victoria policy requires the private
party to fix the base interest rate until the first refinancing. Thereafter, the government
party may choose to either leave the exposure unhedged, or manage the interest rate risk
(either by entering into interest rate swaps itself, or requiring the private party to do so on
the its behalf).
The floating rate component in the payment schedule is a mechanism which provides for
movements in actual interest rates compared to the base interest rate for each interest
period from the first refinancing. For each interest period, the calculation will produce a
floating rate component amount that is a positive or a negative number, depending on
which way interest rates have moved relative to the base interest rate agreed in the model
output schedule in the financial model.

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Should the government party require the private party to hedge the interest rate exposure
beyond the first refinancing, the floating rate component will be a fixed payment each
interest period comprising the difference between the hedged rate and the base interest
rate. Alternatively, where the government party hedges the interest rate exposure via the
Treasury Corporation of Victoria (TCV), the government party manages the floating rate
component payments to the private party by entering into a back to back interest rate swap
with TCV (outside of the project deed). Cash flow management with respect to the interest
rate swap between TCV and the government party will need to be agreed upfront with
DTF.
The floating rate component is paid in addition to the service payment. It is not subject to
abatement, but may be subject to set-off by the government party where it is an amount
payable by the private party.
Refinancing risk allocation

At a refinancing, changes to the debt financing (other than base interest rate changes)
could result in changes to the project equity distributions compared to the base case
financial model. These are mainly due to changes in credit margins and fees but could also
result from other factors such as a release of reserves. To the extent that equity
distributions are higher or lower than those forecast in the base case financial model, there
will be a refinancing gain or loss, respectively, as determined by the relevant project deed.
Typically, the government party does not take any risk on refinancing losses (e.g. losses
accruing as a result of higher fees and margins or changes in the debt profile compared to
that originally forecast), rather this risk is entirely borne by equity.
The evolution of market conditions and contractual provisions
Conditions and contractual provisions prior to the GFC

Prior to the GFC, Australia experienced favourable financial conditions for the financing of
PPP projects, with readily available long-term debt for the term of the project, at a relatively
low cost. Furthermore, the base interest rate for PPP projects prior to the GFC was
generally fixed for the life of the project. Refinancing for these projects is therefore not
necessary, but can be undertaken opportunistically if market conditions allow the private
party to replace its initial financing with lower-cost financing. It should be noted that there
may be financial break costs associated with amending an existing fixed hedging profile.
Many pre-Partnerships Victoria PPP projects did not contain detailed provisions
concerning refinancing. Since the original Partnerships Victoria guidance material in 2001,
the government party adopted a consistent policy position to ensure all refinancing
required government party consent, and ensure that the government party would share in
any gains that could be generated by certain types of refinancing.
Early toll road projects were generally financed with shorter-term debt, and this debt would
be refinanced as required as the project is de-risked following construction and traffic
ramp-up. A practice developed whereby some refinancing was ‘assumed’ or ‘scheduled’ in
the initial bid for the project. As the benefit of these refinancing activities was reflected in
the bid price, the government party would not share in the gains generated by these
refinancing activities. However, these project deeds provided that the government party
would share in ‘windfall’ gains generated by non-scheduled refinancing.
Conditions and contractual provisions during the GFC

During the GFC, the availability of finance reduced dramatically. The cost of debt
increased and tenors (the time over which the debt is to be repaid) reduced. This
significantly affected refinancing opportunities for existing Partnerships Victoria projects,
and changed the nature of the debt finance arrangements for new projects.

The kind of opportunistic refinancing undertaken prior to the GFC disappeared, as it was
no longer possible to obtain new finance on more favourable terms than the existing
finance for these projects.
Partnerships Victoria projects continued to need to refinance their short-term debt, but had
to do so in a less favourable market.
New projects could only secure short-term debt, which would have to be refinanced during
the life of the project. Hence the financing structures for these projects assume s there will
be a number of refinancing events over the project’s life. The difficulty in raising debt was
exacerbated by heightened perceptions of refinancing risk. In some projects, the
government party provided carefully targeted support to mitigate elements of the
refinancing risk for the private party. During this period, the contractual provisions
concerning refinancing were customised to the needs of the particular project.
Current market conditions and contractual provisions

By 2014, market conditions had stabilised, however long term debt remained
uncompetitive. Post GFC some private parties have taken advantage of improved market
conditions to undertake unscheduled refinancing to achieve improved pricing (lower base
interest rates and credit margins).
Debt tenors remain shorter than the full contract term, and therefore more recent projects
continue to be bid on the basis that there will be a number of scheduled refinancing
instances over the project’s life.
Recent refinancing in 2016-17 have shown increasing interest by financiers in providing
long term debt which fully amortises over the project term. This has been noticeable in
both committed bid proposals and refinancing of operating projects. These long term
structures remove future refinancing risk.
Under more recent PPP project deeds, all refinancing requires the government party’s
consent and the consent rights differ according to the materiality of the refinancing.
Typically, the government party is entitled to share in refinancing gains except in specific
defined circumstances.
15.2 Risks associated with refinancing

There are risks to both the private party and the government party in refinancing situations.
The following sections explain those risks and offer guidance to contract directors on how
to manage them on behalf of the government party.
Risks to the State

The general principle behind consenting to a refinancing is that the State should be ‘no
worse off’ as a result of the refinancing (other than changes in the base interest rate which
is a State retained risk). To ensure that the State is no worse off, the government party
should carefully examine any changes in the State’s risk position as a result of the
refinancing. Any new or increased risks allocated to the government party, will need to be
accompanied by adequate compensation provided by the private party.
Typically, the government party does not take any risk on refinancing losses (e.g. losses
accruing as a result of higher fees and margins or changes in the debt profile compared to
that originally forecast), rather this risk is entirely borne by equity. However, in some
Partnerships Victoria projects procured during the GFC, the government party did agree to
share in refinancing losses. In this context, being no worse off means the government
party should be no worse off than the agreed contractual position – that is, the government
party will bear its share of the refinancing losses, but should not be required to also take
on additional risks unless it is adequately compensated.

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Increased termination liabilities

An increase in the project’s debt could result in an increase in termination liabilities for the
government party. This is one of the main reasons that the private party requires consent
from the government party in advance of refinancing.
Termination liabilities are the amount of compensation payable by the government party to
the private party if the project deed is terminated early. The actual amount payable
depends on the circumstances giving rise to termination. However, apart from termination
following private party default, the size of the termination liabilities is usually linked to the
amount of the senior debt outstanding at the time of termination. Even if at the date of the
refinancing the nominal termination liabilities are unchanged, changes in amounts of debt
or debt profiling may result in higher termination liabilities over time (due to reduced or
delayed repayments of debt).
A change in the size of the senior debt is not the only factor that may lead to an increase in
termination liabilities. For example, refinancing that allows the private party to release cash
reserves may also increase termination liabilities. Changing hedging arrangements as part
of the refinancing can increase termination liabilities if higher hedge break -costs apply
under the new arrangements.
Of primary concern is termination due to force majeure. In such an event, the government
party is likely to be required to pay off the outstanding senior debt and other costs resulting
from early termination. The government party will not be required to compensate equity
holders (or subordinated debt in the nature of equity). While termination of a project for
force majeure is extremely rare, the termination payment is a contingent liability of the
State, and as such, the State should be compensated for any increase in this liability as a
result of a refinancing so that it is no worse off.
Increased payments during a force majeure event

In most project deeds, if the private party’s obligations have been suspended due to a
force majeure event, and the event is not covered by insurance, the government party will
service the private party’s senior debt commitments while the obligations are suspended
(usually only the lower of the forecast and actual commitments). Like the force majeure
termination payment, the servicing of senior debt is a contingent liability of the State, and
so the State should receive compensation from the private party for any increase in this
liability so that it is no worse off.

