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Advance Payment - A payment made, in advance of delivery of the services, to the supplier.
ADSCR : Annual Debt Service Cover Ratio - The ratio between operating cash flow and debt service over any one year of the project.
Anticipated Final Cost (AFC) - An estimate or forecast of the final cost made before the project is complete which takes on board the risk exposure at the time the estimate is made using risk analysis.
All Risks Insurance - Insurance against physical damage to the project during operation.
Amortisation - Usually applies to the repayment of a loan or finance leases over time. Where the rate of amortisation is such that the full loan will not be repaid over the term of the loan, a single payment of the outstanding balance will be required at the end of the term.
Amortising Swap - An interest rate swap reduced in instalments to match reductions in the notional principal amount.
Annuitising - Converting a sum of capital to an equivalent series of future annual payments or costs.
Appraisal Period - A period over which the asset is assumed to be used for the specific purpose it has been provided for, for buildings this is conventionally assumed to be 60 years.
Assessment of Affordability - An assessment of whether the cost of the project can be paid for within the NHS body's financial process without unacceptable impact on other service provision.
Asset - An item of economic value. The supplier is responsible for designing, constructing, monitoring, controlling and managing the agreed assets used throughout the life of the NDP contract.
Assumptions Book - The source data for the financial model.
Availability Payment - Part of the service fee, this is a payment for making services and/or assets available. Where availability standards are set and not met by the suppliers, the service fee may reduce.
Bank Financing - The bank will lend money directly to the project company. The cost of this funding is usually measured as a margin over LIBOR. The bank will also determine the cover ratios required for the project which have a direct impact on the unitary payment.
Balloon Repayment - A large final principal repayment of a loan (after a series of smaller payments).
Bank Rate - The interest rate charged by a bank for loans. This interest rate comprises 2 elements. A base rate which represents the cost to the bank of providing the loan and a margin which provides the bank with a profit and with compensation against the risk of not having the loan repaid.Base Cost - An assessment of the cost of the project without cost risk and uncertainty. The ground rules on which the base cost estimate has been prepared need to be recorded and understood. Care is needed here: base cost may mean the cost derived from reference data which therefore includes the occurrence of risk.
Baseline Cost - The total cost of the 'do nothing' option for comparison with the cost of the other options outlined in the Outline Business Case (OBC).
Basis Point - One hundredth of one percentage point. A measure normally used in the statement of interest rates which is often used in finance when prices involve fine margins. 100 basis points equals 1%.
Batching - Grouping together of projects for procurement under a single framework agreement within one project structure but leading to individual project agreements for each.
Bespoke Software - specifically written software as new computer programs for the project, typically owned by the supplier or third party contractor and licensed to the customer.
Bid Evaluation - Evaluation of the bids by the client against pre-agreed or pre-notified criteria.
Bidder - A private sector syndicate (or in-house team) bidding for a NDP procurement.
Boilerplate Clauses - Standard clauses that occur in most types of property and banking documents. They provide the mechanics of how the agreement is to operate, for example clauses dealing with applicable law, the means by which notices may be served and jurisdiction clauses.
Bond - Usually a fixed interest security under which the issuer contracts to pay the lender a fixed principal amount at a stated date in the future, and a series of interest payments, either semi-annually or annually.
Bond Arrangement Fee - Charged by the bond arranger to place the bond with investors. If the bond is underwritten the bond arranger will arrange to buy any of the bond that has not been sold to investors at the end of the placement period at a previously agreed price. The arrangement fee is quoted in terms of basis points of the total bond size.
Bond Financing - Funding is raised via selling a bond to one or more investors. Investors will normally be paid throughout the life of the bond with the principal capital being paid on maturity. The interest rate or coupon rate payable is made up of 2 elements:1) the reference gilt rate and 2) The bond spread or margin. Both are determined by the market but the bond spread can also be influenced by efficient selling of the bond.
Bond Margin / Spread - The price, usually expressed in basis points, of the bond above the reference gilt rate. The margin/spread represents the risk cost.
Bond Underwriter - Financial institution that guarantees to buy the whole bond issue for a fee. Usually the same institution will also act as the bond lead arranger, the institution that finds buyers for the bond.
BOO : Build, Own, Operate - A scheme where the supplier designs, constructs, realises, monitors, controls and manages the assets used to provide the outputs.
BOOT : Build, Own, Operate, Transfer - A similar scheme to BOO but the asset is transferred to the public sector at the end of the contract.
Break Option - Customer option to terminate the contract voluntarily on giving notice, usually of a year, to the supplier. In exchange the customer makes a termination payment to the supplier to compensate for the loss of the contract.
Brokerage - System in place which enables NHS Boards to bank/borrow capital resources.
Budget - Set of authorised costs for financial control purposes which may contain a contingency. This may be broken down by projects and programmes. It is not necessarily the same as the prospective costs used for appraisal or business case purposes.
Bullet Repayment - Repayment of a loan in one final instalment rather than a series of principal repayments.
Bundling - Grouping together of projects or services within one project structure in a manner which allows them to be procured, financed and developed as one project.
