2.19 High value changes will generally be changes for which it is cost effective to go through an extensive due diligence process, for example competitive tendering, to ensure that the public sector achieves value for money. This type of variation is likely to be a "one off" change which may result in an increase in the unitary charge of at least 2% or more or a capital cost in excess of £200,000 (negotiable). Authorities will need to carry out substantial preparatory work in scoping this type of change before issuing a formal variation notice. For example, the authority's technical adviser should provide an estimate of the cost of the change before the variation process is started.
SoPC 4 suggests three options for pricing high value changes:
• benchmarking; or
• independent technical adviser approach; and/or
• competitive tendering/market testing
2.20 For operational projects, where contract managers wish to adopt the benchmarking approach, the contract manager will need to develop his/her own independent estimate of the cost of the change (this may need the assistance of technical advisers) so that he/she can act as intelligent client and, where necessary, query the contractor's estimate. The SPV should negotiate with one of its existing suppliers on an open book basis. This benchmarking approach can be quite useful and efficient where the types of works or services involved are relatively standard and there is sufficient data available in house to conduct the benchmarking. However, where such data is not readily available there is a risk that the approach could collapse into a dispute between technical advisers on either side, therefore the other alternatives outlined below should be considered.
2.21 An alternative option is that both parties jointly appoint an independent technical adviser who will advise on the pricing for the change. This jointly appointed adviser would be independent in the sense that he would not be contracted solely to either party and would not face a conflict of interest. The terms of reference could include:
• assisting the authority and the contractor in developing a high level Reference Price based on a clear specification for a change order as part of the Stage 1 approval, before the detailed design is done by the Contractor; and
• reviewing and signing off the Contractor's estimates for reasonableness as part of the Stage 2 approval.
The cost of the ITA's services would be borne by the Authority.
2.22 Where the option of market testing is chosen, the SPV should be able to:
• invite at least 3 competitive tenders and evaluate these on criteria agreed between the parties; and
• run the competitive tender process and select the preferred supplier on the basis of the economically most advantageous tender.
Parties will need to agree how the work packages are to be priced; the evaluation criteria for selecting the successful contractor; any interface risks between the existing facilities and or the services and the proposed works/services. The SPV will be responsible for running the competition; evaluating the bids and selecting the successful tenderer; carrying out the final negotiations with the preferred tenderers and managing the implementation of the revised works and/or services. The authority should have the right to approve the preferred tenderer. Although SPVs are private sector organisations and are therefore not required to follow the procedures set out in the EU Procurement Services Directive, the principles of fair and open competition and transparency should still apply. SPVs should present proposals to the Authority on how they intend to ensure that fair and effective competition is maintained in the tendering exercise and that there is transparency and equal treatment of bidders.
2.23 The authority and the SPV will need to approve an initial budget for carrying out the variation. SPVs should be asked to supply information on the following where appropriate:
• cost of any staff time incurred in preparing estimates of high value changes i.e. a "mark-up";
• cost of any lifecycle implications resulting from the change;
• cost of any service changes resulting from the change;
• any latent defects risk costing;
• any additional insurance costs
• any change in performance risk. If the SPV has been required to raise additional finance for the change, the charge for bearing the Sub-contractor performance risk will be included in the rates of return required by the funders and will be reflected in the calculation of the revised unitary charge. Therefore, no separate mark-up should be included for this;
• interface risk pricing: i.e. any risks involved in linking the new facilities or services with the existing facilities and/or services. These should be considered on a case by case basis and contract managers may need specialist technical advice to advise on the impact and cost of the risk materialising.
• Due diligence (please see para 5 of pt 1 of Section 3 of this guidance)
2.24 Once the request for a high value change has been made by an authority, the SPV will need to provide full costing information, including any third party costs likely to be incurred, what the project management fee for managing this scale of variation is likely to be, and information on any interface risks and how they are priced. Authorities should agree in advance whether any financial, technical, legal and insurance costs for due diligence will arise required as a result of the high value change request, and agree the budget for these costs. The costs should only be re-imbursed by the authority where they have materialised. The change protocol should provide a mechanism to keep the contract manager informed of how much of the budget has already been used.
2.25 The protocol should address the role of the SPV in carrying out the variation; this could range from project management through to full wrapping i.e. where the SPV pays a fee for a third party to bear the consequences of the risks. This decision will be part of the overall VfM analysis and while construction wraps offer risk transfer benefits, they will often come at a price. There may be circumstances where the authority is considering the direct appointment of a construction contractor to undertake works under a JCT style arrangement. This is not recommended because:
• the authority will have to manage the interface between the new works and the existing PFI services
• the SPV may try to charge a high fee for providing services and dealing with latent defects arising from works provided from a third party outside their control.
2.26 Authorities will need to consider whether any relief from service deductions is appropriate as a result of a high value change. Relief could be given, for example, where the change results in an existing part of the facility being unavailable for a period. In such cases, the parties should agree the time period for which the relaxation of the payment mechanism for this space should take place. For high value changes, authorities should contact the Operational Taskforce based at PUK if they require further advice.