Risks to both parties
Less favourable financing covenants

In negotiating with new debt providers, the private party may propose, or be asked to
agree to, financing covenants that are less favourable than those that applied to the initial
debt finance. For example, the new lender may impose greater restrictions on
modifications, or different triggers for finance defaults that may increase the likelihood of
such defaults occurring. Contract directors should seek advice on whether these financing
covenants are current market standard, as this could mean the covenants are acceptable
where the risk remains with the private party under the financing documents (as opposed
to the State being directly exposed to this risk under the project deed). To the extent that
such changes restrict the future rights of the government party, it should be compensated
so that it is no worse off.
Relationship quality
A strong relationship can assist the parties in managing a refinancing event. If both parties
are proactive in anticipating refinancing events and plan for them appropriately, and if the
private party ensures that it gives enough notice to facilitate consent and potential
information requirements, the refinancing has a greater chance of proceeding smoothly
than if the parties do not work well together. Nevertheless, the long-term working
relationship between the parties can be put at risk if the government party accepts a
refinancing that depletes the private party’s contingency reserves to an unsustainable
level, or one which reduces the amount of equity investment in the project to the extent the
private party’s interest in providing high performance is diluted.
Increased risk of poor performance

The involvement of equity capital in the project’s financing mix delivers a significant
incentive for the private party to deliver high performance. Equity reserves also provide the
private party with the ability to absorb the financial consequences of the risk allocation in
the project deed.
A refinancing has the potential to reduce the proportion of equity in the project which may
reduce the private party’s incentive to perform and may also threaten the private party’s
ability to deal with project risks as they materialise.
Similarly, refinancing which reduces gearing beyond sustainable levels could create
perverse incentives that might motivate the private party to ‘cut and run’ if the project faces
adverse circumstances in future. This situation could come about in a circumstance in
which the private party shareholders have taken most of the benefits of refinancing
(withdrawn equity or taken higher dividends), and the private party is facing additional
costs (due to the adverse circumstances). At such a time, the private party might be less
concerned about project performance – leading to the government party considering
termination for poor performance.
However, this risk should be partly offset by the due diligence that the lender can be
expected to undertake during the refinancing. The lender will be concerned that the
repayment of its debt is not put at risk as a result of the refinancing. The debt provider will
assess the future profitability of the project and the likelihood of termination before
agreeing to the replacement finance. The debt provider will also consider how incentivised
the private party will be to continue performing following the refinancing.

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Asymmetrical information in determination of refinancing benefits

When a refinancing is proposed, there is likely to be an asymmetrical distribution of
information between the parties.
 The private party is likely to be better informed as to current financial market conditions
and the terms on which the project can attract replacement finance. The private party
is likely to prioritise its own interests in any refinancing proposal ahead of any benefit
to the government party. As such, the government party risks agreeing to a sub-
optimal proposal.
 The government party has a stronger understanding than the private party of risks to
the State of a refinancing. As such, the private party could underestimate the issues
that a refinancing proposal may raise for the State.
Key actions to mitigate these risks include the following:
 There should be early discussions between both the private party and the government
party (including DTF) and their respective advisers to openly share information related
to any refinancing proposal. Typically discussions on potential refinancing options
should commence 12 months prior to the maturity date of existing debt facilities. The
appropriate processes are discussed further in section 15.5 below.
 The government party must have robust and ongoing processes for monitoring the
financial position of the private party, so that it is able to appropriately scrutinise the
information that it receives in relation to the refinancing.
Risks specific to scheduled refinancing events

While some refinancing events are opportunistic, and are typically intended to take
advantage of favourable market conditions, other refinancing events are necessary
because the private party has an obligation to repay its existing finance, and must raise
new debt to do so. These refinancings are assumed in the Base Case Financial Model and
there are specific risks for both the private party and the State associated with this type of
refinancing.
Deterioration in lending markets or project risk profile

It is possible that either general debt market conditions or the risk profile of the particular
project will have deteriorated by the time the private party seeks to implement a scheduled
refinancing. If this is the case, the terms and conditions of the new debt may be more
stringent than the original terms, and in some cases a refinancing loss may eventuate.
The private party should bear the risk of any refinancing losses unless the project deed
specifically provides otherwise (which was the case in a limited number of projects
negotiated during the GFC).
Risks involved in ‘bullet’ repayments

Refinancing that introduces a ‘bullet’ repayment element to the debt will require the private
party to repay creditors a lump sum on a specified future date. It is conceivable that the
funds to be repaid via the bullet repayment may exceed the available cash held by the
private party at the time, providing an incentive to attempt to refinance prior to the bullet
payment due date.
If the private party cannot refinance prior to the bullet payment date, it risks insolvency and
default, giving the government party a right to step in and assume responsibility for the
project (and associated risks). The lenders may also decide to step in to resolve issues or
refinance the debt and assume responsibility in order to avoid risking a debt default. If the
private party is able to refinance in time, the risk exists that the refinanced debt terms may
be worse, constituting a refinancing loss.

Risks specific to ‘rescue refinancing’ events
If a private party is experiencing significant financial distress, refinancing might be
attempted in order to gain temporary relief through renegotiated debt terms.
While this type of ‘rescue refinancing’ might reduce the likelihood of the private party
becoming insolvent, the new debt terms could result in the imposition of longer-term
penalties on the private party such as higher debt payments in future periods or tighter
restrictions on dividend payments to equity holders. Not only can these factors reduce the
return to equity from the project, they can also give rise to many of the risks to the State
described above. Again, the refinancing should not leave the State any worse off .
However, in the context of rescue refinancing, the appropriate comparison may be whether
the State is worse off in comparison to the alternative of a default occurring and the
various consequences under the project deed and the financing documents that may flow
from that.
15.3 Factors influencing the timing and nature of refinancing

Financial market conditions and contractual provisions related to refinancing have evolved
over time. Contract directors need to be aware of changing financial market conditions and
the potential impacts that market conditions may have on the stability of the PPP financing
in place, including the potential for unscheduled refinancing.
This section explains the market-wide and project-specific circumstances that can lead to
potential refinancing gains.
Improvement in market conditions

Financial market conditions evolve over time. Both base interest rates and the interest
margin required by lenders for a given level of risk will fluctuate, as will a range of other
factors such as coverage ratios and the acceptable level of gearing. If market conditions
improve relative to the conditions that prevailed at the time the existing debt financing was
negotiated, lenders may be prepared to offer new financing on improved terms, resulting in
a refinancing gain.
Improvement in the project’s risk profile

For individual projects, improved financing terms may be available once construction is
complete and the service delivery phase has commenced satisfactorily. This is because
the terms of finance offered by lenders are related to the level of the project’s risks. Once
the service is operational and the initial design, construction and implementation risks have
been dealt with, lenders may be prepared to improve the terms of the original debt
financing, resulting in a refinancing gain.
However, this is not a possibility in every PPP project. Many projects have been financed
so as to incorporate a lower risk margin in the service delivery phase. In this case the initial
debt arrangements for a project may already distinguish between the construction phase
and service delivery phase, with associated differences in pricing.
Lack of initial optimisation

If the original debt financing for a project was not optimised, a refinancing gain may be
possible. In this situation, the opportunity should exist for improved financing terms to be
achieved at any time that the project is proceeding successfully.

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15.4 Potential benefits to Government from refinancing
A share in refinancing gains

The National PPP guidelines provide that ‘Government will be entitled to a 50 per cent
share of any Refinancing Gain where the projected equity return at the time of the
Refinancing (taking into account any Refinancing) is above that reflected in the original
Base Case Financial Model’15. Typically the projected equity return is improved where a
refinancing involves lower margins and fees than originally forecast. And the government
party also benefits from refinancing by sharing in the financial gain that is generated.
Where the State elects to take refinancing gain over the project term, rather than as a lump
sum, the resultant reduction in service payments to the private party will need to be agreed
following financial close of the refinancing. Project deeds generally allow the private party
to recover prior refinancing losses before sharing in refinancing gains.
Savings to the State from reduced base interest rates at the time of refinancing
The full amount of the difference (whether positive or negative) between the base interest
rate forecast in the base case financial model and that applying to the refinancing will
accrue to the State.
Most PPP projects since the GFC have a floating rate component in the payment
mechanism, effective from the first refinancing, which facilitates the State retaining the risk
of movements in base interest rates from the first refinancing. If unhedged, f or each
interest period during the new financing term, the floating rate component will be a positive
number (payable to the private party) or a negative number (payable to the State),
depending on which way actual interest rates have moved relative to the interest rate
forecast in the base case financial model.
Changes resulting from a refinancing

In some projects, the payment schedule also provides a mechanism for the State and
private party to negotiate in circumstances (usually a refinancing) where a change to the
private party’s debt profile is proposed. The floating rate component section of the payment
schedule recognises that whilst the State takes the risk on movements in the base case
interest rate, it should not accept the additional base interest rate risk which results from
the private party proposing to increase the quantum of debt as part of a refinancing.
Should the State agree to an increase in the private party’s debt profile, it will need to be
proportionately compensated for the incremental risk. This mechanism benefits both
parties in circumstances where some of the gains from a refinancing proposal (which will
typically be shared between the State and the private party) result from the private party
increasing the amount of debt in the structure. The compensation can be made either:
 with an upfront payment where the base interest rate remains unchanged in the base
case financial model, and the compensation is based on (a) the difference in the
original base case interest rate and the interest rates as determined by the swap curve
of the additional debt, plus (b) costs associated with entering into a hedge (either by
the State or the private party); or
 by a change in the base case interest rate in the base case financial model where
there is no upfront payment (compensation is effectively received over time), and the
base case interest rate is amended to reflect a 'weighted' average interest rate, that
includes (a) the interest rates determined by the swap curve with respect to the
additional debt, plus (b) costs associated with entering into a hedge (either b y the
State or the private party).
15
Infrastructure Australia 2008, National PPP guidelines: commercial principles for social infrastructure, section 32.4.