Business Case - An outline of the objectives, desirable outputs and benefits of a proposed project. It will include an assessment of whether the project is viable and whether a NDP solution would offer the best value for money. See also: Outline Business Case, Full Business Case.
Capital Costs - The costs of durable assets which, under present NHS rules, have a value of greater than £5000.
Capital Resource Limit (CRL) - The amount of capital funding available to NHS Boards for expenditure in a financial year.
Capital Structure - The make up of the funding employed in a business/project. It usually refers to the proportions of debt to equity or senior debt and subordinated debt.
Change Event - An event which may entitle the customer to vary the service specification, i.e. the services, objectives, purposes, scope and requirements of the customer. These will be outlined in the contract.
Change of Control - Provision in the contract allowing the customer to terminate in the event of a change of ownership of the supplier if it adversely affects the ability of the supplier to provide the services.
Change of Requirement - A change in the services required under the contract due, for example, to a change in policy, circumstances or technology.
Client - A team of manager/procurers in the public sector responsible for a NDP procurement.
Comfort Letter - A letter of support for a subsidiary's liabilities which does not constitute a guarantee.
Commercial Close - The point at which agreement is reached on all the commercial terms of the project agreement.
Commitment Fee - Percentage fee charged on the available but un-drawn portion of a bank loan.
Composite Trader - A tax treatment which allows all of the expenditure incurred in design and construction to be relieved against trading income, thereby reducing the Project Co's tax burden. This reduction in the tax paid by the Project Co offers scope to reduce the unitary charge paid by the procuring body.
Concession - The grant of exclusive rights to provide a service or to exploit an asset.
Concession Life Cover Ratio - A measure of how well project revenues will cover debt servicing requirement over the lifetime of a project.
Concession Period - The period of time during which a concession is granted in a NDP building contract.
Consortium - Group of companies who come together either to bid for a single project or who form longer-term relationships.
Condition Precedent - A contractual condition that suspends the coming into effect of a contract unless or until a certain event takes place. For example, an estate contract may have a condition precedent which states that the contract is not binding until and unless the property is subjected to a professional inspection, the results of which are satisfactory to the purchaser. Compare with condition subsequent.
Condition Subsequent - A condition in a contract that causes the contract to become invalid if a certain event occurs. This is different from a condition precedent. The happening of a condition subsequent may invalidate a contract which is, until that moment, fully valid and binding. In the case of a condition precedent, no binding contract exists until the condition occurs.
Contingency - That part of a budget not allocated to specific activities but retained to deal with uncertainties crystallising and risks materialising. It may be allocated at project or programme level but this does not necessarily imply that expenditure of contingency is delegated to the relevant project or programme manager.
Contract Award - The actual signing of the contract following negotiations with the preferred bidder.
Contract Guidelines - Standard contract guidelines published by the Scottish Futures Trust.
COP 10 Letter - A letter provided by the Inland Revenue on application to Project Co., in advance of financial close, which gives an indication of whether or not the Project Co.'s activities are likely to qualify for composite trader tax treatment. This is not an irrevocable tax clearance, since the issue of whether a company qualifies, as a composite trader will depend on how it actually carries on its business in fact.
Cost Benefit Analysis - Method of appraisal which tries to take account of both financial and non-financial attributes of a project and also aims to attach quantitative values to the non-financial attributes.
Cost Effectiveness - Method of appraisal applied to the relationship between benefits or services or costs.
Cost Risk and Uncertainty - The concept that we do not know what the final cost of a project is going to be until the project is complete. The term cost uncertainty would suffice (see risk) but we have added 'risk' to be clear that this includes the impact of events which may or may not materialise, as advocated by some practitioners - see also uncertainty.
Coupon Rate - The rate of interest payable on a bond and other financial securities.
Covenants - Undertakings given by the Project Company to the lenders.
Cover ratios - Cover ratios measure the financial robustness of a project i.e. whether the project can pay the interest and principal on its debt and whether sufficient reserves have been accumulated to cushion any reductions in revenues. The debt providers insist that the project company maintain certain cover ratios and usually have the right to step in and manage the contract if these ratios are broken.
Credit Committee - The internal committee of a financial institution that gives the approval for an investment to be made.
Credit Rating - An appraisal by a recognised rating service of the soundness of an investment.
Deal Creep - Gradual increases in the originally agreed Tariff or Unitary Charge by the Sponsors during Project Agreement negotiations, usually caused by the project requirements not being initially specified in enough detail by the Offtaker or Contracting Authority, or by changes in requirements.
DBFO : Design, Build, Finance, Operate - A NDP contract providing for the design, building, financing and operation of facilities.
Debt - Finance provided by the lenders.
Debt Service - Payment of interest and debt principal instalments.
Decant Risk - The risk that the design and development phase of a NDP project may overrun and therefore existing facilities or services have to be available for a longer period than originally anticipated. Any associated costs usually fall on the supplier.
Deductibles - Initial loss amount borne before insurance claims are paid.
Default Ratio - Minimum cover ratio(s) below which an event of default occurs.
