4.31 In assessing the VfM of undertaking a PFI contract it is vital that the procuring authority carefully considers the trade off between affordability constraints and the need for contractual flexibility over the life of a long-term contract. The lowest cost solution will often not be the one that gives the best VfM.
4.32 Though PFI contracts should only be entered into where the public sector's requirements are reasonably stable and can be predicted over the long term, given the duration of PFI contracts (often upto 25-30 years), it is inevitable that the public sector's requirements for services will change to some degree over that time. These changes may occur because of improvements in technology, changing demographics and/or changes in regulations or laws governing certain sectors. Changes may be predictable but some are likely to be unknown at the time of contract signature. In addition some changes may be driven by the public sector and others by the private sector. Some changes may occur because of events outside of the control of either party. Contractual mechanisms for proposing and evaluating changes must be comprehensive and take into consideration that the longer the contract, the greater the likelihood of change.
4.33 Procuring authorities should also specifically bear in mind that during procurement affordability constraints can lead to a reduction in contractual flexibility in service delivery. The desire to remove cost can affect flexibility in several ways including:
• the setting of a long contract life can make the unitary payment lower as the debt held by the special purpose vehicle (SPV) contractor would be repaid over a longer period, but may tie the procuring authority to service delivery for a sub-optimal period of time (see section on contract lengths, para 3.8);
• keeping only a small reserve in the contractor's budget as a contingency to pay for contractual changes may help affordability but may restrict the ability to implement necessary changes. However, holding too large a reserve may be expensive and unnecessary if service requirements are stable; and
• the public sector may find it useful, in order to increase flexibility in processing change requests, for the contract to include pre-pricing of scope variations or unit costs for undertaking works. However, such arrangements have a cost premium attached to them to reflect the unpredictability of factors such as construction and materials inflation. Not incorporating such features might aid affordability but decrease flexibility.