This ensures the State has no liability for the additional debt to pay where interest rates
are higher than the original base case interest rate.
Compensation can also be made through a combination of both an upfront payment and a
change in base interest rate, but generally one of the two above approaches would be
chosen.
In the event the base case interest rate is to remain constant in the base case financial
model, the upfront payment provided for in the floating rate component section of the
payment schedule is calculated as the difference in net present cost of the floating rate
component before and after the refinancing (in order to keep the State whole with respect
to base interest rate risk associated with an increased debt profile). If the refinanced facility
is to be hedged by the private party, the net present cost of the floating rate component is
calculated using standard swap market conventions (including a 'market' swap margin),
whereas for State-implemented hedging, a TCV/State determined swap margin will be
applicable. It is important to note that the methodology will also be based on standard
swap market conventions including a TCV/State determined swap margin where the
decision is made not to hedge the refinanced facility. This is because the only practical
way to estimate the magnitude of additional base interest rate risk to be borne by the State
is to adopt a revised swap curve at the time of the refinancing, as if the State was
intending to hedge the additional debt. Note where ongoing floating rate component
payments are made between the parties, these will be with respect to the total debt
(original plus additional).
Making funds available for other projects

Refinancing events involving either a change in lender or which enable an equity provider
to withdraw funds from the project can be of benefit to the overall PPP market. The funds
freed up by the refinancing become available to fund other projects and help progress the
flow of new deals seeking finance. A refinancing enabling an equity provider to withdraw
funds from an existing project may be particularly beneficial where the equity provider is
seeking to free up funds for another project but either does not want to dispose of its stake
in the existing project, or is constrained from doing so by the change in control provisions
in the project deed.
Greater flexibility for the project

In some cases, depending on the specific agreements between the government party and
the private party, refinancing may provide greater flexibility. This flexibility may be a result
of less stringent loan covenants, which in turn may allow modifications to be approved
more easily. The funding source after a refinancing may also grant greater flexibility; for
example, replacing bonds with a drawdown facility.
Contract extension
The decision by the private party to refinance may be accompanied by a request for an
extension to the project deed. By extending the project deed, the private party may be able
to extend the term of its debt finance and therefore borrow more for modifications, resulting
in a refinancing gain.
There can be justification for the government party agreeing to extending the project,
specifically when extending the term will enable the government party to secure future
services at currently contracted prices, which may be cheaper than those available in the
future.
Government parties need to carefully assess both the benefits and risks relating to any
proposed extension of the project deed term, with the decision being taken on operational
and value for money factors. Government parties should not extend the original project

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deed term unless doing so would have been justified on a separate stand-alone basis,
regardless of the refinancing event.
Requests for contract extensions should be considered in consultation with the
Partnerships Victoria team at DTF, to ensure the implications for the government party,
including any need for additional budget cover and change in risk are understood.
15.5 Dealing with refinancing requests and notices
General principles
The government party’s role and obligations in respect of refinancing will be set out in the
project deed. The government party is required to provide or withhold its consent to the
refinancing proposal and/or variation to the finance documents within a specified period .
The definition of refinancing and the scope of the associated consent rights will determine
the contract director’s actions and necessary resources. DTF will manage all PPP
refinancing events in consultation with contract directors to ensure a timely and consistent
approach to assessing and consenting to refinancing requests.
Each project deed will specify the particular consent requirements and process to be
followed. Unless the project deed expressly provides otherwise, the following principles
should apply when assessing or reviewing refinancing requests from the private party, and
should be agreed between the government party and the private party as a condition of
approval for changes to the finance documents:
 any refinancing gain must be shared between the government party and the private
party on a 50:50 basis, provided that the projected equity return at the time of the
refinancing is above that reflected in the original base case financial model;
 the outcome of the refinancing should not threaten the perceived value for money of
the project;
 a refinancing should not jeopardise the stability and success of the long -term
contractual relationship between the private party and the government party;
 the reasonableness of any fees payable by the private party in relation to the
refinancing should be carefully assessed, as the fees may be an indirect means of
extracting funds from the transaction without needing to share gains with the
government party;
 any gains which are to be received must be carefully weighed up against the extra risk
which may arise as a result of the refinancing;
 appropriate benefits such as compensation should go to those bearing risks;
 it is reasonable for the government party to seek compensation for any increased
exposure to termination liabilities arising from a refinancing; and
 the government party’s reasonable third-party costs for assessing the refinancing
request must be met by the private party.
Which party initiates refinancing?

The private party is responsible for initiating a refinancing.
It is possible, although uncommon, for the government party to request a refinancing.
However, there are risks to the government party in pressing for a refinancing, since the
private party might seek to gain a negotiating advantage from the government party’s
eagerness for a refinancing.
Contract directors should be mindful of the differing incentives of those involved in
refinancing. Financial intermediaries, such as investment banks, earn fees for arranging
new forms of finance and from underwriting a refinancing for an existing project. They
therefore have an incentive to seek and stimulate refinancing opportunities.

Being prepared and resourcing
While it should be left to the private party to initiate refinancing, there are benefits from the
contract director being aware of the refinancing intentions of their private party
counterparts.
In order to be ready to deal with refinancing proposals, the contract director should have a
basic understanding of the following aspects of the project:
 the current financing arrangements and the financial agreements that govern them;
 the current financial model;
 how to calculate debt cover ratios for their projects, and the existing value of those
ratios; and
 the circumstances in which refinancing needs approval (usually all); and
 the provisions for calculating and sharing refinancing gains or losses under the project
deed and related project contracts.
Refinancing of a Partnerships Victoria project is one way in which both the government
party and the private party can share in the benefits of a successful project. Government
parties should therefore be receptive to refinancing proposals from the private party. There
are significant technical financial issues to be dealt with in a refinancing, so preparing in
advance is an advantage. Importantly, and consistent with recent project deeds, the
Partnerships Victoria standard project deed requires that the private party must notify the
State regarding its proposed refinancing strategy, at least 60 business days prior to
formally requesting the State’s consent to a refinancing.
The Partnerships Victoria team at DTF must be consulted when considering any proposal
for a refinancing event, and will lead assessing and negotiating the refinancing, in close
consultation with the contract director.
Assessing and negotiating a refinancing is a resource-intensive activity requiring suitably
qualified senior resources and decision makers, as well as increased interaction with
professional advisers. The government party (including DTF), should ensure that such
resources are in place when a refinancing proposal is received, to achieve the optimal
outcome for the State.
The government party should engage experienced legal and commercial advisers (and
where feasible, should also consider using TCV) to assist them to understand the full
implications of any refinancing proposal, to advise them in any associated negotiations,
and to check that the refinancing gain or loss has been calculated correctly.
Refinancing strategy
In the event of a scheduled refinancing, the private party will usually be contractually
required to prepare a refinancing strategy to guide the refinancing event, and will be
required to provide a copy of the strategy to the government party.
The project deed may also require the private party to prepare a refinancing strategy for
any unscheduled refinancing. Even if the project deed does not require this, it is
recommended that contract directors request a refinancing strategy document from the
private party.
The refinancing strategy document should describe the private party’s plans for managing
both volume risk (underwriting) and pricing risk (refinancing gains and losses).

