The transition from construction to operations covers the period when the infrastructure has been built and is ready to commence operations. An additional element of this phase is sometimes referred to as the ‘bedding-in’ phase, where full payment deductions ordinarily available to the Procuring Authority may be discounted for several months to allow the Project Company to settle in to the operations phase without being penalised.
This phase can be a time of increased tension between the Procuring Authority and the Project Company because of the contractual milestones and payments involved, as well as a change of contractors
This subsection provides guidance on managing the transition from construction to operations. The key elements of successfully managing the transition are summarised below and detailed in this subsection under the heading ‘Guidance’:
Testing and commissioning is a distinct activity marking the transition from construction to service operation. As construction works come to an end, as part of its mobilisation for the operations phase, the Project Company must meet specific contract requirements in order to demonstrate the project’s readiness for operations. The Procuring Authority is required, as part of the contract, to monitor whether these conditions have been satisfied and provide sign off, which can be a complex and time consuming task.
Testing and commissioning activities carried out by the Project Company have to be carefully coordinated with the equivalent verification activities required by the Procuring Authority. This process may also involve a number of third parties engaged to carry out the tests, or to independently verify testing and commissioning results.
The Procuring Authority will wish to utilise the full duration of the testing and commissioning period to ensure that the quality of the asset matches its expectations and standard. However, it may also be under political pressure to reach the service commencement date within tight time constraints (e.g. the service commencement of a stadium for a sporting event). The Project Company may also be applying pressure on the Procuring Authority to sign off the works as availability of revenue is often dependent on completion of the construction works, and so late delivery will erode potential Project Company profit. Rushing testing and commissioning may lead to the parties agreeing to move forward and commence service with an ‘extended’ list of defects, which is effectively incomplete work that causes issues down the track.
Because of the importance of this transition stage, the number of activities that must be carried out by multiple parties, and the prolonged duration, this stage presents a significant challenge to service commencement. The strategy for testing and commissioning has a significant impact on the success of the transition. The parties involved should agree on a seamless and effective procedure eliminating unnecessary delays in operation.
The specific testing and commissioning requirements are set out in the relevant PPP contract, but typically include signing off that:
One issue at this transition stage is that technical experts are often not sufficiently involved in the preparation of the PPP contract in relation to on time testing and commissioning – leading to a potential for unrealistic requirements. In particularly complicated projects with multiple assets, there may be requirements for independent testers to respond within a matter of days against complex testing criteria, which in practice requires weeks to prove to the relevant level of sign off. This can cause unnecessary tension among stakeholders and requires the Procuring Authority to be realistic about the overall construction timeline and desired commencement dates.
Example – Early planning for testing and commissioning
The I-495 Express Lanes project in the USA highlights the need to build adequate time into the project schedule for testing and commissioning of complex tolling and traffic management systems. For that project, it was noted that detailed planning and coordination for the road opening and commencement of tolling should begin at least one year prior to the anticipated opening date.
For more information, see the I-495 Express Lanes Case Study.
A testing and commissioning panel can be set up to manage the challenge of a smooth transition from construction to operations. This panel may consist of representatives of the Procuring Authority, the Project Company, the construction contractor and the operations contractor. It should be set up before the commencement of testing and commissioning.
Example – Operational readiness and airport transfer team in Jordan
An example of a testing and commissioning panel is highlighted in the Queen Alia International Airport Expansion project in Jordan, where the Project Company formed an ‘Operational Readiness and Airport Transfer’ team two years prior to service commencement. The Procuring Authority was closely involved, and the planning paid off with a successful transition.
For more information, see the Queen Alia International Airport Expansion Case Study.
Key Performance Indicators (KPIs) either contain detailed descriptions or leave room for interpretation. Therefore, a ramp-up period can be helpful to allow parties to understand the intent of the project’s KPIs and a test performance evaluation can start before official commencement of the operations phase.
The practical implementation and verification of operational KPIs, and the associated definition of performance failures and payment deductions, is a challenge at the beginning of the operations phase. The definition of performance failure can be a source of tension, given its importance to the revenue of the Project Company. This is particularly relevant if the contract drafting is not clear in terms of recording performance levels and applying payment deductions.
During this period the Procuring Authority should make sure that the Project Company’s quality management and management information system, performance monitoring procedures, overall reporting mechanism, and audit trail supporting the Project Company’s assessment of performance, are robust and tie in with the Procuring Authority’s governance and payment processes.
The administrative staff of the Procuring Authority may not have experience in making large payments during the operations phase (particularly if they are more familiar with traditionally procured projects where there won’t be a large debt service component to the payments during operations). The Procuring Authority should ensure that staff are knowledgeable on internal procedures and payment mechanisms well before the deadline for the first payment becomes due.
Guidance on KPIs and payment mechanisms is detailed in Section 3.2 (Performance Monitoring).
Example – Operations ‘bedding-in’ periods
Several case studies highlight the need to allow adequate time for the parties to become familiar with operational KPIs including allowing ‘bedding-in’ periods for both the Project Company and the Procuring Authority to establish teams, procedures and plans in the first months of operations.
Testing and commissioning issues can pose a significant risk to the relationship between parties. Stakeholder management with respect to the Project Company in detailed in Section 3.3 (Stakeholder management).
The research indicated that the Project Company and Procuring Authority sometimes retreat to an adversarial contractual position when disagreements arise during testing and commissioning. On one side, the Project Company is interested in ensuring that testing and commissioning is completed on time, as it typically triggers available payment. Agreed compensation is also typically payable to the Procuring Authority if completion of construction is delayed. On the other side, the Procuring Authority typically wishes to utilise the full duration of the period contractually available to complete testing and commissioning and to ensure that the quality of the asset matches its expectations and standards.
The skillset required during the operational phase is different from the management and oversight expertise needed during construction. There may be a need to change staff at this stage to account for the change in tasks required, although key staff need to be retained over both phases to ensure knowledge continuity. In addition, this is the period when there is a distinct team change on the Project Company side.
The changes in staff on both sides can create an opportunity for the establishment of a new relationship and different team dynamics. The time needed to rebuild the relationship with the Project Company at this stage should not be underestimated. Joint training and inductions may be valuable at the start of operations and service commencement to help build the relationship.
Notwithstanding the opportunities to build a strong relationship during this transition, several of the projects studied experienced delays in reaching the operations phase in part due to adversarial relationships that were created during the testing and commissioning stage. This implies that this period may also carry a higher risk of disputes. For example, a dispute over commissioning on one waste PPP in the study has gone to court and is threatening the viability of the project itself. This is also a time when there is an increased likelihood of the Project Company bringing forward claims for cost overruns, as this stage gives the Project Company and/or the construction contractor a clear view of the overall cost position for the construction phase. Claims are detailed in Section 3.5 (Claims) and disputes are detailed in Chapter 5 (Disputes).
Example – Staff training
The parties on the Queen Alia International Airport Expansion project in Jordan understood the challenges of transition phases from an early stage, and careful planning started two years before the transition from construction to operations. The effective transition management, as well as early planning and training, ensured good transfer of knowledge from the construction team to the operations team and helped overall readiness for service commencement.
For more information, see the Queen Alia International Airport Expansion Case Study.
Example – construction to operations
Sections of the completed Segarra Garrigues Irrigation System project in Spain began operations while construction was ongoing in other sections, so there has been a crossover period of many years. This is a challenge for the Procuring Authority, who has to manage both the construction and operation phases simultaneously.
For more information, see the Segarra Garrigues Irrigation System Case Study.