13.2.1 Changes in PFI Contracts can be classified in different ways, and it is recommended that Authorities collect data on changes to projects to build up a pattern of changes that are occurring in their sector.
13.2.2 The typology below should help Authorities in drafting change mechanisms that are best suited for the pattern and types of changes occurring in their sector.
13.2.3 Changes in Service can be classified:
By Origin
• Authority change
• Contractor change
• Changes in law
By Timing
• Construction
• Early operations
• Steady state operations
By Value
• Small
• Medium
• Large
By Impact
• Financial only
• Works only
• Services only
• Works and Services
By Type
• Change in use or functionality
• Change in capacity or throughput
• Change in service specifications or performance standards.
13.2.4 Changes by origin: As discussed above, the Authority may wish to make anticipated or unanticipated changes to its Service requirements. In many cases, such changes tend to be driven either by underlying changes in the Authority's business strategy (e.g. changes in care delivery strategies in hospitals) or changes in legislation.179 Similarly, the Contractor may wish to propose changes to either the Service requirement itself (e.g. to improve efficiency), or to the way in which it delivers the Service. Although the output specification should generally be flexible enough to allow the Contractor to make changes to its method of delivering the Service (e.g. by introducing new technology) without formally consulting the Authority, there may be circumstances where aspects of the method of delivery impact on the Service requirement and are therefore critically important to the Authority. In such circumstances, the Authority will wish to be formally consulted prior to the implementation of the changes. This can usually be done most efficiently by including in the Contract a suitable form of review procedure (providing a quicker, simpler way of dealing with these matters than a full-fledged change mechanism).180 Such review procedures deal typically, for instance, with design development and changes to construction proposals, the construction programme, Service Delivery proposals, programmed maintenance and third party use arrangements.
13.2.5 The rights of the parties will vary depending on the origin of the change. For instance, the Authority should generally 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 should generally be given only limited rights to object to or refuse to undertake the changes, such as if the change would imperil the economics of the Project or otherwise make it impossible for the Contractor to meet its obligations under the Contract. In contrast, the Contractor should generally be given the right to propose changes to the Service requirements but the Authority should have an absolute right to approve or reject such proposals. However, if the change is required to comply with a Qualifying Change in Law, then both parties will be obliged to agree and implement it.
13.2.6 Changes by timing: Changes during the construction phase should, where possible, be kept to a minimum and unless a long period of time is scheduled to elapse before the Service Commencement Date (e.g. three years or more) the Authority should not ordinarily seek to change its construction requirements prior to Service Commencement. In exceptional circumstances the Contractor may be able to incorporate such a change during the construction period (if it is requested early enough in the construction programme) more cheaply than after the Service has commenced, and the Contract (in such exceptional circumstances) should then incorporate provisions to reflect this possibility. However, in general Authorities should seek to ensure that no significant changes of scope occur during the construction period, as this can seriously imperil the ability of the Contractor to deliver the project to time and budget.
13.2.7 Changes by value: The majority of unanticipated changes in PFI projects tend to be small in relation to the capital value of the transaction. Such changes (particularly in the accommodation sector) reflect the need to cater to different user preferences in the detailed design and operation of the facility (e.g. changing furniture layout based on teacher preferences). Small and medium value changes need to be specified, agreed and implemented relatively quickly and cost-effectively to avoid users perceiving the Contract as "inflexible", causing in turn a negative impact on user satisfaction.
13.2.8 In contrast, large-value changes typically reflect major changes in strategy or policy that could not have been anticipated when the Contract was signed. As such, they tend to occur less frequently and generally warrant the time and cost of proper due diligence (from the Authority, the Contractor and the Senior Lenders). The Authority should consider what rights the Contractor should have to refuse to implement large-value changes (particularly if they impact on the risk profile of the Project), and how to secure transparent, value-for-money pricing from the Contractor. Large value changes could give rise to procurement issues if they were not properly covered under the terms of the original OJEU advertisement.181
13.2.9 The definition of small, medium or large-value changes should be relative to the size of the Project. For instance, a £100 million hospital PFI scheme may define "small" as less than £5,000, "medium" as £5,000 to £100,000 and "large" as values higher than £100,000; a £1 billion hospital transaction may well have different thresholds.
13.2.10 Changes by impact: A proposed change may involve construction and/or changes to the facilities management "(FM)" services. It is generally easier to accommodate changes which are solely related to the FM service provision but do not involve additional construction works. For the latter, a variety of commercial issues surface in relation to how the change should be implemented - for instance, the choice of the construction company could be significant if there are interfaces between the new construction and the existing facility which will need to be managed by the Contractor. Similarly, large extensions to the built area (particularly in accommodation projects) will tend to have a significant impact on the calibration of the payment and performance mechanism, and on the risk profile of the Project. These will need to be negotiated with the Contractor and the Senior Lenders.
13.2.11 Changes by type: The commercial issues related to different types of change normally arise from their differential value or impact. For instance, changes in use or functionality typically tend not to be large-value, and may not even involve any change to Works or Services (e.g. where changes to classroom timetables mean that hours available for community or third party use of schools need to be modified). On the other hand, changes in capacity would almost certainly involve both new construction and more Services, and would tend to be large in value. Changes in Service specifications or performance standards probably fall somewhere in between and can be much more variable - they may have a purely financial effect (e.g. a change in the risk sharing on energy efficiency), or they may involve both Works and Services.
13.2.12 Other Changes: Occasionally other changes are needed to the arrangements between the parties, which are neither changes to the Services or to the Works or to the Contractor's proposals. These would not fit in to the review procedure or the change mechanisms, but would involve a change to the Contract, negotiated between the parties and effected through a Deed of Amendment. It is vital to the integrity of the arrangements between the parties that all such amendments, together with all other various change orders which might be implemented, are clearly recorded and that the Contract, as an ongoing document, remains complete, coherent and up to date.
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179 Changes in Law are discussed in Section 14.
180 In most PFI contracts, there is a clear and deliberate distinction made between the change mechanism (which is used to make changes to the Authority's Service requirements) and a review procedure through which the Authority is given the right to comment on or (and in some cases - if it wishes - to raise objections to) the manner in which the Contractor delivers the Authority's Service requirements. Apart from its limited rights under the review procedure, the Authority should not otherwise constrain the Contractor's ability to make changes to its Service delivery methodology so long as the Service requirements are met. See, for example, the BSF Standard Form PFI Project Agreement March 2006 at Schedule 6, on the Partnerships for Schools website www.partnershipsforschools.org.uk or the Department of Health Standard Form Project Agreement (Version 3) at schedule 10, available at www.dh.gov.uk.
181 Authorities should seek professional procurement advice when drafting their original advertisements to ensure that, as far as possible, procurement issues do not obstruct the processing of changes.