3.6.1 Before Service Commencement and at points in the Contract where the Service changes significantly (for example on the introduction of a new asset or new operational procedures), the Contractor should be under an obligation to demonstrate that the arrangements put in place will meet the output specification in the Contract. The method of demonstration by the Contractor will be dependent on each situation but may take the form of:
• a completion inspection of any asset built or developed with demonstration of principal facilities and services;
• completion of acceptance trials for new services; and
• other performance tests or inspections.
3.6.2 The Contract should set out in detail:
• the form of the tests, inspections or demonstrations (''Tests'') to be carried out by the Contractor;
• the timetable for the Tests - it may be appropriate to undertake partial Tests over a period rather than a single Test;
• the consequences of a failure to pass a Test;
• the notice of the Tests to be given by the Contractor to the Authority - this is particularly important if the Authority has to roster staff and resources to participate. If it is essential for the Authority to attend the Tests, the Contract should specify a time period for the Authority to respond to the notice and, to the extent that the Authority does not respond in time, a Compensation Event will have occurred (see Section 5.2 (Compensation Events)) although the Authority can still attend once it has responded;
• the responsibility for the cost and organisation of resources for the Tests. Again this is particularly important if the Authority's staff and resources are to be involved (also the responsibility for costs if Tests have to be repeated should be considered);
• the access for the Authority to witness the Tests (if the Authority does not control the site);
• the documentation required by the Authority as evidence of the results of the Tests;
• who is responsible for assessing satisfaction of the Tests - this should, in most cases, be done by joint assessment by the Authority and the Contractor or by an independent third party, although there will be cases where both parties accept that the Authority is the best judge (e.g. with defence equipment projects the best judge of whether the equipment behaves like it should are its users). The Authority should in no circumstances rely on any technical or other adviser appointed solely on behalf of the Senior Lenders, but may accept an adviser that has been jointly appointed and owes duties to all sets of interested parties; and
• the timing and procedure for acceptance of Service Commencement if the results of the Tests are satisfactory. Acceptance may be confirmed by the third party tester or by the Authority, in which case again the Compensation Event consequence of being late should be borne in mind if the Service cannot commence before any such confirmation is issued.
3.6.3 At the time of acceptance of the Service, there must be no "approval" of the means of delivery of the Service, as this may involve the Authority in taking back part of the Contractor's risk. Rather, acceptance should be based as far as possible on satisfaction by the Contractor of objective Service Commencement based tests.
3.6.4 As stated in Section 3.2.5, the Authority should not generally accept stages of work (e.g. by signing off milestones) prior to the Service Commencement Date and delivery of the full Service as this dilutes risk transfer.56 In certain projects, however, it may be appropriate for the Authority to commence payment before a complete service is available. The principal examples of these are as follows:
• in roads projects, where the Highways Agency in England and Wales, or the Roads Service in Northern Ireland issues a permit allowing traffic to use the road once certain safety standards have been achieved, although construction may not be fully completed. Final acceptance of the road takes place once the Contractor has completed the outstanding construction works and the payment mechanism is structured to ensure that the Contractor is incentivised to do so;
• in accommodation projects, the Authority may accept Service Commencement where certain minor aspects of the construction works are incomplete but which are not integral to the Contractor's ability to provide the main Service - this may be done by specifying particular areas (e.g. landscaping works) or through more generic descriptions (e.g. "de minimis defects, shrinkages or faults"). Whether this is agreed prior to or after signature of the Contract, the Authority must ensure that the Contractor remains incentivised through the payment mechanism to complete the outstanding works. The Authority's technical adviser should advise on what aspects of the works can be completed after Service Commencement;
• in light rail projects where milestones trigger payments of grant, or where a portion of the repayments are derived from fare box revenues;
• in certain projects there may be aspects of the project for which the Authority retains a part of the risk deliberately, as it will ultimately retain responsibility for a part of the overall Service; and
• in projects in which Service Commencement is phased (i.e. different buildings or pieces of equipment are brought into service at different times), then an appropriate phasing in the introduction of payments (again with built-in incentives) may be appropriate.
3.6.5 In projects where Service Commencement is phased, there are two clear alternatives available to the Authority:
• to stipulate that full Service Commencement will only be accepted when all phases in the scheme reach the required output specification level, which would incentivise the Contractor to bring them all up to the output specification standard as quickly as possible. This would mean, however, that the Authority would receive the full output specification level of service for some phases without paying for it; or
• to accept full Service Commencement as each phase reaches the output specification standard, so that payments reflect the service received. A slight variant to this that may be adopted in very large grouped schemes, where it would be administratively cumbersome to have phase by phase Service Commencement, would be to accept Service Commencement in batches as full service availability is confirmed. If this approach is adopted, some of the incentive effect of the first alternative above can still be achieved if payment is not increased pro rata as phases reach the output specification, so that there is in effect an amount retained or abated until the last phase reaches Service Commencement.
3.6.6 The overall time period until the planned completion and service commencement of the last phase is likely to have a significant impact on the relative value for money of these two alternatives - the longer the period, the more reluctant the Contractor is likely to be to accept the delayed payment involved in the first alternative above.
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56 Neither should the Authority seek to impose any milestones during the construction phase.