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At a minimum, the refinancing strategy should include:

 an audited financial model relating to the refinance;
 details of assumptions used in the financial model;
 the key aspects of the proposed refinancing, including establishment fees, debt
margins, principal amortisation profile, debt service reserve requirements and any
associated interest rate or foreign currency hedging;
 a comparison with any refinancing assumed within the original financial model;
 a certificate from the auditors of the financial model;
 the amount of the proposed refinancing gain or loss;
 details of any changes in amounts payable by the State under the project deed as a
consequence of the refinancing;
 fees payable to financial advisers/lenders;
 a description of proposed changes to the private party’s obligations to its equity
investors;
 copies of proposed changes to the existing financial agreements;
 drafts of any new financial agreements; and
 a program detailing the timing of all key milestones in the refinancing request and
consent process, including (but not limited to):
– submission of all draft documentation to the State;
– clarification meetings between the private and government parties, as required;
– provision of in-principle agreement by the State to the draft proposal and
documentation;
– formal submission of the private party’s refinancing consent request;
– provision of any updated documentation, as may be required;
– date by which the State’s consent is due under the relevant project deed;
– contract execution; and
– financial close.
The refinancing strategy should be provided to the government party sufficiently in
advance of the private party’s formal consent request submission to enable the State to
consider the impact of the refinancing. If the project deed does not specify a time for
providing the refinancing strategy, the contract director should request that such a strategy
be provided by the private party at least 60 business days prior to any proposed
refinancing.
Providing or withholding consent

The government party will need to be prepared to respond in a timely way to refinancing
events. The scope of consent rights will be specified in the project deed. The State is not
able to unreasonably withhold consent. In older project deeds, the State usually has the
right to withhold consent for an unscheduled refinancing in certain circumstances. In newer
project deeds, all refinancings (scheduled and unscheduled) require the State’s consent.
There are limited circumstances detailed in the project deed in which the State is able to
withhold consent. These circumstances include:
 where the refinancing increases or adversely changes the profile of the risks or
liabilities of the State under any project document to which the State is a party without
adequate compensation to the State;
 where the terms and conditions of the proposed finance are not on arm’s length
commercial terms, or are not in accordance with current market practice;
 where the new financing will not be used solely for the project;
 where, in connection with the refinancing, there will be a change in the equity financing
of the project; and

 when the new financial arrangements would be disadvantageous to the private party
compared with the existing arrangements and the government party considers that the
new arrangements will adversely impact the private party’s financial health or ability to
perform its obligation under the project deed.
In withholding consent to a refinancing, the government party should have a strategy in
place for managing the broader market perceptions of this action, to ensure that the refusal
to provide consent is not seen by the market as a disincentive to invest in other
Partnerships Victoria projects. The government party should be aware that, if a refinancing
is necessary (for example, because the initial debt raised for the project was short -term
debt and the bid assumed the debt would be refinanced), rather than purely opportunistic
(motivated by a desire to take advantage of favourable market conditions), a refusal to
provide consent may lead to a default under the private party’s financing arrangements
unless the grounds on which the State refused consent can be resolved or mitigated.
In the context of rescue refinancing negotiations, the government party should consider
what other options are available to the private party to ensure sufficient funds for the
project are available if consent is withheld.
How should any gains be taken?

The private party may take refinancing gains as an immediate lump sum payment.
However, the government party can elect to take its share of any refinancing gains as:
 a lump sum;
 a reduction in services payments over the remainder of the term of the project deed; or
 a combination of these two.
There are benefits and risks associated with each option.
If the government party elects to receive its share of the gains as a lump sum, the private
party may need to take on additional debt to fund the lump sum, especially if the
refinancing would otherwise only have involved repaying the original borrowings over a
longer period. Increased borrowings to fund the lump sum could in turn increase the
government party’s termination liabilities.
On the other hand, taking the gains as a reduction in service payments might reduce the
refinancing gain itself because a reduction in service payments will reduce the project’s
debt cover ratios, which will in turn reduce the amount of new debt that can be raise d.
The decision may also involve considering the equity internal rate of return, and the impact
this may have in eroding the potential gains to the State over the contract term. That is, if
the equity internal rate of return is quite high (which would be a function of financial market
conditions prevailing when the contract was executed), there may be reduced value to the
State in receiving an upfront payment (measured in net present value terms).
Use of the gains

A refinancing gain should not be considered a windfall for the project or government party
itself. Refinancing gains will be accounted for as consolidated revenue in the first instance.
Therefore, the decision on how to take the gains is one in which DTF should be consulted.
Any proposal by the government party to apply gains to the project itself, such as to
address affordability concerns or to invest in facility improvements, will be assessed on a
case by case basis through existing DTF budgeting processes.
Partnerships Victoria projects are of finite length, with the debt remaining within the project
generally reducing over time. This reduction in debt over time means that the potential
gains or losses to be made from refinancing the debt will diminish (other things being
equal) the later in a project a refinancing is undertaken.

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Victoria
16. Change of ownership/control

16.1 Introduction
A project deed will typically require the private party to obtain prior consent from the
government party for transactions affecting the control and ownership of the private party
and any key subcontractors. In this context, it is important to understand the difference
between control and ownership:
 Control generally refers to the ability to make or determine the outcome of decisions
concerning an entity’s financial and operating policies. The precise meaning of ‘control’
is usually defined in the project deed, typically by adopting the definition in the
Corporations Act. Applying this definition to the circumstances of a particular project
can be complex. Contract directors should seek legal advice where necessary.
 Ownership generally refers to having a direct or indirect legal or beneficial interest in
the private party (or a key subcontractor). A change in ownership may not necessarily
constitute a change in control, for example, a sale of 40 per cent of the shares in the
private party may be a change in ownership, but may not be a change in control if the
new shareholder is not able to make or determine the outcome of decisions concerning
the private party’s financial and operating policies.
Why are changes in control and ownership regulated in Partnerships Victoria

contracts?
As Partnerships Victoria project deeds are typically for long-term asset-based service
provision, it is important that the State understands the financial health and sustainability of
the contracted counterparties. During the procurement phase, the State will have carried
out detailed due diligence on the private party and its consortium members. This is to
understand:
 the capabilities of each consortium member;
 the role each consortium member will undertake within the consortium;
 how the consortium plans to effectively work together to provide service ou tcomes;
 the reputation of each consortium member for service provision;
 the financial stability and capability of each consortium member and the consortium’s
ability to meet its financial obligations under the project deed (including parent
company guarantees; and
 any historical legal disputes, or if any are currently outstanding.

Prior to contractual close of a Partnerships Victoria project, the private party is required to
confirm the structure of its consortium and provide a warranty or assurance to the State of
the legal and beneficial ownership of each member. Maintaining this structure minimised
counterparty risk. However over the life of the contract, changes are likely to occur and the
State consent provisions in the project deed enable the government party to conduct
adequate due diligence on the proposed changes in control or ownership.
16.2 State consent prior to any change in ownership/control

While each project deed is different, typically the private party must not permit any change
to the legal or beneficial ownership of any shares or units or any other interests (providing
a change in control) of it or any member of the consortium, without the State's prior
consent. The project deed will outline the circumstances in which it would be reasonable
for the government party to withhold its consent. If none of the reasons are satisfied, the
government party must provide its consent to the change in ownership/control.
Additionally, recent project deeds mandate that designated equity investors (which are
considered sufficiently critical to the private party’s ownership structure and ability to meet
its obligations through the construction and initial operating period) must maintain their
initial ownership level for a specified period (usually two years from commercial
acceptance) to ensure the designated equity investors remain incentivised to manage the
asset to steady-state operations. This means that the State has an absolute discretion to
withhold consent to a change in ownership/control during the minimum hold period.
Typical ownership structures are complex

The ownership structure of the private party in a Partnerships Victoria project is initially
developed by the bidding consortium to meet both the government party’s requirements
and the needs of investors. The ownership structure of the private party can be complex. In
most cases, the investors do not invest directly in the private party, instead investing
through one or more intermediate entities that may be companies, trusts or partnersh ips. A
change in the ownership or control of any one of these entities may result in a change in
ownership or control of the private party. In addition, any of these entities may appoint an
investment manager to manage the investment on their behalf, and that manager may be
in a position to exercise control over the private party, even if it does not have an
ownership stake.
Key subcontractors may also have complex ownership structures. The contract director
must consider the specific ownership structure of the project, and understand how the
relevant contractual provisions apply to each entity with a role in the ownership or control
of the private party or key subcontractor. When any change is proposed, it may be
necessary for the contract director to undertake due diligence to ascertain its
appropriateness by seeking legal advice on the rights of each entity. This may require a
legal review of all of the relevant company constitutions, shareholders agreements, trust
deeds and partnership agreements.
Permitted changes in ownership/control

In some Partnerships Victoria projects, ‘permitted’ changes in ownership or control (also
known as permitted share dealings) are proposed by a bidder and included in the project
deed. The private party or the relevant subcontractor can implement a permitted change in
ownership or control without the State’s prior consent, but usually is required to give prior
notice the State.

