Annex A Contract term extension

A.1  At an early stage the Authority should consider what, if any, flexibility it has in extending the term of the original Contract. If sufficient time is allowed for planning the exit/transition period, there should be no need to invoke term extension rights but there may be circumstances where the Authority believes that an extension of the existing Contract may be appropriate or necessary, or where it remains a valid option to be maintained alongside developing plans for transition to a successor service.

A.2  In order to understand what flexibility exists in the timing of the end of the existing arrangement, the Authority should review what right it has to extend the Contract and specifically to understand:

•  how long the Contract may be extended for, and what flexibility there is;

•  how many times the Contract can be extended;

•  how much notice must be given to the Project Company;

•  what rights, if any, the Project Company has to refuse the extension or to negotiate the terms of the extension;

•  what elements of the charges are already provided for in the Contract and will be applicable during the extended term, or whether payment terms will need to be renegotiated;

•  whether a change in the level of services would be required, e.g. an amendment to any elements of the existing service during the extended term which are not provided in the existing Contract and payment arrangements; and

•  whether the Contract provides for a period for the transition of services to a replacement supplier or suppliers at the end of any fixed term or whether the Authority needs to estimate the risks of (1) completing the new procurement; (2) the date of readiness of new services to enable transition to begin; and (3) the length of time until completion of transition.

A.3  In any event, extending the term should not be considered as an easy option to compensate for bad planning since it may:

•  not be welcomed by the Project Company or its sub-contractors;

•  not provide the flexibility to easily manage shifting procurement timescales;

•  require difficult negotiations with the Project Company; and

•  require additional funding.

A.4  There may also be limitations under EU procurement regulations about how and how often the Contract can be extended. If the Authority is in doubt as to what might be allowable under EU law, it should seek professional legal advice.

A.5  If the term extension provisions are to be used, it is better that they are held as a contingency in the event that the procurement for future delivery over-runs. In such cases, the Authority should seek to provide the Project Company with as much notice as possible to avoid disruption and to simplify the Project Company's planning. This further emphasises the need for effective planning and project management throughout the exit/transition period, (e.g. understanding dependencies, monitoring and mitigating risks and tracking milestone slippages which might suggest that a replacement procurement is at risk of over-run).

A.6  If the Contract does not specify how the service charges are to vary in the event of an extension of the term, negotiations should be commenced as soon as the option is considered. It is possible that some of the assets may be close to the end of their economic life at the end of the Contract term or that the Project Company may find an extension to be inconvenient. In either event, the Project Company may seek one or more of:

•  an increase in charges to reflect additional costs that the Project Company wishes to charge for but which it is currently bearing the risk of;

•  an increase in charges to reflect additional costs that are new to the extension period;

•  an increase in charges greater than might occur simply through the continuation of any existing indexation formula in the Contract;

•  a less stringent service credit regime; and

•  less demanding performance targets (e.g. relating to reliability and repair times).

A.7  The Authority must be aware that any such revisions to the payment and performance model could lead to a material reduction in the value or money of services during the extension period.

A.8  The Authority also needs to review:

•  any existing contractual provisions such as limits of liability that are expressed in the Contract in absolute terms rather than as a percentage of Contract charges to see if they are still relevant;

•  whether any provisions would not remain valid in an extension period (e.g. a parent company guarantee or whether the Contract specifies actual dates for certain activities, for example benchmarking rather than periodic timescales);

•  whether any specified usage volumes are still appropriate for the extension period;

•  where PFI service charges have been sculpted over the existing term, whether the charges payable in the last period (i.e. the tail period of the financing) include an amount that you would not expect to see in the charges for extended period either because you are no longer amortising the initial capital cost or you should not include previous smoothing adjustments; and

•  whether there are issues such as who is leasing the land on which the asset stands.