Delay Event - An event delaying completion of the development phase for which the supplier can claim an extension of time to complete the project without financial penalty.
Delay Risk - The risk of increased costs due to delayed completion of the design and development phase of the project.
Demand / Usage / Volume Risk - The risk that the level of demand for the outputs or usage of the facility or services is lower than expected.
Depreciation - The amount of expense charged against earnings to write off the cost of an asset over its useful life, giving consideration to wear and tear, obsolesce and salvage value. If the expense is assumed to be incurred in equal amounts in each business period over the life of the asset, the depreciation method used is straight line. If the expense is assumed to be incurred in decreasing amounts in each business period over the life of the asset, the method used is said to be accelerated.
Design and Development Phase - The first stage of a NDP contract during which the technical infrastructure is designed and developed.
Design and Development Risk - The risk (borne by the suppliers) that the design and asset fail to provide the specified outputs or that the design and development phase overruns in time or in costs.
Distributions - Net cash flow paid to the investors as subordinated debt interest or principal.
Direct Agreement - An agreement between the customer and the supplier's funder allowing a replacement supplier to be provided by the funder should the original supplier default.
Discounted Cash Flows - The revenue and costs of each year of an option, discounted by the respective discount rate. This is to take account of the opportunity costs that arise when the timing of cash flows differ between options.
Discounting - The comparison of quantities which are distributed over time by converting them to a present value by applying a discount rate.
Discount rate - The rate at which the present value of money depreciates in real terms, calculated on the basis of the perceived benefits of receiving revenue/resources sooner rather than later.
Draw Down - Allocation of a contingency to a specific activity for spending. This will be subject to appropriate governance procedures.
DSRA : Debt Service Reserve Account - A Reserve Account with a cash balance sufficient to cover the next scheduled debt service payment.
DSU Insurance - Delay in Start-up insurance, i.e., insurance against the loss of revenue or extra costs caused by a delay in completion after damage to the project.
Due Diligence - A thorough analysis and appraisal, often by a bank, of a project prior to making an investment decision primarily to assess risk. Covers financial, technical, insurance and legal aspects.
Economic Appraisal - General term used to cover cost benefit analysis, cost effectiveness analysis, investment and option appraisal.
Economic Life - The period up to the point when major refurbishment is required for the asset to continue in use.
Early Stage Risk Analysis - The risk analysis that is carried out during the initial stages of the project, especially appraisal or feasibility, which is likely to be less detailed than during implementation, for example, reflecting the materiality of different risk issues.
Easement - A right to use adjacent land, e.g., for discharge of water.
EFC - Estimated final cost or expected final cost, both equivalent to anticipated final cost.
EIA : Environmental Impact Assessment - A study of the effect of the construction and operation of the project on the natural and human environment.
EIB : European Investment Bank - The long-term lending institution of the European Union.
Emergency Step-in - The right of the Offtaker or Contracting Authority to take over the running of the project for reasons of safety or public security.
EPC Contract - Engineering, Procurement and Construction Contract, a fixed-price, date-certain, turnkey contract under which the project is designed and engineered, equipment procured or manufactured and the project constructed and erected.
EPC Contractor - The contractor under the EPC Contract.
Equipment Costs - The cost of supply of Group 2 equipment, the supply and installation of Group 3 equipment and the supply and placing of Group 4 equipment. Equipment costs are not included in the works cost.
Equity - The value of a company or project after all liabilities have been allowed for. The equity is owned by the shareholders.
Equity Bridge Loan - Finance provided by lenders during the construction period for the amount of the equity investment.
Equity IRR - The IRR on the equity paid in by the investors, derived from distributions.
Equivalent Annual Cost - Used to compare the costs of options over their lifespan. Different lifespans are accommodated by discounting the full cost and showing this as a constant annual sum of money over the lifespan of the investment.
Estimate - Approximate judgment of amount.
Expected Cost - Mathematical term for the average cost predicted by a risk model taking the probability element into account.
Expert Assessment - The quantification of risk models using the experience and knowledge of suitable people.
FM : Facilities Management - Management of the asset and services by the supplier. See also Hard and Soft FM.
Facilities Management Agreement - An agreement by which a supplier will undertake to provide facilities management as part of the output specification.
Fair Market Value - The value to be arrived at for the sale of the asset to the customer on termination of the contract.
Final Cost - The eventual cost of the project which is subject to risk exposure until the project is complete.
Financial Appraisal - An analysis of monetary implications of the options.
Financial Close - The date on which all Project Contracts and financing documentation are signed, and conditions precedent to initial drawing of the debt have been fulfilled.
Financial Risk Exposure (FRE) - A term used by the Green Book Supplement for the risk allowance during a project and related to the base cost and anticipated final cost (AFC) through the relationship AFC=BC+FRE; where there is a probability distribution this would be the expected value according to the Green Book.
Financing Risk - The risk that finance will be more expensive than envisaged or that the supplier will be unable to obtain finance for the NDP project. Contracts are sometimes entered into conditional on funding in order to alleviate this risk.
