The Issues Between Collaborative Delivery Models And Traditional Project Finance

Financing projects delivered through collaborative delivery models reconciling collaboration with bankability

Collaborative delivery and traditional project finance diverge on their approach to risk. Collaborative models emphasize collective risk-sharing and adaptive management, while project finance relies on discrete risk allocation and contractual enforcement. The models diverge on five critical features¹.

Absence of fixed-price certainty

Alliance and IPD use cost-plus-fee structures where the total cost is unknown at contract execution. Participants develop a Target Outturn Cost (or similar concept) or estimated maximum price collaboratively, and the final outturn depends on actual performance. This means lenders cannot fix the quantum of their exposure at financial close, which is a prerequisite for non-recourse lending, where debt must be sized against deterministic cash flow projections.²/³

Pooled rather than allocated risk

Alliance and IPD pool risk. All project risks and outcomes are jointly shared and managed within the terms of the agreement. The "no blame, no dispute" philosophy means that no single party bears sole contractual responsibility for cost overruns, delays, or defects. From a lender's perspective, this creates an environment in which there is no single creditworthy counterparty standing behind a completion obligation, and therefore no party against whom the lender can enforce a guarantee if the project exceeds budget or is delivered late.

No single-point construction obligation

Under an alliance or IPD contract, there is no single contractor bearing a fixed-price construction obligation. Construction costs are reimbursed on a cost-plus basis with a gain-share and pain-share mechanism against the TOC. If costs exceed the TOC, the pain is shared among participants, but the owner ultimately bears the residual exposure. There is no contractual backstop guaranteeing completion within a defined budget. This is fundamentally at odds with lender requirements for a completion guarantee, which is typically the most critical credit support during the construction phase of a non-recourse financing.

Impaired step-in rights

Step-in rights in conventional project finance operate through direct agreements between the lender, the SPV, and each key project counterparty. The lender's right to step in is triggered when the SPV defaults under the financing documents, and it typically involves three escalating levels of intervention: cure rights (paying amounts due on behalf of the defaulting party), step-in rights (taking over management of the SPV or the project), and novation (substituting a replacement entity for the defaulting party). For these mechanisms to work, lenders require bilateral contracts with identifiable counterparties whose obligations are severable (meaning a single contractor can be removed and replaced without dismantling the entire contractual structure).

Multi-party integration complicates step-in. The project is delivered by a joint management team under shared governance. Replacing one participant disrupts the entire alliance relationship, and consensus-based decision-making is difficult to reconcile with lender enforcement remedies.

Enforcement against an integrated team presents challenges that extend beyond contractual drafting. In collaborative models, a participant's contribution is closely intertwined with the contributions of others, as the project is delivered through a collective, iterative process rather than through discrete, severable work packages. Knowledge, expertise, and decision-making are distributed across all participants, making replacement of one member materially more complex than under a bilateral EPC or design-build contract.

Even if step-in rights were contractually preserved (for example, by carving them out of a "no dispute" clause) a number of practical hurdles remain. For instance, attributing default in a shared-risk model, overriding unanimous governance to impose a replacement, and rebuilding the relational capital and institutional knowledge held by the departing participant, may limit the practical effectiveness of these rights.

Absence of contractual remedies

The cost-plus nature of remuneration means there is no contractual ceiling on construction expenditure. The absence of liquidated damages for delay or underperformance means there is no contractual remedy if the project is late or fails to meet output specifications. Without those anchors, lenders cannot build a non-recourse financial model with sufficient certainty.

Each tension suggests a different category of structuring response. The sections that follow examine these and other responses in detail.

See more

1. Introduction
2. Why does financing remain necessary under collaborative delivery?
3. What is bankability? 
4. What are the collaborative delivery models? 
5. Core principles of collaborative delivery models 
6. Core principles of traditional project finance 
7. The issues between collaborative delivery models and traditional project finance 
8. Available solutions and potential structuring 
9. Conclusion

Footnotes

1. For simplicity, the differentiating elements of collaborative delivery and traditional project finance are presented here in their most distinct forms.

2. We note that PDB's two-phase structure means that the collaborative development phase resolves design and pricing uncertainty before a firm fixed price is established, the same fixed-price certainty that lenders require as a precondition for non-recourse debt.

3. References to "cost overruns" throughout this article should be understood as exceeding construction costs measured against the applicable benchmark (whether a TOC, approved budget, GMP, or similar threshold), not against a fixed contract price in the lump-sum sense. The concept of a "cost overrun" in a cost-plus or cost-reimbursable contract requires some explanation. Unlike a fixed-price or lump-sum contract, where an overrun is measured against a contractually binding price and the risk of exceedance sits squarely with the contractor, a cost-plus structure does not establish a fixed ceiling on reimbursable costs. It does not follow, however, that cost overruns cannot arise. In collaborative delivery models, the jointly developed Target Outturn Cost (TOC), estimated maximum price, or approved project budget serves as the relevant benchmark. When actual costs exceed that benchmark, the excess amount is properly characterized as a cost overrun, even though the contractor is not in breach of a fixed-price obligation. The distinction is significant for three reasons. First, the gain-share and pain-share mechanisms that are central to alliance and IPD contracts are triggered by reference to the TOC (costs above the TOC engage the pain-share regime and, once participants' exposure is capped (typically at profit), residual cost risk reverts to the owner). Second, from a financing perspective, lenders, sponsors, and government backstop providers all measure cost overruns against the approved base-case budget, regardless of the underlying contract form, and instruments such as cost overrun facilities, contingent equity commitments, and completion guarantees are sized and triggered by reference to that budget. Third, where a guaranteed maximum price (GMP) is established (as may occur in progressive design-build once the development phase concludes) costs exceeding the GMP are overruns in the traditional sense, with the allocation of that risk depending on the terms agreed at financial close. Unlike alliance and IPD contracts, where the TOC is a performance benchmark rather than a contractual ceiling, a GMP arises only in progressive design-build once the development phase has resolved enough uncertainty to support a firm price.

Read the original article on GowlingWLG.com