2.18 Before planning to negotiate variations to a contract, Authorities should first agree a protocol with the PFI provider to outline how the variations will be agreed. Some contracts, particularly those that use SoPC4 terms, will have an existing variations protocol which allows for timely decisions and (as noted above) transparent pricing at different levels in the PFI project structure. However, many older contracts have less efficient change mechanisms, particularly for smaller changes.
2.19 Following publication of SoPC4, the IUK Operational Taskforce produced guidance3 for pre-SoPC4 contracts to improve management of variations. The guidance includes a sample protocol, similar to the SoPC4 provisions, which can be agreed by the parties and has been designed to be introduced into an existing contract. However, many contracts are yet to implement this protocol.
2.20 Agreement in principle of applying the Variations Protocol for Operational Projects to older contracts will be an area pursued through the planned industry code of conduct. Authorities will require legal advice to apply the Variations Protocol for Operational Projects to their existing contracts. In considering whether to incur these costs, authorities should consider whether there is a VfM case for changing their contract, as referred above in relation to transparency provisions.
2.21 Each PFI project is unique and, rather than provide a prescriptive variation mechanic, SoPC4 notes a number of key principles to be reflected in contractual change mechanisms. Best practice suggests that change mechanisms should be able to accommodate anticipated changes as well as residual unanticipated changes.
2.22 The majority of unanticipated changes in PFI projects tend to be low value within the context of the project. Small and medium changes need to be specified, agreed and implemented quickly and cost-effectively. Authorities should use catalogues of small works and rate cards where possible. Subject to confidentiality restrictions, these may be obtained from another authority (preferably with a contract in the same sector with similar requirements), or possibly the PFI provider.
2.23 Large value changes warrant the time and cost of proper due diligence. To ensure value for money when assessing the price of large value changes, the public sector should have access to appropriate commercial and technical expertise, and can utilise a number of approaches such as benchmarking or requesting the contractor to undertake competitive tendering by obtaining quotes from at least three suppliers. The public sector should be careful to consider the impact large value changes may have and whether they may give rise to any procurement issues if they are not within the terms of the original OJEU notice.
2.24 At a minimum, a variation protocol should cover the following elements:
• Notification and specification of the variation by either party: the proposing party should provide enough detail on the proposed variation as early as possible. Equally, a contractor should be allowed sufficient time to consider and object (if warranted) to a variation on specific grounds. These grounds of objection should be specific enough to avoid ambiguity and any disputes at the time.
• Allow the contractor the ability to price/estimate the variation: for small value changes, the public sector should agree with the contractor a catalogue of pre-priced works that can be "called-off" as and when required. This catalogue can be refreshed each year coupled with an appropriate inflation index. Where a contractor decides to proceed, it should be afforded a reasonable amount of time (although the timescale should be specified) to provide an estimate to the Authority.
• Give the Authority unfettered rights to approve the variation and consequential change/cost to the project: the Authority should have the final right of approval in determining whether to proceed or discuss further the contractor's estimate/response.
• Provide a process for implementation of such variation: timescales should be prescribed (at least for small value changes) and agreed on a case by case basis for medium to large value changes.
• Outline how such variations will be funded, giving options where appropriate: for Authority variations, the Authority is generally liable for the cost. In cases where the Authority is liable to fund or share the costs for a variation (e.g. resulting from a qualifying change in law), best practice suggests the Authority should only fund capital expenditure upon the achievement of milestones or completion during the construction phase and through the Service Payment during the operations phase. Only in limited and pre-defined circumstances (e.g. large value changes) should the Authority consider alternative forms of financing and place a corresponding obligation on the contractor to use reasonable endeavours to seek additional finance.
• Provide a process for due diligence for large value changes: for small value changes, a catalogue of works should negate the need for extensive due diligence. However, it is reasonable to expect (for large value changes) insurance, legal and technical due diligence to be carried out, in addition to any senior lenders wanting to undertake their own due diligence as a consequence of the variation. Where the Financial Model is to be adjusted, such adjustments should be kept to a minimum with periodic reviews once or twice annually.
• Outline the documentation and monitoring obligations of the contractor: the contractor should be the prime counterparty responsible for documenting and monitoring any variations to avoid any interface risks or confusion as to responsibilities.
2.25 The authority should have an unfettered right to request changes in the operational period but a more restricted ability to do so during the construction period. The contractor's right to object to authority changes should be limited to where the economic fundamentals of the project are imperilled or where such changes would make it impossible for the contractor to fulfil its obligations under the contract. Conversely, the contractor can have the ability to propose changes to the service but the Authority should retain an unfettered right to approve or reject such proposals.
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3 Taskforce Note 3: Variations Protocol for Operational Projects (http://www.hm treasury.gov.uk/ppp_operational_taskforce.htm)