13.3.1 Authorities must include in their Contract a well-developed Change Protocol that deals effectively and appropriately with the different kinds of changes discussed above. Such Change Protocols must be developed during the procurement process, and be agreed and incorporated into the Contract at Financial Close. At the same time, Authorities must ensure (as part of the evaluation process prior to the selection of the winning bidder) that the Contractor will be properly resourced to provide an appropriate change management service to the Authority that complies with the Change Protocol during the operational period, reflecting its responsibilities and obligations as a responsive partner.
13.3.2 Change Protocols should cover, at a minimum, the following elements of the change management process for all types of changes:182
• Notification and Specification;
• Authority Approval;
• Change Implementation;
• Funding and Payment;
• Due Diligence; and
• Documentation and Monitoring.
At each stage, the Change Protocol should clearly define the roles and responsibilities of each party and the timescales within which they are expected to perform, whilst recognising the different requirements (in terms of process and timing) of different types of changes.
13.3.3 Notification and Specification: It is important that Authorities inform the Contractor early on of their intention to request changes (and vice versa). The Change Protocol should set out a clear format and timing for early notification, following which the parties should collaborate in good faith to develop an appropriately detailed specification for the change request. The specification should wherever possible be a restatement of the original output specification, and where not, an alternative output specification. However, it may be that (particularly with small to medium-value changes) an input specification may be more appropriate where the Works or Services required are very specific. Authorities should agree with the Contractor at Financial Close a catalogue of pre-specified small Works and Services that can simply be ordered (at pre-priced rates - see below). The rates in this catalogue can then be reviewed and refreshed each year of the Contract by indexing them to an appropriate inflation index like the CPI or RPIX. The final specification should be signed off by the Authority and submitted to the Contractor as a formal Change Request (unless it relates to a Contractor change), together with any other information the Contractor may reasonably require in order to develop a design solution and estimate for the change.
13.3.4 Contractor's Estimate: Following the receipt of the Change Request from the Authority, the Contractor should generally be given a reasonable period of time (depending on the scale and complexity of the change requested) to notify the Authority if it wishes to refuse to implement the change.183 It would be reasonable for the Contractor to have the right to refuse on the following grounds.184
• if it requires the Service to be performed in a way that infringes any law or is inconsistent with good industry practice;
• if it would cause any consent to be revoked (or a new consent required to implement the relevant change in Service to be unobtainable);
• if it would materially and adversely affect the Contractor's ability to deliver the Service;
• if it would materially and adversely affect the health and safety of any person;
• if it would require the Contractor to implement the change in Service in an unreasonable period of time;
• if it would (if implemented) materially and adversely change the nature of the Project (including its risk profile); and/or
• the Authority does not have the legal power or capacity to require the implementation of such a Change.
If the Contractor agrees to proceed with the change (or, in the case of a Contractor change, once the final specification is agreed), the Change Protocol should set out the timescales by when the Contractor will respond with a design solution (if required) and an estimate of the costs of the change, together with any other information the Authority reasonably requires to approve the change ("the Contractor's Estimate"). The Contractor's Estimate should generally include the opinion of the Contractor on (as appropriate).185 186
• a detailed timetable for implementation;
• whether relief from compliance with obligations is required, including the obligations of the Contractor to achieve the Planned Service Commencement Date and meet the performance regime during the implementation of the change in Service ;
• any impact on the provision of the Service;
• any amendment required to the Contract and/or any Project Document;
• any Estimated Change in Project Costs, taking into account any Capital Expenditure that is required or no longer required;
• any gain or loss of revenue;
• any regulatory approvals which are required; and
• the proposed method of certification of any construction or operational aspects of the Service required by the change in Service if not covered by the procedures specified in Section 3 (Service Commencement).
Timescales for the submission of the Contractor's Estimate should distinguish between the scale and complexity of different change requests. The Change Protocol should set out a definite (and short) timescale for responding to requests for small value changes to the service, whereas timescales for medium to large value changes can be agreed flexibly between both parties in each case depending on the type and complexity of the change.
13.3.5 Authority Approval: Upon receipt of the Contractor's Estimate, the Authority should similarly have a reasonable period of time in which to consider the response, and then indicate its approval or otherwise to the Contractor. The Authority's rights of approval should be related to the origin of the change as discussed above: it should have absolute rights to approve or reject the Contractor's Estimate if the change is an Authority or Contractor change. The Authority should not be able to reject a change in Service which is required in order to conform to a Qualifying Change in Law. The costs of introducing a change in Service resulting from a Qualifying Change in Law (including any resulting variation in the Unitary Charge) should be shared in accordance with Section 14 (Change in Law) and to the extent not dealt with should be borne by the Contractor.
