3.18 A key area requiring skilled contract management is in relation to contract variations. The Queen's Hospital and the MOD pilot projects are typical in having negotiated variations to the original contract, both in construction - for example to extend the asset capacity - and to modify services in the operational phase (which can also impact on asset lifecycle requirements and costs).
3.19 Commercial teams in authorities should prepare thoroughly for commercial negotiations, and have clear objectives for the public sector going into the negotiation. The principle of variations in PFI project agreements is that the Project Company is left in a "no better, no worse" position, and this includes making sure that the public sector is rebated if variations actually improve private sector returns. Authorities can expect that the Project Company will be required by their lenders and equity investors to maintain the financial standing of the Project Company (as measured by financial ratios set at the outset of the contract) following the variation. Authorities should ensure that surplus returns are rebated to them without constraints that would expose them to project risk, such as any conditionality on the Project Company meeting scheduled payments and equity distribution restrictions in existing financing agreements.