Box 1: Summary approach to conducting a contract savings review Steps to be followed: 1 Check that existing contract is being managed effectively 2 Check whether payment mechanism is being used with effective performance monitoring and payment deductions 3 Check insurance cost sharing provisions 4 Consider opportunities to increase energy efficiency 5 Review asset usage and scope to optimise management and use of asset 6 Consider subletting or mothballing spare capacity (if avoidable costs offer VfM) 7 Review whether service specification reflects requirements and that the public sector is only paying for what it needs. Consider potential for efficiencies from standardisation, procuring services outside the PFI contract and/or seeking repricing through value testing 8 Share / benchmark / obtain cost information, comparing information with other comparable projects 9 Consider the costs and benefits of changing the contract 10 If contract changes are likely to be required, agree suitable cost transparency measures and variation protocol 11 Communicate lessons learned with departmental PFUs and other public sector networks |
2.5 The approach to conducting a contract savings review has been tested through the pilot projects. The savings opportunities in the box above are discussed in the next chapter of this document in the context of the experience of testing them for the pilot projects. It is recommended that authorities carefully consider the scope for savings in these areas.
2.6 The first stage in any contract savings review is a high level review of the contract, including the contracted services and payment mechanism (including cost and gain sharing provisions), and whether any value testing rights have been exercised. The effectiveness of contract monitoring and the service provider's performance should be reviewed against contracted service levels.
2.7 The authority's actual asset usage levels and current service requirements should be compared with the outputs required under the contract. Opportunities should be explored to increase efficient use of the asset, or to mitigate the marginal costs of surplus capacity. Potential to rescope specified services should be considered, taking into account comparable service standards in other benchmark facilities.
2.8 Whether or not specification changes are likely to be of interest, contract managers should seek available data to inform judgements about the current cost effectiveness of service unit cost pricing compared with suitable benchmarks, and whether to exercise available value testing provisions (in conjunction with any service rescoping, if relevant).
2.9 Where any contract variations may be necessary to deliver savings measures, then this may present an opportunity to introduce more recent standard contract provisions with respect to data transparency and variations protocols. In all cases the VfM of making contract changes will need to be considered, taking account of the likely costs and benefits, as set out in the sections below.