It is recommended that for large-value changes, Authorities should follow a 2-stage approval process with the Contractor providing an initial budget price at Stage 1 (based on which the Authority can confirm it can afford to pay for the change), followed by detailed design work and a fixed price at Stage 2. This will prevent significant abortive costs from being incurred by the Contractor in the earlier (less certain) stages, and also give the Authority more confidence and certainty of affordability.
For small-value changes, Authorities should consider delegating approval authority to local representatives so that such changes can be agreed quickly and without too much process or bureaucracy (e.g. school head teachers could be given the responsibility to agree small value changes related to their school where the change was funded through their own delegated budgets).
13.3.6 Change Implementation: Once the Authority has signalled its approval of the Contractor's Estimate, the Contractor should proceed to implement the change in Service in accordance with the agreed timetable. A standard timescale can be set out in the Change Protocol for small-value changes (such as those listed in an agreed catalogue of small Works and Services), or agreed on a case by case basis for larger or more complex changes.
13.3.7 Funding and Payment: Authorities will generally be liable for the cost of changes associated with Authority changes, and should ensure they have budgeted accordingly. For Contractor changes, the Authority should be under no obligation to pay unless a payment from the Authority is specifically agreed as part of the discussions with the Contractor. Finally, the costs of introducing a change in Service resulting from a Qualifying Change in Law should be shared with in accordance with Section 14 (Change in Law) and to the extent not dealt with should be borne by the Contractor.
Where the Authority is responsible for bearing or sharing the cost of the change in Service, it should generally be assumed that:
• the payment for any capital works will be made on the achievement of milestones or on completion through lump sum capital payments; and
• the payment for any change to Services shall be made through an adjustment to the Unitary Charge.
It should only be in limited circumstances (for instance, large-value works) that the Authority should consider whether the disciplines of securing additional private finance to fund the capital cost of a change will be worth the extra cost and complexity of securing the funding.187 There should, however, be an obligation on the Contractor to use reasonable endeavour to seek any additional finance if required (even though in practice this may be limited to obtaining the finance from the existing Senior Lenders).
13.3.8 Due Diligence
13.3.8.1 Senior Lenders' Due Diligence: It is reasonable for the Senior Lenders to wish to conduct due diligence on changes which can alter the risk profile of the Contract, in order to protect their investment. However, due diligence costs can be significant and can render smaller value changes uneconomic if not managed properly. Accordingly, Change Protocols should set out a framework for due diligence which, whilst protecting the position of the Senior Lenders, allows routine small value changes to be processed at minimal transaction costs. Some ways in which this might be achieved are suggested below.
13.3.8.2 Legal and technical due diligence: Legal due diligence will generally be necessary whenever there is either a change to the terms of the Contract, or a separate Deed of Amendment (see Section 13.3.8.9) is required to give effect to the change. Similarly, where changes in Service pose any additional (and material) design or construction risks, or may have a material impact on the operating and life-cycle costs of providing the original Service, technical due diligence will be necessary and desirable.
The Change Protocol should list circumstances where a change in Service can be agreed between the Authority and the Contractor without the need for legal and/or technical due diligence. This could include for example:
• where the change in Service is called off from a pre-priced catalogue of small Works and Services; and/or
• where the change in Service can be implemented without any material impact on the ability of the Contractor to deliver the existing Service.
13.3.8.3 Financial due diligence: Financial due diligence will typically concentrate on adjustments to the financial model and calibration of the payment mechanism.
13.3.8.4 Adjustments may need to be made to the financial model to give effect to a change in Service, so that the Unitary Charge is adjusted to take into account the change in Project Costs and the Contractor is left in a no better no worse position.188 In particular, the Senior Lenders will wish to conduct due diligence over the financial model to ensure that cover ratios remain acceptable.
13.3.8.5 To improve the efficiency and speed of the process, Authorities should agree with the Contractor that the financial model should generally only be adjusted and reviewed periodically (say once or twice a year), so that all the changes that have occurred during that year can be 'bundled' together into a single cumulative adjustment as necessary. This will avoid the expensive and cumbersome exercise of carrying out financial due diligence on the financial model every time a change occurs, and greatly reduce the transaction costs of undertaking changes. An exception to this rule can be on the occurrence of large-value changes, where it is quite likely that the financial model will need to be adjusted on a case by case basis.
13.3.8.6 Similarly, payment mechanisms are usually calibrated at Financial Close based on the economics of the Project at that time. As changes in Service accumulate, the payment mechanism may well need to be re-calibrated to ensure that it remains a fair and effective method of incentivising the Contractor whilst being acceptable to Senior Lenders. To keep due diligence costs at an efficient level however, it is strongly recommended that Authorities agree with the Contractor (who in turn should agree with the Senior Lenders) as part of the Change Protocol that reviews of the Payment Mechanism should only be triggered after changes up to a certain aggregate value have occurred in a year. Below this threshold, the parties should only need to agree a periodic review of the payment mechanism (such as every year or every two years) to ensure that the calibration stays in line with its desired objectives.
