2.27 Two of the main purposes of negotiating a change protocol are to achieve value for money for the public sector and to establish transparency of pricing. Key to achieving these aims is to establish what was originally bid by the contractor to cover requests for changes by the public sector, so that contract managers can be clear as to what costs should be reasonably included or excluded when the contractor prices a change request.
2.28 Contract managers may have found some of the following added on to the base cost of a change quoted by a contractor:
• Latent defects % risk premium
• SPV margin on Capex (Capital expenditure)
• SPV management fee
• Maintenance cost
• Lifecycle cost
• FM cost
• SPV margin on Opex (Operational expenditure)
• FM margin on Opex
• Change in law % risk premium
Many of these additional mark-ups are not acceptable and authorities should be careful to examine both the justification for these and the method of calculating. Contractors and SPVs should not be charging mark-ups on mark-ups for example.
2.29 Latent defects % risk premium; this is sometimes claimed where a change to the facilities involves new structural work which increases the risk of a latent defect occurring. Contract managers should not accept this cost as an automatic mark-up. For high value changes this risk premium may be appropriate for some construction based variations e.g. where there is new construction. However, authorities should be careful to protect risk transfer agreed in the original deal whereby the contractor will be taking risk on latent defects on the original facilities i.e. those handed over at service commencement. Where the benchmarking/independent technical adviser option is taken authorities should seek advice from the technical adviser. Where the competitive tendering option for high value changes is adopted, contract managers should review the tender documentation to identify whether this is to be priced (e.g. is this passed to the sub contractor?) to make sure that there is no double charging. If the sub contractor is responsible for managing both the Capex and the Opex, then there is no justification.
2.30 SPV margins in Capex and Opex: SPVs may also claim a separate fee or margin for accepting performance risk on the change and accepting an interface risk between the implementation of the change and the provision of the existing service. The Authority will also need to consider whether mark-ups for performance risk and interface risks are justified. It is unlikely that low value or medium value changes will justify this type of mark-up and where these are asked for on high value changes, SPVs should demonstrate why these mark-ups are justified and where they were agreed to in the procurement. The % should be no higher than the original SPV cost %.
2.31 FM margin on Opex: sub contractors may also charge a margin that provides a contribution to overheads and profits at the sub-contractor level. The percentages quoted for these will vary from contractor to contractor and from project to project. Authorities should interrogate the detailed FM cost schedule from the original bid to see what levels were set in the original deal. Sub contractors may try to argue that this type of mark-up is agreed custom and practice which may have been introduced after the deal was signed.
2.32 SPV management fee: in addition to the costs for materials, SPVs may argue that the labour cost for undertaking a variation and for processing it was not costed in the SPV management fee originally bid (see Agreed Daily Rate in the attached protocol). Contract managers should consult the original bid to see if this is the case. SPVs may try to argue that this type of mark-up is agreed custom and practice which may have been introduced after the deal was signed. For low value changes, the SPV is probably only acting as a "middleman" and passing through the requests to the FM subcontractor and back again. For medium and high value changes, given the possible need for design management, procurement and project management, it is possible that the SPV will be carrying out a more extensive role and may need to bring in additional staff or third party support.
2.33 Maintenance and lifecycle fees: in addition to the capital cost of the change, the SPV will need to price in the cost of on-going maintenance of the item together with any lifecycle replacement cost. Because of the nature of low value changes, these costs are unlikely to apply. For medium and high value changes, contract managers should review maintenance and lifecycle fees on a case by case basis and not accept an automatic mark-up for all changes. When a change is requested late in the operational phase, it is unlikely to need a lifecycle contingency and similarly, the related maintenance cost should be low. Authorities will want to know that the lifecycle replacement has taken place, and should challenge the SPV if they are charging for lifecycle replacement in their estimates and not carrying this out.
2.34 FM cost: some changes will lead to an additional FM cost, e.g. the addition of a new space may lead to an increased cost in cleaning. Contract managers should look at this on a case by case basis. Provision should also be made in the protocol for any decrease in FM costs resulting from a change.
2.35 Change of law: a SPV may try to add a change of law risk percentage to reflect that some changes may be liable to attract a cost from a change in law which was not covered in the assumptions made in the original bid. The change in law provisions should already cover this eventuality and therefore an automatic mark-up should not be included in the estimate for a variation.