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The contract director should be diligent in reviewing any proposed or actual permitted
change in ownership or control to evaluate whether in fact it meets the requirements of the
project deed. If the private party or a key subcontractor proposes or implements a
transaction that is similar to, but different from, the permitted change in ownership or
control documented in the project deed, the standard process requiring the State’s consent
should be followed.
Change in ownership/control process

As discussed in Chapter 4, it is important to maintain a good working relationship through
regular interactions with the private party (including informal discussions and formal
meetings). This will provide the private party with the opportunity to advise the State early
of an impending change in ownership/control, providing the contract director with additional
time to prepare for the request (which may be important if the project deed provides the
State with a short response period).
When a contract director receives a change in ownership/control request or notification, the
contract director will need to:
 review the relevant project deed clauses to understand the requirements of the
contract;
 review the processes outlined in the contract administration manual; and
 determine if any legal or commercial advice is required.
Should professional advice be required, the contract director should consult their
Partnerships Victoria contact as DTF has visibility over other Partnerships Victoria projects
that could be receiving the same request. In this case, DTF can facilitate proc uring a
common set of advice which will be more efficient and ensure a consistent State response
across projects.
At a minimum, legal and commercial advice should be sought to carry out the necessary
due diligence assessment on the proposed transaction, to ensure the reputation,
experience and financial viability of the new entity and to ascertain if there are any reasons
why the State should consider withholding its consent to the change in ownership/control
request.
Project deeds typically provide for the State to be reimbursed for adviser costs incurred in
considering the request for change in ownership/control because it is a private party
initiated event.
The contract director also needs to consider the drivers for each of the parties involved in
the proposed transaction, as exiting parties’ interests are not necessarily aligned with
those of the proposed investor or the State. Therefore the contract director should be
aware that each party’s own position and interests may impact their representations and
conduct throughout the change in control process.
Reasons to withhold consent

The State should try to ensure that it is no worse off by agreeing to the change in control. It
should therefore try to maintain the agreed financial security package and risk positions
that were agreed upfront when the initial project deed was signed.
The grounds on which the State may be able to reasonably withhold consent are usually
set out in the project deed, and typically include the following:
1. The private party has not provided the State with full details of the proposed change
in control and any further information requested by the State.
2. The change in control is to take effect prior to the second anniversary of commercial
acceptance (where it relates to the private party only).

3. The proposed investor/entity:
 is not solvent and reputable;
 has an interest which conflicts in a material way with the interests of the
government party and is involved in a business or activity which is incompatible,
or inappropriate, in relation to the construction or operation of the facility; or
 does not have a sufficient level of financial and technical capacity.
4. The proposed change in control is against the public interest.
5. The proposed change in control would increase the level of risk or liabilities to the
government party.
6. The proposed change in control would impact adversely on the ability or capacity of
the private party to perform its obligations under the project deed or any other project
contracts, and if applicable, of the key subcontractor to perform its obligations under
the key subcontract.
Potential consequences for the private party if the State withholds consent
The State’s right to withhold consent is an important protection for the State a gainst the
risks that may arise as a result of a change in control or ownership. However, the contract
director should be aware of the potential consequences for the private party if the State
withholds consent. The consequences may include the following:
 The proposed change in control or ownership may reflect the fact that the existing
investor has a risk appetite and capabilities appropriate for the higher risk early stages
of a project, but less appropriate for the current status of the project (particul arly if the
project is now in its service delivery phase and performing well). In these
circumstances, the existing investor may wish to sell out to an incoming investor with a
preference for the long-term, lower-risk investment opportunity presented by the
operating project. If the change cannot proceed because the State does not give
consent, this may create difficulties in the relationship between the State and the
private party, as there may not be a strong alignment of interest in the long-term
project outcomes.
 The proposed change in control or ownership may be intended to allow an existing
investor to recycle their capital, raising funds for investment in new projects. If the
change cannot proceed because the State does not give consent, this may prev ent the
investor investing in new State projects.
Internal restructures and transfers to related parties

The State's prior consent is usually not required for a change in control or ownership
where the new owner is a related body corporate of the outgoing owner. This enables the
private party and key subcontractors to undertake internal corporate restructures, provided
the ultimate ownership remains the same.
However, the private party is still required to notify the State prior to any such changes.

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Publicly listed entities

If the ultimate holding company of the private party or a key subcontractor is listed on a
stock exchange, a change in control may occur as a result of trading on that stock
exchange. Practically, it could be difficult for the listed entity (or the private party) to
provide prior notice to the State ahead of such a change in control. In these circumstances,
the private party must seek the State’s consent immediately after the change in control
occurring (providing full details), and the State must notify the private party within a
specified period whether it consents to the change in control. If the State does not consent
to the change in control, the project deed usually requires the private party to procure that
the relevant entity cease to retain control within a specified time, or that an alternative
subcontractor be procured.
Any off-market transaction (i.e. a transaction not occurring on the stock exchange) that
may result in a change of control or ownership of a listed company is subject to the general
consent requirements set out above.
Ability and capacity of the private party and subcontractors to perform their roles
Changes in ownership can result in the departure of an investor with strong knowledge and
capability related to the project, and their replacement by an investor with less knowledge
and capability. For example, a common change in ownership is the sale by an initial project
sponsor of its interest in the project to a long-term ‘passive’ investor once the project has
reached a state of steady operations. The contract director should carefully consider
whether the private party will continue to have access to the necessary resources and
expertise to satisfactorily perform its obligations.
Where an initial active investor is replaced by a long-term passive investor, particular
attention should be paid to the proposed arrangements for operating and managing the
private party. In a Partnerships Victoria project, the subcontractors are engaged by the
private party, not by the government party. The government party relies on private party
employees and representatives of the investors (behind the private party) to manage the
private party’s subcontracts. When a change in ownership or control is proposed, the State
must assure itself that appropriate arrangements will be in place to give the private party
access to the strategic, technical, commercial and legal capacity required to perform its
obligations under the project deed and manage the subcontracts appropriately. It may be
appropriate to seek formal commitments from the private party or its investors in relation to
the ongoing availability of this capacity.
Ability and capacity concerns can also arise in relation to changes of ownership of key
subcontractors. Within the framework of the change in control or ownership consent
requirements, the contract director should carefully consider whether the subcontractor will
continue to have access to the necessary resources and expertise to satisfactorily perform
its role on an ongoing basis, taking into account the range of risks and circumstances that
may arise.
Probity investigations
In assessing a proposed change in control or ownership, the State must consider whether
any probity concerns arise. In most projects, these issues will be assessed as part of the
due diligence conducted by the State in considering whether to consent to the change. In
some projects more sensitive to probity concerns, the project deed will regulate probity
issues separately from the change in control or ownership process. The contract director
should ensure that such mechanisms in the project deed are appropriately applied to any
proposed change.

Implications for parent guarantees
The private party’s security arrangements, including any parent company guarantee from
the builder’s parent company, are particularly important during the construction phase.
A consent to the change in ownership or control of a key subcontractor does not
necessarily translate to a consent to the change in entity providing the parent guarantee in
respect of the key subcontractor. The State needs to be satisfied that it is not left in a
worse position with the change in parent guarantor. For example, the new entity being
domiciled in another country potentially reduces the enforceability of the parent guarantee.
Until the State is satisfied with the replacement parent guarantee, and provides consent to
the change in entity providing the parent guarantee, the parent guarantee from the existing
parent entity must remain on foot.
Financiers’ approval of changes in control and ownership

The private party’s financing documents are likely to require it to also obtain the consent of
its financiers to changes in control and ownership. There is a degree of alignment between
the government party and the financiers, in that the financiers will be concerned about any
impact the change may have on the risk profile of the project. However, the financiers’
focus will be on financial risks (that is, the risk that the private party may be unable to meet
its payment obligations), whereas the government party is concerned about a broader
range of issues, including public interest considerations and ongoing sustainability of
service delivery. The fact that the financiers have approved a change in control or
ownership should therefore not be regarded as an indication that the change should also
be acceptable to the government party.