13.3.8.7 Insurance due diligence: Changes in Service, particularly where they involve a change to the insured assets, may also require authorisation from the insurers.189 Underwriters rely on the concept of utmost good faith, and will normally expect to be notified immediately of any material change in the scope of the Project. Materiality will to a large extent depend on the size and nature of the scope change. The insurance arrangements can be structured to give the Contractor a degree of flexibility in processing changes without any additional insurance due diligence. For instance:
• A capital additions Clause in the material damage insurance will cover the Contractor for 'modest' changes in the scope of the Project leading to a change in the capital value of the insured assets. Typically the amount is capped at a relatively low level (e.g. c. £100,000). The insurer will still need to be advised of the material change, though this can be when the insurance is renewed, rather than at the time of the scope change.
• A contract works extension could be included in the insurance package which will cover the Contractor for works undertaken during the operational period.
• The above provisions are fairly standard and are included in the Required Insurance template in Annex 3 referred to in Section 25 (Insurance and Criminal Damage).
13.3.9 Documentation and Monitoring: All changes in Service should be implemented in accordance with the Change Protocol, with the Contractor acting as the prime counter-party responsible for implementation. The alternative to this is for the Authority to contract directly with a builder or FM services company to implement the change, but this is not recommended as, over time, it can lead to serious interface risks and confusions as to responsibilities. It could also have significant value for money implications if it displaces the basic risk allocation embedded in the Contract.
There is a separate issue as to the terms under which the Authority should contract for changes in Service. Small value changes should generally be capable of being covered under the existing terms of the Contract and the Change Protocol where the implementation process is typically straightforward and construction or operation risks are not substantial. However, for those changes in Service where the implementation is complex or the risks are substantial, it is quite likely that the parties will need to agree a bespoke set of terms and conditions under which the Contractor will deliver the change particularly in relation to matters such as:
• payment terms;
• land/site issues;
• statutory permissions;
• warranties from construction or services sub-contractors;
• protections against failure to complete (liquidated damages, deductions, termination rights);
• Relief and Compensation Events (including the interface with the existing Project);
• limits of liability; and/or
• indemnities and insurance issues.
This makes it likely that for complex changes, a separate Deed of Amendment that accurately encapsulates the particular terms agreed in relation to such changes will usually be appropriate.
It is important for both parties to accurately document and monitor all changes, and ensure that they are captured in a change log which tracks any new assets or services agreed as part of the Change Protocol, and references the terms (e.g. Deed(s) of Amendment) under which the changes have been carried out.
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182 See for example Part 18 of the MOD Standard Form Project Agreement for a systematic step-by-step approach to the change management process of all types of changes.
183 Although the expectation must be that any issues the Contractor has with respect to the change are resolved in the collaborative process of developing the specification. Furthermore, small value changes should not generally have any material impact on the Project and so it should be the presumption that the Contractor will have no objection to carrying them out.
184 Other than where the change is required to comply with a Change in Law - this situation is dealt with in Section 14.
185 Other information may be needed on certain projects (for example, to allow a certain level of security clearances). Also, most of this list will not be applicable for small value changes - see e.g. Part 18 of the MOD PFI Project Agreement which differentiates information requirements in the Contractor's response based on the type of changes.
186 The timetable should identify the different phases of the development period, such as technical, pricing, planning, legal, etc and indicate which of the deliverables will be issued in which phase, and the points at which the Contractor will require the Authority to issue any further confirmations to proceed.
187 There is a balance to be struck between requiring Contractors to put in place facilities to cover changes (which may involve a commitment fee), or leaving the financing of change to be dealt with as it arises over the project life. Contractors sometimes include standby facilities or variation bonds as part of their finance package to cover foreseeable changes which can be a useful element of flexibility. Unforeseen changes on the other hand have tended in practice to be funded by the Authority itself through capital payments without prior facilities being put in place.
188 See e.g. Schedule 22 of the English NHS Standard Form Project Agreement Version 3 as an example of how to update the financial model to account for the cost of implanting variations. See also section 13.4.3 for a discussion of including or excluding different types of costs in the costing of variations.
189 Whilst project specific insurance provides a greater level of protection than group insurance, and hence represents the preferred insurance solution, it is worth noting that a change in the scope of the Works is much less likely to have an impact on the insurance programme if a group policy is used. The same point applies, albeit to a lesser extent, to project specific insurances where the cover provided is also on a first loss basis, and so routine operational changes in scope are unlikely to impact on the assessment of the first loss limit.