Floating Charge - Charge or assignment on a company's total assets as security for a loan on total assets without specifying specific assets.
Force Majeure - Limited category of events outside the control of the parties to the contract that could result in termination of the contract (for example, act of God).
FBC : Full Business Case - The FBC explains how the preferred option would be implemented and how it can be best delivered. The preferred option is developed to ensure that best value for money for the public purse is secured. Project Management arrangements and post project evaluation and benefits monitoring are also addressed in the FBC.
Full Life Costs - The total cost of options including necessary refurbishment, replacement or maintenance costs likely to occur throughout the whole expected life of the project.
Funding Competition - A process whereby the financing for a project is obtained after a competition involving several potential funders rather than being provided by an incumbent funder retained by the project consortium appointed as preferred bidder.
Gantt Chart - A Gantt Chart is a diagrammatic representation of the timing and duration of the various sequential phases of a project. It is commonly used in project management and routinely available in many project management software packages.
Gateway Review - A review of any capital project carried out at a key decision point in the project's development by appropriately qualified and experienced people independent of the project team.
GDP Deflator - An index of the general price level in the economy as a whole, measured by the ratio of gross domestic product (GDP) in nominal (i.e. cash) terms to GDP at constant prices.
GEM : Generic Economic Model - Provides a means to calculate the value for money of options at OBC and FBC. It also provides a framework for including the adjustment for optimum bias, though the scale of the adjustment for optimum bias needs to be calculated outside the GEM.
Gilts - Government securities traded on the London stock exchange. They are called gilt edged as it is certain that the interest will be paid and they will be redeemed on the due date.
Gilt Rate - The rate of interest paid on a government security. The gilt rate is often considered to be the risk free rate of interest because of the certainty the the interest will be paid.
Green Book Supplement - The anticipated companion document 'Determining risk uncertainty in the early cost estimates of (infrastructure) projects and programmes' to update guidance on appraisal in the presence of risk.
Group 1 Equipment - Items which are supplied and fixed under the terms of the building/engineering contract and included in the works cost. These are generally large items of plant and equipment which are permanently wired/installed. However, excluded from this group are items subject to late selection due to considerations of technological change, e.g. radiodiagnostic equipment, and specialised equipment items best suited to central purchasing arrangements.
Group 2 Equipment - Items which have implications in respect of space/construction/engineering services and are installed under the terms of a building/engineering contract but are purchased by the client under direct arrangements and funded out of the separate equipment budget, along with Group 3 items. They include the items described above as being excluded from Group 1 equipment.
Group 3 Equipment - Items which have implications in respect of space and/or construction/engineering services and are purchased and delivered/installed directly by the client, e.g. furniture, small refrigerators. Like Group 2 items they are funded from the separate equipment budget. Specific guidance on Group 2 and 3 equipment is available from NHS National Services Scotland.
Group 4 Equipment - Items which may have storage implications but otherwise have no impact on space or engineering services and are purchased by the client from normal revenue budgets, e.g. surgical instruments, desktop equipment.
Hardware - The computer and communications equipment used to provide the services, for example, personal computes and servers.
Hard FM - The maintenance of buildings, engineering, landscaping and similar elements of an asset.
Hedging - Hedging is a way of reducing some of the risk involved in holding an investment. There are many different risks against which one can hedge and many different methods of hedging. A hedge is a way of insuring an investment against risk.
Heritable Property - Consists of land and of things built on or attached to land; all other property e.g. equipment, is moveable.
IM : Information Memorandum - Document provided by Boards to potential bidders at prequalification stage to set out the details of the proposed scheme and give background information on the Board and the Commissioners.
IM&T : Information Management and Technology - Covers all aspects of management and use of information, including paper-based information, computers and telecommunications.
Implementation Plan - A plan included as a schedule to the contract, which sets out the timetable the supplier must comply with in the development and supply of any assets and the delivery of the services.
Incentives to perform - Element of the service fee, that rewards the supplier for standards of service which may be higher than the minimum performance standards, specified in the contract.
Independent Checker - An engineering firm not linked to any party to the Project Contracts, who confirms that project construction has been carried out as required by the Project Agreement and EPC Contract.
Independent Tester - A suitably qualified professional/technical/engineering firm not linked to any party to the Project Contracts who will undertake all work necessary to permit the issue of certificate(s) of practical completion, commissioning completion certificate(s) and snagging notice(s) in accordance with and as required by the Project Agreement and EPC Contracts.
Specific duties will include:
Index-linked Bond - A bond where the value of the interest payments and principal are linked to an index of inflation.
Initial Agreement - Stage before Outline Business Case, containing basic information on the strategic context changes required, overall objectives and the range of options that an OBC will explore. (For smaller projects, please see SBC-Standard Business Case.)
Input - A cost incurred in providing a service or running a facility. Can also be used to describe the physical service required to deliver a service (e.g. buildings or staff).
Interest Rate Swap - A hedging contract to convert a floating interest rate into a fixed rate.
IRR : Internal Rate of Return - The rate of return on an investment derived from future cash flows.
Investment Appraisal - The analysis of different options involving capital investment.