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Victoria
17. End of term arrangements

17.1 Introduction
This guide covers two primary ways that a Partnerships Victoria project may end, either by
contract expiry or termination. This chapter focuses on contract expiry. This an important
stage in a Partnerships Victoria project. A range of activities must be undertaken by both
the government party and the private party in the period before, during and after contract
expiry – referred to as the end of term arrangements.
For some Partnerships Victoria projects, the expiry of the contract may complete the
project lifecycle, while for others the ongoing service need leads to a new contractual
arrangement or asset investment (undertaken according to the Investment lifecycle
guidelines 16).
This chapter deals with the likely issues and commercial principles for contract directors to
consider before, during and after contract expiry in order to:
 plan and implement the end of a public private partnership project; and/or
 plan a smooth transition to a future asset or service arrangement.
There are a range of different Partnerships Victoria contracts, with different contractual
expiry or termination arrangements which may present materially different or complex
situations. This guide provides an initial source of information on the processes and
provides practical assistance in assessing the next steps for the project. If required,
contract directors may also seek assistance from DTF, or may wish to obtain appropriate
professional advice.
16
DTF website <http://www.dtf.vic.gov.au/Investment-Planning-and-Evaluation/Investment-professionals-
toolkit/Investment-lifecycle-and-High-Value-High-Risk-products>

Steps in end of term planning and implementation
The government party will need to prepare for the end of term at least four years from
contract expiry by undertaking the following steps:
1. due diligence – understanding contract expiry conditions/options, asset condition,
performance of the private party, lessons learnt from the current contract (including
any reviews undertaken);
2. determining future service delivery needs for the relevant sector, and how they are
best delivered, including the assets required to support service delivery. Due
diligence work from step 1 will help to inform this assessment. This analysis should
determine the specific future role of the project assets in meeting these future service
needs, including the extent of any necessary modifications or augmentations to the
project assets. Options include:
 continuing to use or upgrading / modifying project assets for further use;
 decommissioning or disposing of project assets; or
 developing other short-term contingency service provision options, if there is a
risk that the new arrangements are unlikely to be ready in time.
3. gaining the government party’s approval and funding for the strategy determined in
step 2, and for any additional resourcing required to manage that transition;
4. developing an end of term / service plan to execute the agreed strategy. The plan
should include the establishing a governance structure and resourcing to implement
the agreed strategy; and
5. implementing the transition to the new arrangements.
Each of these steps is outlined in further detail below.
17.2 Step 1: Due diligence

The first step in the end of term process is taking stock of the contract expiry arrangements
and all key information known about the Partnerships Victoria project. This will inform the
assessment process in following steps.
Reviewing the project deed

As each Partnerships Victoria project is unique, the contract director must
comprehensively review the existing contractual arrangements to ensure they have a
thorough understanding of the range of specific expiry provisions and how they apply to
each party to the contract. These specific contract expiry conditions may include:
1. ownership and control of assets at contract expiry – the project assets and site
usually remain with or vest in the State on contract expiry, but this is not always the
case (e.g. Victorian County Court project). The Government’s options are more
limited if the private party retains ownership or control of the project assets at
contract expiry. In some project deeds, the government party may have the option to
ask the private party to decommission the project assets and remediate the site;
2. contract extension provisions – some project deeds include specific provisions for
one or more extensions of the term for a pre-specified period on similar terms and
conditions at the request of the government party and agreement by the private
party. Of course, the project deed can be renegotiated by mutual agreement between
the parties, but this is a larger and more complex exercise than the exercise of a
contract extension provision under the project deed;

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3. condition of assets at the end of term – unless the private party will own the
project assets after contract expiry, the private party must ensure that the project
assets meet the government party's return conditions at contract expiry. For the
purposes of informing end of service considerations, the contract director must
understand the condition of the project assets. The National PPP guidelines:
commercial principles call for an independent, jointly funded, inspection four years
prior to the end of the contract term. Contract managers should be aware of their
project asset inspection rights under the project deed;
4. payment adjustments – the project deed may permit the government party to
withhold service payments or seek a performance bond (usually up to a specific
value) if, following the asset condition inspection, the government party is concerned
that the Project Assets may not meet its condition targets on contract expiry; and
5. obligations on the private party if the government party elects to re-tender the
services – if the government party elects to re-tender the contract services at the
end of the contract term, the incumbent service provider must take all reasonable
steps to ensure that the contract services continue with minimum disruption and risk
to both government party employees and public users. Typically, these obligations
will include providing project documentation such as asset registers or asset
condition reports.
The contract director must review the end of term provisions in the project deed applying to
the specific Partnerships Victoria project. Contract directors are encouraged to obtain
appropriate professional legal advice to ensure they gain a thorough understanding of the
State’s rights and obligations under the project deed (and associated project contracts),
and understand the implications of these rights and obligations for the end of term
arrangements.
Harnessing lessons learnt from the project

The contract management team will have a view on the performance of the project, any
positives, any issues, and any lessons learnt that can inform the decision-making process
for post end of service arrangements. These views are usually recorded and documented
progressively over the life of the project. As part of the due diligence process it is beneficial
to conduct an independently-facilitated lessons learnt session.
Lessons learnt should be supported by a range of objective data including:
 extent to which performance measures have been met;
 abatements;
 areas of dispute and resolutions;
 major problems and solutions;
 change events; and
 staffing levels and turnover.

In addition to harnessing the lessons learnt from an in-house perspective, information
should also be available from independent reviews of the project undertak en during its life.
Such reviews may include:
 post-implementation reviews undertaken as part of the Investment lifecycle guidance;
 gateway reviews 17 (specifically related to gate 6: benefits evaluation);
 any reviews jointly-commissioned with the private party; and
 Auditor-General reviews.
Under the Investment lifecycle guidance18, the stage 5 ‘realise’ guideline can assist the
government party evaluate the extent to which the planned benefits have been delivered. It
also provides an opportunity to assess how well a project has been planned, procured and
implemented. When conducting a post-implementation review, sometimes called the
‘investment evaluation’, it is important to reflect, document and communicate the lessons
learned so that future planning and design of similar investments can be informed
A gate 6 gateway review, can be the mechanism for a review and contribute to future
service need analysis. The gate 6 gateway review covers a number of issues, including:
 whether the benefits in the business case are being delivered;
 assessing the effectiveness of the ongoing contract and/or service delivery
management processes; and
 confirming a business need exists for the investment and assess ongoing
requirements.
It is common for the Auditor-General’s Office to review most Partnerships Victoria projects,
at least once during their contract term given that they generally fall into the high-value
high-risk project category.
Collectively, these in-house and independent reviews will contain a significant amount of
relevant material that should be used, distilled and harnessed to inform the next steps in
the end of term process. They will assist the contract director to develop an accurate
understanding of the issues encountered in the project and to determine whether
difficulties encountered over the contract term were caused by relationship /management
disharmony, the contractual arrangements/structure, external factors, or a mixture of these
factors.
More broadly, by effectively capturing and applying lessons learned from existing projects,
both Partnerships Victoria and other government departments and agencies are able to
improve:
 project planning and selection;
 contractual arrangements and structures;
 project management and outcomes; and
 government department/agency and Partnerships Victoria policies.
17
toolkit/Gateway-products>
18
toolkit/Investment-lifecycle-and-High-Value-High-Risk-products>

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17.3 Step 2: Determining future asset and service requirements

Determining future asset and service requirements should occur within the Investment
lifecycle and high value – high risk guidance framework, as well as any other applicable
departmental guidelines. This framework has five phases:
1. conceptualise (prepare a strategic assessment or preliminary business case to
confirm the business need);
2. prove (prepare a business case and recommend an investment);
3. procure (undertake a procurement process and award a contract);
4. implement (deliver the solution); and
5. realise (deliver the benefits and measure the success of the investment).
The first two phases – conceptualise and prove – need to be undertaken and submitted to
government for approval and funding before formal action can begin to procure an agreed
solution based on ongoing service provision.,
In the event that the government party decides to discontinue the service there is no
requirement for any government approval or additional funding for the end of term
arrangements. However the government party will remain responsible for either disposal or
decommissioning of the existing project assets and ensuring an orderly exit from the
service contract.
Conceptualise phase – confirming the future service need

