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Operations and Handback

83. Contract Management and Administrative Process

3.1. Introduction to Contract Management during the Operations Phase

During the Operations Phase, key activities that must be included in managing the PPP contract are: monitoring and managing project delivery and performance against service outputs; monitoring and managing changes; managing disputes; and managing handover processes at the end of the contract.

During the Operations Phase, a change in the level and nature of stakeholder involvement will become evident. On the private partner’s side, the role of the construction companies will shift from construction management and cost control to one of maintenance and risk mitigation. Overall, their level of involvement will decrease (or cease), especially if they sell down their levels of equity and ownership.

Conversely, the role of the operator will increase as the assets are commissioned into service. Performance management is the key activity, followed closely by asset management with a view to maximizing revenue and reducing performance-related penalties. On the side of the public partner, the role changes from oversight of construction and commissioning of the asset to performance oversight. In some cases, the public party may change from an implementation department to an agency with long-term statutory duties related to the services provided under the PPP (for example a transit authority).

Most importantly, in terms of introducing a new stakeholder, is the involvement of the users who are typically members of the public who rely on the performance of the assets to derive the benefits promised to them in the earlier stages of the project development. In cases where the user fees provide all or part of the revenue earned by the private partner, the number of users can also impact on the asset usage and wear, with an impact on life cycle, renewal, and refurbishment costs.

Another major change is the end of the involvement of the Independent Engineer, leaving the private and public partners to engage directly with each other without the intermediation of the objective and neutral third party.

3.1.1. Monitor and Manage Project Delivery and Service Outputs

Performance monitoring procedures can include self-reporting procedures, independent audits, regular meetings and reports, and the use of intelligent systems that automate data collection and reporting processes. The monitoring system implemented must be sound and constantly used in order to deliver Value for Money (VfM).

The monitoring performance system is primarily focused on the service performance (the level of achievement of the service levels or output specified in the contract), but it will also track and monitor other breaches of contract.

If the level of service performance is under the required standard, penalties and/or deductions or abatements might be implemented. Direct penalties are used in some user-pays projects. In government-pays contracts, the financial penalization due to poor service performance (failure to meet the service levels or output required) is commonly by means of payment reductions or adjustments, in addition to the accrual of performance points (see chapter 5.9.3).

Performance points are mainly used to track and record breaches: once non-compliance or performance points reach a specified level, they can result in increased oversight, work by the procuring authority at the private partner’s expense, suspension of work, or termination of the contract under the persistent breach consideration. However, many other methods for determining penalties, deductions and abatements, and for tracking breaches are possible. The contract management team should ensure that they understand the particular method used in their contract. For an in-depth analysis of the performance and reporting please, refer to section 4 of this chapter.

3.1.2. Manage Changes Permitted in the Contract

Well-developed PPP frameworks provide flexibility within the contract in order to accommodate changes that might occur during the Operations Phase. Foster Infrastructure (2012)[1] states that the need for flexibility to implement variations in a PPP typically arises due to one of the following causes.

  • The government wishes to implement a new policy initiative.
  • The specific needs of the government’s project change.

As a norm, the PPP frameworks will provide for the common features of variation clauses, such as the following:

  • The government has a right to request variations to the works and services provided under the contract;
  • The contract includes limits on the size or nature of variations that the government can request or require the private party to implement;
  • The contract includes a process for the private partner to consider and respond to variation requests;
  • The variation process includes mechanisms by which the government can determine whether variation costs represent Value for Money (VfM);
  • The contract specifies how costs and savings arising from variations will be allocated between the parties;
  • In some PPP frameworks, streamlined processes are provided for small variations;
  • Some PPP frameworks contemplate the parties agreeing to the terms of foreseeable variations at the time that the original PPP contract is agreed; and
  • PPP contracts also contain other clauses that provide flexibility, for example, a change in law clauses and government unilateral termination clauses.

Such variation clauses can provide efficiency for the government in implementing changes. However, the government should ensure that any changes are subject to the same degree of scrutiny and control as would apply to any similar government investment or action that was implemented outside of a PPP contract. The change process in the PPP contract should not be regarded as a way of circumventing ordinary government processes, and care should be taken to ensure that any changes offer Value for Money.[2]

In certain countries, there is a perception that PPP contracts do not provide long-term flexibility and can impose significant costs on the government (if there is a need to modify the asset or vary the services provided by the private partner at some point during the life cycle of the project). Recent case studies[3] highlight the need for enhanced contractual flexibility, primarily dealing with possible changes in user needs, which, in the presence of rigid contracts, have sometimes triggered very costly contract renegotiation processes.