Junior Debt - Debt whose holders have a claim on the asset only after senior debtholders claims have been satisfied. See also: subordinate debt, mezzanine debt.
Key Stage Review - An independent review of a PPP project conducted by Scottish Futures Trust on behalf of SGHSC to assess the readiness of projects to proceed to the next stage of procurement. Reviews are undertaken at Pre-OJEU, Pre Invitation To Negotiate and Pre Preferred Bidder stages.
Maintenance Reserve Account - A Reserve Account that builds up a cash balance sufficient to cover the major maintenance of the project.
Monoline insurance fees - Monoline insurance refers to insuring, or wrapping, a bond so that it attains the highest investment grade credit rating (AAA). The impact of "wrapping" the bond is that the risk to the bond investors is reduced and therefore the risk premium element of the bond spread will be smaller. Two parts of the monoline fee will impact on price: 1) The actual fee, measured as a percentage of the bond value and 2) payment structure i.e. if the fee is payable up-front or paid over the lifetime of the bond.
Marginal Cost - The extra cost incurred in producing one more unit of output.
Material Default - A serious default which threatens the continuing provision of services and normally gives the customer a right to terminate the contract if not remedied within a certain period.
Mature Cost Estimate - The cost estimate that is created prior to commitment in the model used in the Green Book Supplement, built from bottom-up risk analysis, and associated with the Outline Business Case (OBC).
Mezzanine Debt - Financing ranked below senior debt, but above equity, in terms of repayment. It is therefore, more expensive and will usually account for a smaller proportion of total funding, 5-10%. Mezzanine funding is often used for large projects when senior debt providers will not provide all of the funding required as they wish other parties to take on some of the risks of the project. Potential providers of mezzanine debt will compete on the interest rate among other things. Mezzanine debt is also often called subordinated debt, i.e. subordinate to the senior debt.
Minimum Payment - The minimum service fee payable to the supplier where the performance of the outputs is at the lowest level possible without the supplier breaching the NDP contract and justifying termination by the customer.
MIRR : Modified IRR - An IRR calculation with a reduced reinvestment rate for cash taken out of the project.
Mono-line Insurer - An institution that insures investors in the bonds guaranteeing the they will be paid. The effect of this is to enhance the credit rating of the bond to that of the Mono-line insurer, typically AAA, the highest rating, which reduces the cost of the bond to the bond issuer.
Mono-line Wrapped Bond - The name given to a bond that has been insured by a mono-line insurer.
Monte Carlo - See risk model.
Monte Carlo Simulations - A statistical method of calculating the effect of risk on outcome by producing a probability distribution of possible outcomes.
Net Present Cost - The net present value of costs.
NHSScotland Fire Safety Management - A suite of documents which explains the policy and technical guidance in fire precautions in hospitals and other healthcare premises, comprising the Scottish Government Health and Social Care Directorates Fire Safety Policy, the Scottish Health Technical Memorandum (SHTMs) and Scottish Fire Practice Notes (SFPNs) which comprise NHSScotland Firecode. Contact Health Facilities Scotland.
Nominal Return - The return on a project or investment including inflation (cf. real return).
NDP : Non-Profit Distributing model - The Non-Profit Distributing (NPD) model has been developed and introduced as an alternative to and has since superseded the traditional Private Finance Initiative (PFI) model in Scotland.
NPV : Net Present Value - The aggregate value of cashflows over a number of periods discounted to today's value.
OJEU - The Official Journal of the European Union which carries notices for procurements by public authority utilities above a specified threshold.
O&M - Operation and maintenance.
On-costs - That part of the capital cost of a building which arises from the interaction of departments within a building and the building within its site.
Operational Phase - The stage of a NDP contract during which the services are provided to the customer or to the public.
Operational Policy - A statement outlining the objectives, principal functions and modes of operation of an entire hospital or a department, particular service or activity.
Operational Risk - The risk, usually borne by the supplier, that operating costs will increase during the course of the contract.
Operational Systems - A description of the way a health building project, a hospital department or a particular service or activity will operate in line with operational policies and within prevailing spatial and resource constraints. Operational systems must take account of the interdependent nature of services and activities and should clarify management responsibilities.
Opportunity Cost - Value in most valuable alternative use, e.g. the value of an asset in the next best alternative use to which the asset could be put, e.g. land already owned that could be sold or the alternative value of a given action like using capital receipts in place of NDP.
Optimism Bias (1) - Belief that things can be built more quickly and cheaply than that is the case.
Optimism Bias (2) - An adjustment (or uplift) made to the base cost of projects at the appraisal stage, originally to compensate for optimism bias (1).
OBC : Outline Business Case - The OBC is a detailed document which identifies the preferred option and supports and justifies the case for investment. The emphasis is on what has to be done to meet the strategic objectives identified in the Initial Agreement (IA). A full list of options will be reduced to a short list of those which meet agreed criteria. An analysis of the costs, benefits and risks of the shortlisted options will be prepared. A preferred option will be determined based on the outcome of a benefits scoring analysis, a risk analysis and a financial and economic appraisal. PPP should be explored.