The conceptualise phase begins with a review of the relevant government party long-term
service plan, and the need for a continuing service provision. The asset planning should
align with the government party’s asset management strategy and consider the
requirements of the Victorian Government’s Asset Management Accountability
Framework.19
An investment logic map can be a useful tool in the conceptualise phase to:
 identify the key problem(s) that need to be addressed;
 identify the major benefits that will accrue if they are addressed;
 explore the range of potential strategic interventions and identifies the preferred
strategic response to address the problems and achieve the benefits; and
 identify the likely solution, at a strategic level.
It is likely that the service requirements will differ materially from that in the current project
given the passage of time. For instance, models of care have changed significantly in the
health care and corrections sectors over the past 20 years.
The contract director, working with policy and or service areas of the government party,
should prepare a preliminary business case (if the project is high-value, high-risk) or a
strategic assessment (if the project is below the high-value, high-risk threshold). Either
document can be prepared in-house if sufficient expert resources are available, otherwise
expert adviser support may need to be engaged. Once completed, a gate 1 (strategic
assessment) review should then be undertaken, arranged through the Gateway Unit in
DTF.
19
DTF website <http://www.dtf.vic.gov.au/Investment-Planning-and-Evaluation/Understanding-investment-planning-
and-review/What-is-asset-management>

The preliminary business case / strategic assessment will be submitted to the portfolio
Minister, and to Cabinet as necessary, to determine whether the service need is high
priority and whether the project should proceed to phase 2, ‘prove’.
If the proposed project does not receive Ministerial/Cabinet approval to proceed to
phase 2, it may mean the service is no longer valued highly, and the provision of the
service is to be discontinued upon contract expiry. If the service is discontinued, it is likely
the government party would either:
 arrange to dispose of or sell the underlying project asset(s); or
 decommission the project asset(s) that have been used to provide the service.
Either of these options will provide the government with an orderly exit from the existing
Partnerships Victoria project. Under this route, the contract director will still need to ensure
the services continue until contract expiry, and an orderly exit the contract consistent with
contractual obligations. A plan and resourcing will be required (this is addressed below in
section 17.5).
Prove phase – assessing viable options and developing a business case

Once a future service need that aligns with both departmental and government policy has
been confirmed by Cabinet, the end of term arrangements for the existing project need to
be managed within the context of phase 2 of the Investment lifecycle and high-value, high-
risk, guidelines. This requires preparing a full business case which assesses project
options (based on the preferred strategic option of phase 1), and recommends a preferred
project solution and procurement method, and identifying likely costs, risks, stakeholder
plans and resourcing for implementation.
In assessing the options, all viable options must be examined and analysed to identify the
recommended solution.
The business case will assess a range of asset management strategies to provide the
recommend service solution over the new project term. This will consider options including;
 continuing to operate the existing assets;
 upgrading, refreshing or modifying the existing project assets; or
 replacing the existing project assets with new assets.
The business case will also assess a range of service delivery options to provide the
recommended solution. This will include considering a range of service provision options,
including:
 the State to assume public service provision;
 re-negotiating with the existing private sector service provider; or
 re-tendering to engage an alternative private sector service provider.
The business case should include details of proposed implementation arrangements to
deliver the recommended solution, including governance and resourcing arrangements and
budget to manage the transition/procurement process.
A gate 2 (business case) review must be undertaken before the investment proposal is
submitted to Cabinet for consideration.

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Victoria
Figure 17.1: End of term decision tree
Service need/
requirement
Future of
asset?
Continue operation
Discontinue use
Decommission New or existing

or dispose? provider?
State arranges State arranges Re-negotiation with

State assumes service Re-tender for a new
decommissioning of disposal of project existing service
provision/assets service provider
project assets assets provider
Orderly exist from

service Ongoing service
17.4 Step 3: Government approval and funding

The business case submitted to Cabinet should seek funding to implement the
recommended option and to deliver the services for a defined period. Specific funding
should be sought for:
 any capital works to be undertaken by the government party;
 service payments to a private provider or recurrent budget funding for the government
party to deliver the services (to the extent that such funding does not already exist) ;
 procurement and/or transition process resourcing and adviser support;
 if the project deed is to continue or a new contract is to be negotiated;
 any changes to contract management resourcing; or
 as necessary, any funding to decommission the facility.
The relevant project governance committee must endorse the recommended option, which
the appropriate Minister(s) should also ratify.
The formal enactment of the end of service plan should not begin prior to the Cabinet
decision and approval of funds (if applicable).

17.5 Step 4: Developing an end of service plan and project team
As soon as government approval and funding is obtained, an end of service plan should be
fully developed. This plan may need to cover arrangements for new service delivery
arrangements and/or completion of the existing project deed (if applicable). Separate
teams may need to undertake these tasks.
The end of service plan will need to:
 establish governance and resourcing arrangements, including whether activities will be
undertaken by one or two teams;
 identify all of the key drivers, risks and issues that may affect the end of term
processes;
 identify all of the key stakeholders and develop a stakeholder management plan;
 clarify the contractual rights and obligations of the parties to the existing contract; and
 map out managing the transition to new arrangements.
Once the initial end of term plan has been developed, the plan will need to be updated
and maintained until the transition to a new arrangement has been completed.
Establishing an end of term team

End of term planning is a key work stream for the contract management team. The extent
of change involved can influence the resources required. Some transition activities may be
completed as part of business-as-usual activities. More material changes may require
additional resources and expert adviser support.
Typically, the end of service team will be established and operated as either an internal
team within the business as usual team or as a specific purpose end of term team.
Separating the end of term work stream from the business as usual work stream will allow
the contract director to concentrate on managing the existing project and business as
usual team. This separation reduces probity risk (where the existing service providers are
active participants in the bidding to provide any future service arrangements).
Figure 17.2: Difference between internal and specific purpose end of term teams
Internal end of term team Specific purpose end of term team
Contract director End of service

Business as usual team Contract
project
director
manager
End of service Business as End of service

team usual team team
Internal end of service team

Typically, an internal end of term team is used where:
 end of term arrangements are considered to be less complex, and may be treated as a
business as usual activity;
 minimal changes are being made to the existing contractual arrangements or the
contractual arrangement is being extended or rolled over; and
 there are no probity considerations that prohibit the business as usual team
undertaking this role.

Par tnerships
Victoria
Specific purpose end of term team

An external end of service team is typically used where:
 end of term arrangements are considered to be highly complex or unusual;
 significant changes are being made to the existing contractual arrangements;
 active negotiations with the private party are required; and
 material probity issues are likely to arise.
The contract director has an important role managing the existing project, developing the
initial end of term plan and establishing the end of term team. It is recommended that a
separate project manager/lead negotiator be appointed to manage an external end of term
project team.
Ideally, the end of term project team will include the incumbent contract director (or senior
member of the contract management team) in an advisory capacity, to provide their
corporate knowledge of the existing contractual arrangements. In addition, it is also
recommended that the team draw on the knowledge and expertise of the existing contract
management team and project advisers for input and support, as required.
The size and the composition of the end of term team will reflect the size and complexity of
the Partnerships Victoria project. It is suggested that the team include the following
members:
 end of term project manager/lead negotiator;
 senior officer from department service area (i.e. customer representative);
 contract director (from business as usual team);
 legal adviser(s);
 commercial adviser(s);
 technical adviser(s);
 Partnerships Victoria (DTF) representative; and
 other members (as required)
17.6 Step 5: Implementing the transition to a new or ongoing arrangement

Managing the transition to a new or ongoing arrangement is a critical stage in the end of
term process. The arrangements will be based on the business case and government
approvals outlined in the previous steps. Critically, the contract director must ensure that
there is continuity of services for the users, either by:
 a contract continuation or extension for the existing services provider;
 a modified contract with a new contract provider offering a new service; or
 a new arrangement to replace the existing service offering with a new/different service
arrangement.
Guidance on the tendering for new arrangements is provided in other documentation and
will not be addressed further in this chapter. Detailed guidance materials relating to
management of this transition are set out in both the procure and implement solution
stages of the Investment lifecycle and high-value, high-risk guidelines, and under the
gateway review process, gate 3: readiness for market, gate 4: tender decision and gate 5:
readiness for service.