Enhanced flexibility, in particular directed to accommodate changes in user needs, is important for the long-term projects typical of PPP. It may be achievable through well designed change management contractual clauses necessary to limit potential abuses. However, enhanced flexibility will inevitably come at the cost of lower predictability, a higher risk for the investing private sector party, and reduced effectiveness of the competitive selection process. If the government seeks too much flexibility in the contract, the risk of change may be unacceptable to bidders. Indeed, if the government needs a very high degree of flexibility for change in the project, this suggests the project was not suitable to be a PPP in the first place.

The detail of change management and dealing with variations in PPP contracts is further explained in section 7 below.

3.1.3. Managing Changes not Provided for in the PPP Contract

As previously mentioned in this PPP Guide, in cases where changes of the PPP contract occur and are not provided for in the contract itself (which often happens due to the lengthy duration of PPP projects), the processes and procedures must be clearly stipulated and followed by both the government and the private partner. Questions (such as what is the procedure, who needs to be responsible for initiating, signing off on, and delivering the decisions that stakeholders need to be consulted on) must be stated in the contract management manual (chapter 7.4.2). Therefore, during any change process, the contract management team needs to address these issues and strike a satisfactory balance between:

  • Encouraging the private partner to manage its risks; and
  • Preventing poor performance by the private partner from endangering the viability of the PPP contract.

While contract renegotiations triggered by changes that are not permitted in the PPP contract may be a common feature of PPPs in some countries, the associated risks should be acknowledged and mitigated. PPP contracts can be designed to minimize major renegotiations at a later stage.

Contract renegotiations require careful analysis and a dialogue between the parties before contract changes can be agreed on and implemented. The use of an experienced, trusted, and neutral facilitator may be beneficial. Whereas some renegotiations are efficient, others represent a form of rent-seeking opportunism and should be discouraged. Renegotiations of significant aspects of the PPP contract have considerable implications for the parties and are, in principle, forbidden under certain laws. They are generally regarded as undesirable due to the following reasons:

  • Competitive bidding may be distorted and the most likely winner is not the most efficient company, but the one most skilled in renegotiation;
  • As renegotiations are carried out bilaterally, the positive effects of competitive pressure are lost; and
  • Renegotiations often reduce the overall economic benefits of PPP contracts and might have a negative impact.

Where the rent seeking is on the part of the government (that is, the government seeks to renegotiate the contract to secure a better deal), a broader reputation risk arises for the entire PPP program, as potential bidders will not be confident of getting their expected benefits from future projects and hence may not bid at all.

In some cases, the changes that are not envisaged within the PPP contract are dealt with by agreeing that the private partner may perform the work, subject to certain conditions, such as providing the service at cost in addition to an agreed mark up. If this is not to the satisfaction of the government, an external bidding process should preferably be implemented. If the cost of the change exceeds a certain amount (for example, a specified percentage of the government payments under the PPP contract), consent from a regulating party or the lenders may be required.

3.1.4. Dispute Resolution

PPP contracts typically specify dispute resolution processes to reduce the risk of legal conflict over technical issues or differences in contract interpretation. Alternative dispute resolution processes may include mediation and third-party arbitration (following a period of time allowed for both parties to make good faith efforts to resolve the dispute themselves).

Prior to mediation or arbitration, dispute resolution processes often define tiered systems of problem identification and resolution through negotiation to encourage problems to be resolved at the lowest levels. For example, the contract may specify a process whereby the parties to a dispute are given a set time period to seek ways to resolve their dispute before it is elevated to their respective managers (see section 11).

3.1.5. Exit and Hand-Back of the Asset to Government

PPP contracts generally specify the required condition of the facility at the end of the contract term. They also normally time the contract term with the full amortization of the capital value of the assets so that there is no obligation for the public partner to reimburse the private partner for any unamortized value at the end of the contract term.

The condition of a facility at hand-back depends on the maintenance and operation procedures employed throughout the life cycle of the facility. Therefore, the private partner is typically required to develop a capital replacement or asset management plan for equipment, systems, and assets. To manage the financial risks associated with hand-back, some PPP contracts require the private partner to establish a hand-back reserve account that begins to accrue toward the end of a contract. This may be used for unplanned repairs required prior to or shortly after hand-back of a facility to the government (see section 14 for more detail on managing hand back).


[1] Foster Infrastructure 2012, Comparative Study of Contractual Clauses for the Smooth Adjustment of

[2] For a discussion of approaches to ensure that changes offer Value for Money, see Foster Infrastructure 2012, Comparative Study of Contractual Clauses for the Smooth Adjustment of Physical Infrastructure and Services through the Lifecycle of a PPP Project, Foster Infrastructure Pty Ltd.

[3] Iossa, Spagnolo and Velez, Contract Design in Public-Private Partnerships – Report prepared for the World Bank (September 2007), page 57 (available at

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