Output - The actual services provided under a NDP contract to the client against which the supplier's performance is measured.
Output Specification - The requirements set out by the client in terms of what they want to achieve, leaving the tenderers to decide on how they will deliver those requirements (for example a number of operations to be done rather than theatres to be build). The services detailed in the output specification should be capable of objective assessment so that the performance of the supplier can be accurately monitored.
Out-turn Cost - Same as the final cost of a project.
Outsourcing - Where a service that would usually be provided internally by the client, or not at all, is procured from outside the client's organisation.
P50, P80, etc - See percentile.
Pari-passu Security - Security shared by different lenders on an equal and pro rata basis.
Payment Mechanism - The contractual procedure for calculating the service fee due to the supplier for the outputs.
Percentiles - A measure of confidence constructed using probability. For example the 80th percentile cost (also known as the P80) is such that the probability of the final cost being less than P80 is 80%. (P50 is also known as the median).
Performance Bond - Security provided by the EPC Contractor for performance under the EPC Contract.
Performance Monitoring - The monitoring by the client of the performance by the supplier of its obligations under the NDP contract.
Performance Payments - The element of the service fee which varies according to the extent to which the supplier meets defined performance targets.
Planning Supervisor - Should be appointed at the beginning of the project and whose role is to advise the client on health and safety and ensure that:
PLCR : Project Life Cover Ratio - The ratio of the NPV of operating cash flow and debt service during the remaining life of the project.
Portfolio Effect - The concept that the relative variability of a portfolio (or programme) of projects is less than that of the individual projects. This is a mathematical concept (valid only where there are not strong dependencies between the projects) that justifies, for efficiency reasons, holding contingency at programme level rather than allocating it to projects. In other words the programme P80 will be significantly less than the sum of the project P80s.
PPPs : Public Private Partnerships - A generic term for projects involving both the public and private sectors. The involvement can be to varying degrees and the partnership can take different forms.
Preferred Bidder - A bidder with whom detailed final contract terms are negotiated.
Prequalification - A procedure, carried out after initial expressions of interest, under which suppliers must satisfy the client that they have the technical and financial resources, as well as the experience, necessary to undertake and complete the relevant NDP contract.
Prepayment - Early repayment of the debt, which may be in connection with a refinancing.
Prior Information Notice - A notice published in OJEU informing potentially interested parties that an OJEU advertisement will follow shortly.
Probability - Mathematical construct used to quantify the likelihood of an even occurring.
Project Board - A board established to supervise a project, responsible for ensuring that the necessary resources are made available for the procurement and will oversee the operation of the project management team.
Project Company - The Special Purpose Vehicle created to construct and operate a project.
Project Finance - A method of raising long-term debt financing for major projects through “financial engineering”, based on lending against the cash flow generated by the project alone; it depends on a detailed evaluation of a project's construction, operating and revenue risks and their allocation between investors, lenders and other parties through contractual and other arrangements.
Project IRR - The IRR of the Project Company's cash flow before allowing for debt service and distributions.
Project Manager - The individual accountable to an awarding authority for the management of a project. A project manager may be an officer of the awarding authority or an appropriately qualified building consultant. See also the Scottish Government Construction Procurement Manual.
Project Team - A multi-disciplinary team of awarding authority officers augmented by appropriately qualified building consultants, led by a project manager, which is responsible for the management, cost, progress and technical commissioning of a project in accordance with Scottish Government Construction Procurement Manual and the guidance contained in the Scottish Capital Investment Manual.
Proposal - The bidder's response to the client's specification. It sets out the bidder's proposal for the provision of the required services and the service charges required.
QSRA : Quantitative Schedule Risk Analysis - The construction of a risk model aimed at estimating the risk exposure of project milestones, including the delivery date; generally implemented by Monte Carlo analysis of a logically linked project programme.
Rate-fixing Date - The date on which a floating interest rate is re-fixed to the current market rate.
RBS - Risk Breakdown Structure.
Real Interest Rate - The interest rate excluding inflation.
Real Return - The return on a project or investment excluding inflation (cf. nominal return).
Redeposit rate - Once a bond has been sold to investors the project company has a large sum of cash before it is actually required in the project. These proceeds will be put on deposit and the interest rate paid is called the redeposit rate. Banks will normally compete with each other to hold the bond proceeds and may offer different interest rates. It is in the interests of the project company, and therefore the department, to receive a high rate of interest as this income will, to some extent, offset the interest payments falling due on the bond and thus lead to a reduction in the unitary payment.
Reference Class Forecasting - The use of data from other projects to estimate the final cost of new projects. See reference data.
Reference Data - Information about the final cost of previous projects which can be used to characterise the risk exposure of future projects using reference class forecasting.
Reference Project Site - A particular possible solution to the output requirement normally available for inspection by the client.
Re-financing - Prepayment of the debt and substitution of new debt on more attractive terms (e.g. lower cost or longer maturity).
Relief Event - An event anticipated in the contract which may cause the supplier to breach the terms of the contract but for which the supplier will not be penalised financially.
