2.2.1 The Authority will wish to specify a duration which is expected to result in the best value for money solution for the Project. Factors to be taken into account when deciding on the duration of the Contract will include:
• the Service requirements of the Authority (see Section 7 (Price and Payment Mechanism)) and the Authority's ability to forecast quality and quantity outputs in the longer term;
• the expected life of the assets underpinning the Service and any possible residual value (see Sections 2.2.2 and 20 (Treatment of Assets on Expiry of Service Period)) and the need for and timing of major refurbishment or asset refreshment programmes during the Contract (see Section 11 (Maintenance));
• the importance of continuity in the delivery of the Service, including the degree of transition difficulties and inefficiencies that might be caused by changing Contractors;
• the importance of maintaining performance incentives over time;
• the viability of recompeting the Contract regularly, including private sector capacity and bidders' likely willingness to bid against the incumbent;
• the ability of the Contractor accurately to forecast its base cost; and
• the possibility of an option to extend the term of the Contract by entering into a further contract period with the initial Contractor (this can equally be structured as a no cost early termination option - see Sections 20.2.5 and 20.6 (Valuation of Terminal Payments on Expiry where Residual Value Risk has been Transferred)) even if there is no alternative use.
See further paragraph 3.10 of HMT's Value for Money Assessment Guidance November 2006.47
2.2.2 Some assets (e.g. vehicles or property) may have an alternative use which means that they can generate revenue for the Contractor after the Contract expires (see Section 20 (Treatment of Assets on Expiry of Service Period)). If this is the case, the Contractor should not expect to recover the full cost of financing its investment (i.e. debt and equity return) over the life of the Contract, as it will be able to recover the balance by putting the assets to such alternative use after the Contract expires (e.g. selling them). The price the Contractor charges to the Authority can therefore be lower and the Contract duration shorter than would be the case if the Contractor needed to recover all its costs over the life of the Contract (see Section 20.2 (Assets where the Authority retains Residual Value on Expiry)).
2.2.3 Given the rapid pace of both technological change and Authority functions (particularly in projects such as hospitals), the Authority should ensure that the Contract is sufficiently flexible to allow changes to the Service over time (see Section 13 (Change in Service)). If, however, the Authority is concerned that changes will be so radical that the Service in its present form may become redundant it may wish to retain some flexibility by having shorter Contract periods, consistent with an affordable financing plan, or break points (see Section 21.5.4 (Authority Break Points)).
2.2.4 The impact of certain events on the duration of a Contract is dealt with in the Sections on Compensation Events (see Section 5.2 (Compensation Events)), Relief Events (see Section 5.3 (Relief Events)) and Force Majeure (see Section 21.3 (Termination on Force Majeure)). A delay in the Service Commencement Date should not lead to an extension of the Contract (see Section 5 (Supervening Events)).
Required drafting is as follows:
(a) This Contract and the rights and obligations of the parties to this Contract shall take effect on the [date of this Contract][Effective Date].
(b) The Service Period will commence on the Service Commencement Date49 and terminate on the earlier of:
(i) the Expiry Date; and
(ii) the Termination Date.
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47 See HMT website www.hm-treasury.gov.uk
48 It is often possible for contract signature and financial close to be simultaneous. If there are project specific reasons for conditions precedent being required (i.e. a condition such as planning must be satisfied), then the concept of conditions precedent and "Effective Date" will be needed (and the effect of pricing of interest rate fluctuations, between the date of contract signature and financial close, will need to be addressed). If conditions precedent do exist, the obligation to use reasonable endeavours to satisfy these (to the extent this is needed) should take effect prior to the conditions precedent being met. Other obligations (such as those of confidentiality) may also come into effect prior to the satisfaction of any condition precedent.
49 See footnote 48 above.