Current Partnerships Victoria contract expiry arrangements, including any term
extensions
The project deed will typically include transition provisions that set out the rights and
responsibilities of the parties. Therefore, the contract director must understand these
provisions and plan for the impact of transition to future arrangements. Some items to
consider include general matters such as:
 important dates;
 assets (including asset registers and maintenance logs);
 personnel;
 intellectual property;
 training obligations;
 site access arrangements;
 data (including performance reports, documents and records);
 leases, licences, rights; and
 provision of a transition plan.
Condition of project assets at the end of term

Unless the project assets remain with the private party, the incumbent service provider
must ensure the project assets meet the government party's handover conditions at
contract expiry. The contract director must understand the contractual rights with regard to
the condition of the project assets and site at the end of the contract term, and any
provisions governing hand-back arrangements.
To ensure these contractual obligations are met, an independent assessor is usually
appointed to inspect the project assets. Depending on the condition of the project assets,
the assessor may notify the government party and the incumbent private party service
subcontractor of any works required to be carried out to meet the handover conditions and
a program and the expected cost of carrying out the works.
Understanding these contractual provisions enables the contract director to plan for
assessment of assets and completion of any required works program to ensure that the
project assets’ condition at the end of term meets contractual requirements.
Where there the contract is extended, some of the assets may be close to the end of their
service life at the end of the contract term, and accordingly the contract director or end of
service project manager must consider:
 additional costs and risks that may be incurred by the private party over the extension
period (and the overall increase in service payments);
 the cost of any other additions, upgrades or modifications;
 indexation of the existing service payment model over the extension period; and
 any modifications required for the performance regime.
Final service payment

Prior to making the final service payment under the project deed, the contract director
should consider a number of issues that may impact the end of term payment. In general ,
these issues may comprise, but are not limited to:
 withholding part of the final payment or requiring a performance bond, if it is likely that
the private party will not perform any of its specified ongoing obligations after expiry of
the project deed;

Par tnerships
Victoria
 making payment of any monies withheld during the contract term for any outstanding
obligations that have been satisfied by the private party, as it is likely that the end of
term date will correspond with the end of the remediation period; and
 calling on the performance bond to the extent that the private party has failed to
perform its obligations (the performance bond will usually expire 12 months after the
end of the project deed).
If the government party seeks to withhold funds or requires a performance bond, the
amount will depend on a number of considerations:
 what contractual rights to withhold money or require security the government party has
under the project deed;
 whether the government party will continue using the project assets at the end of the
contract term;
 whether the government party will be re-tendering the services;
 the risk and effect on the government party of the private party not complying with its
end of term obligations; and
 whether the private party is a special purpose vehicle or a company of substance
financing the project on balance sheet.
Obligations on the private party if the government party elects to re-tender the
services
If the government party elects to re-tender the contract services at the end of the contract
term, the incumbent service provider is obliged to ensure that the services continue with
minimum disruption and risk to both government employees and public users.
In the event of a re-tender the private party’s obligations will include providing:
 performance reports;
 operations manuals;
 asset registers;
 maintenance records; and
 details of current legal documents (including variations, subcontracts, leases).
The project manager or contract director must understand the contractual rights with
regard to the re-tendering obligations of the incumbent service provider. Understanding
these provisions enables the project manager/ contract director to plan and allocate
adequate time and resources to ensure the State is able to access the required data,
without disrupting the activities undertaken by the incumbent service provider.
The government party also requires adequate resources and time to analyse the data and
develop a better understanding of the operational capability of the infrastructure, operating
practices and performance of the incumbent service provider. This understanding will
enable the government party to develop better future service requirements or to run a more
efficient tender process. Understanding this information will enable the contract director or
project manager to:
 develop a thorough understanding of the existing or base service provision;
 develop a better appreciation of the impact of any proposed changes or modifications
to the current service arrangements that might be considered;
 provide potential bidders basic information required to bid; and
 develop a benchmark to assess bids against the current or base service provision.
Again, the contract director or project manager must allocate adequate time and resources
to collect and effectively use this data as part of the end of service arrangements plan.

Continuing obligations
Typically, expiry of a project deed does not affect any accrued rights and obligations under
the project deed as at the expiry or termination date (including any rights and obligations
accrued as a result of a default). In addition, the project deed will typically include specific
provisions that survive expiry of the project deed. These provisions usually relate to:
 indemnities and warranties;
 defects liability period;
 end of term maintenance and refurbishment obligations;
 payment and termination provisions;
 intellectual property;
 confidentiality obligations;
 dispute resolution;
 public relations and publicity;
 records; and
 end of term rights and obligations.
The contract director or project manager will need to review a range of different contractual
provisions, which may be affected by any proposed contract extension. These provisions
include:
 any existing contractual provisions that are expressed in absolute terms rather than as
a percentage of a particular value or amount (e.g. liability caps);
 any contract provisions expressed using actual dates that would not remain valid in an
extension period (e.g. a requirement that a parent company guarantee must remain in
place until a specific date);
 whether specified usage volumes or other utility arrangements are appropriate for the
extension period;
 any access issues that may be affected by leasing arrangements under the existing
contract;
 the impact on the service payment model that may have been structured over the
existing term; and
 the impact on any KPIs, which may need to be adjusted to meet the required level of
service.
Short-term contract extension options

Early in the planning for the end of term arrangements, the contract director will need to
consider the degree of flexibility to extend the existing project deed (i.e. does that State
have a short-term option that it is able to exercise in the existing project deed?). This
flexibility may determine whether or not the State pursues a short-term contract extension.
Additionally, planning for a short-term extension may be a prudent contingency exercise
should implementing new arrangements be delayed.
Importantly, a short-term contract extension should not be regarded as a means of
providing additional time to undertake end of term arrangements or to compensate for poor
planning, as an extension may:
 not be acceptable to the incumbent service provider or subcontractors;
 not provide adequate flexibility to assist with managing timelines for procurement;
 require difficult negotiations with the incumbent service provider; or
 require additional project funding and/or not provide value for money.

Par tnerships
Victoria
As part of reviewing the existing project deed, the contract director must gain an
understanding of the existing project deed provisions (and provisions in associated project
contracts) that may affect a short-term contract extension. Such provisions may include
 whether the contract is able to be extended;
 the potential length of contract term extension;
 the number of times the contract may be extended;
 the process to provide notice to the private party;
 whether the private party has the right to refuse or re-negotiate an extension;
 how the services to be provided by the private party will be determined; and
 how payment for these services will be determined.
All these factors will influence whether a short-term contract extension is a valid option. In
addition to the project deed there may be other project contracts that impact options for the
future, such as lease arrangements that detail site tenure arrangements, which could also
constrain the State’s options.
If a short-term contract extension is a valid option, it is important to recognise that
contractual may need to be amended (i.e. service payment model and performance regime
requirements). If a contract does not specify how either the service payment model or
performance regime requirements will change in the event of an extension of the contract
term, negotiations with the private party should be commenced as soon as is practicable.

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What are the main considerations for resourcing and governance of a contract management team?

What are the main considerations for resourcing and governance of a contract management team?

What factors should be considered when reviewing options for a short-term contract extension?

What factors should be considered when reviewing options for a short-term contract extension?

Par tnerships

Contract management guide

Authorised by the Victorian Government

© State of Victoria 2018

Version Last Updated sections Rationale

Part 2: Key elements of effective contract management ................................... 25

Part 3: Contract performance ............................................................................ 84

Part 4: Specific contract management events ................................................. 107

Contract management guide Page 1

Page 2 Contract management guide

Contract management guide Page 3

Page 4 Contract management guide

Contract management guide Page 5

Part 1: Introducing Partnerships Victoria

Contract management guide Page 7

The Partnerships Victoria framework requires compliance with:

1.1 The purpose of the guide

1.2 The Partnerships Victoria contract management framework

Page 8 Contract management guide

Partnerships Victoria in DTF is accountable for:

1.3 Contract management through the project lifecycle

Contract management guide Page 9

Resourcing Resourcing Manage performance Manage performance Manage performance

Develop tools Manage change Manage change Manage change

 Develop performance  Manage transition  Manage evolution of  Implement end of service

Integrate contract Manage contingency Manage contingency Manage contingency events

Page 10 Contract management guide

Governance Governance Governance Governance

 Project director  Project director  Contract director  Contract director or

Administration Administration Administration Administration

 Is the contract  Populate contract  Update contract  Manage knowledge and

1.4 Where do I start?

Contract management guide Page 11

Input contract management expertise into RFP

Contract execution and Within 60 days of financial close have approval of

Develop and finalise contract administration manual

Implementation and ongoing review of contract

Procurement phase activity – contract management plan

Page 12 Contract management guide

Construction phase activity – contract administration manual

Service delivery phase activity

1.5 Success factors for effective contract management

Dedicated resourcing, governance and probity

Active relationship management, dispute resolution and issue management

Upfront planning, information collection and analysis

Contract management guide Page 13

Active knowledge and information management for performance monitoring

Effective contingency planning

1.6 Contract performance

Page 14 Contract management guide

Service delivery phase

Effective performance monitoring in a Partnerships Victoria project has a robust strategy

1.7 Overview of common contract management events

State-initiated modifications and augmentations

Contract management guide Page 15

Page 16 Contract management guide