Required Performance Standard - The minimum level of performance required from the supplier under the contract.
Reserve Accounts - Accounts controlled by the lenders (or their trustee or escrow agent) in which part of the Project Company's cash flow is set aside to provide security for the debt or to cover future costs; cf. DSRA, Maintenance Reserve Account.
Reserve Cover Ratio - The equivalent of LLCR for a natural resources project.
Reserve Tail - Proven reserves available after the final maturity of the debt.
Residual Value - The expected value of a capital asset at some future date, normally at the end of a contract.
Residual Value Risk - The risk that the asset's residual value is lower than anticipated at the end of the contract.
Retention Mechanism - The withholding of an element of the service fee at the end of the contract until the supplier has met the required conditions for handover of the assets.
Revenue Risk - The risk that the revenues received for the provision of outputs are lower than anticipated, for example because of lower levels of demand or usage than expected.
Revenue Stream - The income which the supplier expects to receive under the NDP contract.
Risk (1) (the concept of risk) - (ISO 31000) the effect of uncertainty on objectives.
Risk (2) (a specific risk) - A description of a specific event which may or may not occur, together with its causes and consequences.
Risk Allocation - The process of assigning operational and financial responsibility or specific risks to parties involved in the provision of services under the NDP.
Risk Allowance - An amount added to base cost to recognise risk exposure for application in management processes. It is context-specific depending on the process in question: appraisal, budgeting, implementation, etc. It might be set at the expected value, P50, P80, best/worse case, etc.
Risk Analysis - The process of estimating risk (1). This may include uncertainty, sensitivity to scoping options and so on.
Risk Breakdown Structure - A hierarchical expression of the possible risks (2), or types of risk, in a risk analysis and therefore likely to be a key element of a risk model.
Risk Exposure - The output of risk analysis, a representation of the range of final costs (in this context) which credible, essentially the same as the risk profile. May be expressed as best and worse case, a confidence interval (e.g. P10-P90) or a complete probability distribution.
Risk Management - (ISO 31000) coordinated activities to direct and control an organisation with regard to risk (1).
Risk Matrix - A table used as a management tool throughout the procurement process.It will usually constitute of a listing of the various risks and uncertainties to which particular project options are exposed together with an assessment of the likelihood of their occurring and the financial or other impacts on the outcome of the project.
Risk Mitigation - The part of risk management which is focused on identifying and implementing actions to reduce risk.
Risk Model - Quantified model of cost risk and uncertainty constructed using probability. Risk models are often calculated using Monte Carlo methods, a technique involving random sampling.
Risk Profile - Essentially the same as risk exposure, though generally has an implication of the many types of impact of risk (safety, reputation, etc) and is therefore less used when focusing on cost risk.
Risk Reduction - A quantification of the extent to which risk has been reduced, for example the reduction in an AFC.
Risk Register - A list of risks (as per risk (2)) together with other information such as the likelihood of the risk materialising, planned risk mitigation, etc.
Risk Release - Release of a contingency from a budget so that it can be allocated elsewhere, a different project or a higher level contingency. This is necessary for financial efficiency.
Risk Register - A document which identifies the bearer of a particular risk, e.g. a risk matrix which will also contain quantitative assessments (i.e. costs and likelihoods) of the characteristics of the risks.
Risk Transfer - The transfer of risk from the public to the private sector is a fundamental feature of NDP. Risks are of many kinds including political, operational and financial - and not all are appropriate for transfer.
Risk Workshop - Held to identify all the risks associated with a project that could have an impact on cost, time or performance of the project. These criteria should be assessed in an appropriate model with their risk being converted into cost.
Scope - Defined in the Green Book Supplement as a statement of the requirements, functionality and benefits of the project with a view to emphasising that the scope may legitimately vary until quite a late stage in the lifecycle - in which case it needs to be controlled - or may be fixed early on.
Scottish Health Technical Memoranda (SHTMs) - SHTMs are guides to topics of importance in health building design, such as engineering services systems, safety standards and selected building components. Contact Health Facilities Scotland.
Scottish Hospital Planning Notes / Scottish Health Planning Notes (SHPNs) - SHPNs set out 'best practice' standards of accommodation and environmental services for health buildings. Contact Health Facilities Scotland.
Scottish Hospital Technical Notes (SHTNs) - SHTNs are guides to topics of importance in health building such as 'Post Commissioning Documentation for Health Buildings in Scotland' and 'Management and Disposal of Clinical Waste'. Contact Health Facilities Scotland.
Securitisation - The process by which the supplier seeks to use the revenue stream it anticipates receiving under the NDP contract to secure financing arrangements.
Senior Debt - Usually the largest proportion of the total funding, typically in NDP deals between 80-90%, but sometimes even higher. There are 2 sources of senior debt: bank financing and bond financing. In the event of bankruptcy, senior debt must be repaid before subordinated debt is repaid.
Sensitivity Analysis - Analysis of the effects on an appraisal of varying the projected values of important variables.
SE/STUC Staffing Protocol - Agreement between the Scottish Executive and the Scottish Trades Union Congress which sets out how stag should be involved in the PPP process and how employment matters should be handled. See HDL(2003)50, HDL(2004)18 and HDL(2006)10.
Service Concession Contracts - A contract under which a customer engages a supplier to provide services and allows it to exploit the provision of the service to the public for profit.
Service Credits - A charge made by the supplier to the customer if the service levels are not achieved.
Service Fee - The fee payable to the supplier for the provision of outputs which will reflect the quality and availability of the services. A single payment, sometimes known as the unitary fee, is usually made to the supplier although the amount will consist of several elements individually assessed.
Service Level Agreements - Contractual arrangements with sub-contractors who provide services at agreed levels of quality.
Service Levels - The required level at which the services must be provided under the contract, normally a variety of targets which must be met or service credits will be due to the customer.
Service Test - This term refers to the running of the service, in advance of the go live date, to test whether it meets the requirements of the NDP contract.
Services - The work to be carried out under the contract as well as the on-going provision of services throughout the lifetime of the NDP contract to the customer. A detailed description will be included in schedules to the contract and the client's requirement.
Software - Computer programmes.
Soft FM - Services, other than building and engineering (Hard FM), which support the operation of the facility. Soft FM typically includes catering, cleaning, parking etc.
Special Purpose Vehicle - The project company established by the bidder/sponsor which has as its sole purpose the delivery of a project. Its shareholders will include sub-contractors and finance providers.
Specially Written Software - Software created specifically for the performance of the NDP contract.
Step in Rights - The right of the customer, where the supplier defaults, to intervene in one or more of the supplier's areas of responsibility.
Sub-Contractors - Third parties which provide a part of the services to the supplier under sub-contracts.
Subordinate Debt - Debt over which senior debt takes priority. In the event of bankruptcy subordinate debtholders receive payment only after senior debt claims are paid in full. See also: junior debt, mezzanine debt.
Supplier Default - Breach of the terms of the NDP contract by the supplier which in cases of serious default may justify termination or the exercise of step in rights.
Switching Point - The value of a key variable at which the output of a model changes from positive to negative.
Syndication - The process by which the Lead Managers reduce their underwriting by placing part of the loan with other banks
Tail - Continuing project revenues after repayment of the debt; cf. reserve tail.
Taxation Risk - The risk that changes in taxation legislation will increase costs or reduce the supplier's return on its investment.
Technical Infrastructure - Equipment which provides the services and will be developed, procured and owned by the supplier.
Technology / Obsolescence Risk - The risk that the asset will cease to be technically the most effective and efficient way of delivering the service during the concession service.
Technology Refreshment - The supplier's commitment to continue to provide new technologies under the contract.
Termination Payment - A payment made to the supplier by the customer on termination of the contract, the amount will be dependent on the reason for termination.
Third Party Contractor - The supplier of any third party asset or service.
Third-Party Risks - Risks that failures by parties not involved with the Project Contracts may affect the completion or operation of the project.
Third Party Software - Software which is licensed from a third party other than the supplier for example word processing systems and database software.
Transfer of Undertakings (Protection of Employment) Regulations 1981 - These regulations cover situations where the provision of a service changes hands. This can happen in NDP projects where a service is transferred with an existing workforce. The purpose of the regulations is to protect employees who are affected by a transfer of the undertaking in which they are employed.
Transferred Assets - Assets which the client wishes the supplier to take over as part of the services and which may ultimately be replaced by new services supplied by the supplier.
Transferred Staff - Employees of the client who will transfer over to the supplier along with any transferred assets.
Unbiased Estimate - An estimate where the probability of the outcome being higher than the estimate is equal to the probability of the outcome being lower than the estimate.
Uncertainty - Arises when the outcomes of courses of action are indeterminate or subject to doubt.
Uncertainty - See cost risk and uncertainty. Uncertainty is often used to describe situations where the outcome is not known, but there is no identified event which may or may not occur, the impact of future inflation for example. Often uncertainty has an upside whilst risk is generally a downside.
Unitary Payment (or Unitary Charge) - The single payment (incorporating payments for services and assets) made at agreed intervals by the client to the supplier over the course of the contract term for the provision of the services agreed within the contract.
Uplifts - A generic term for estimating risk allowances which does not benefit from specific project risk analysis, for example optimism bias (2).
Usage - The amount that the services are used.
Usage Payment - The element of the service fee which varies according to usage.
VAT - Value added tax.
Variability - A spread of possible outcomes around an expected outcome.
Variant Bid - A bid to deliver the client's requirement which differs from the standard bid.
Warranties - Guarantees against failure of equipment, provided by the EPC Contractor.
Whole Life Asset Performance - The performance of the asset over its anticipated life span.
Whole Life Cost - The full capital and revenue costs of a project over its life. Usually expressed as a Net Present Cost to reflect the relative values of costs at different times over the life of the project.
Working Capital - The amount of funding required for inventories and other costs incurred before receipt of sales revenues.
Works Cost - The cost of construction.
Wrapped Bonds - Bonds guaranteed by a monoline insurance company.
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