13.4.4 Pricing Issues
13.4.4.1 There are a number of different pricing techniques which could be systematically introduced into the Change Protocol to increase transparency and certainty in pricing changes (although different techniques will be relevant to different types of changes).
13.4.4.2 Small-Value Changes: The recommended approach for transparent pricing of small value changes is that Authorities agree a detailed catalogue of small works and Services (at pre-set prices that are linked to a suitable inflation index such as CPI or RPI-X), so that such small-value changes can simply be "called off" the catalogue. For small-value changes that cannot be pre-priced in the catalogue, there should be a schedule of rates for any specialist labour required for design, construction, installation or commissioning purposes, and any cost of materials incurred in implementing the change should be charged at cost to the Authority on an open-book basis or using industry benchmarks such as the BMI price book. Wherever possible, the small value change in service should be carried out by a suitably qualified on-site Contractor employee (e.g. a caretaker or handyman) so that specialist labour charges are avoided.190
13.4.4.3 Where small-value changes have long-term lifecycle or FM implications, the Contractor should clearly indicate this to the Authority as part of the specification- setting process, and the pricing for such extensions to the FM and lifecycle Services should be done on an open-book and transparent basis. Wherever practicable, however, Contractors should seek to develop a flexible Service solution so that small- value changes (particularly those drawn from a catalogue of pre-priced works and services) can be accommodated relatively easily.
13.4.4.4 Medium-Value Changes: One of the difficult pricing issues in respect of medium-value changes is that they can encompass a very large variety of fairly bespoke works and services, and frequently have long-term lifecycle and FM service implications. As a result, they are neither standard enough to allow a pre-priced approach (as for small-value changes) nor large enough to warrant a full-fledged technical audit, benchmarking or competitive tendering approach (as would apply for large-value changes).
13.4.4.5 As a result, it is likely that the best method of introducing greater transparency into the pricing of medium-value changes is to adopt a framework approach with:
• standard allowances agreed between the Authority, the Contractor and the Construction and Services Sub-Contractors at Financial Close for professional fees, overheads, contingencies and profit margins (as described above in Section 13.4.3);
• a schedule of rates for specialist labour services and an agreement to charge the cost of materials based defined on market rates (e.g. the BMI price book); and
• the pricing for any bespoke risks (e.g. site conditions) agreed on an open-book basis.
13.4.4.6 This framework approach could reflect a form of "after-sales support" provided by the Construction Sub-Contractor, and a method of on-going support from the Services Sub-Contractor(s) during the operational period. Other than for projects with very long construction periods, it should be possible for the Construction Sub-Contractor to sign up to a support package for implementing medium-value changes that runs for at least 2 years post-Service Commencement. The framework can then be renewed (depending on use and anticipated activity) every few years from then on by the Contractor, or put out to competition.
13.4.4.7 Large-Value Changes: For Large Value changes, it will usually be cost-effective to go through an intensive due diligence process that ensures the Authority can be confident about the value for money of the price developed by the Contractor. Authorities can choose from any of the following approaches to ensuring value for money in pricing large value changes:191
• benchmarking;
• independent technical adviser approach; and/or
• competitive tendering/market testing.
13.4.4.8 Benchmarking: A benchmarking approach requires the Authority to develop its own independent estimate of the cost of the change in Service (perhaps with the assistance of its own technical advisers), so that it can intelligently query the Contractor's Estimate, and judge whether or not it is getting value for money. This benchmarking approach can be quite useful and efficient where the types of Works and Services involved are relatively standard and there is sufficient data available in-house to conduct the benchmarking. In the absence of good data however, there is a risk that the approach can collapse into a dispute between the technical advisers on either side, and other alternatives (such as the ones discussed below) should be considered.
13.4.4.9 Independent Technical Adviser approach: Under this approach, both parties agree a joint appointment for a suitably qualified independent technical adviser (ITA) who will advise on the pricing for the change in question. This jointly appointed adviser would be independent in the sense that it is not contracted solely to either party and therefore would not face a conflict of interest.
The terms of reference of the ITA could include:
• assisting the Authority and the Contractor in developing a high level Reference Price based on a clear specification for the change order as part of the Stage 1 approval, before detailed design or pricing work is done by the Contractor; and
• reviewing and sign off the Contractor's estimates for reasonableness as part of the Stage 2 approval.
The cost of the ITA's services would be borne by the Authority.
13.4.4.10 Competitive Tendering approach: Under this approach, the Authority can require the Contractor to obtain competitive quotes from at least three suppliers for the provision of the Works and Services associated with the change. The Contractor should generally be responsible for:
• deciding how best to package the Works and Service into work packages;
• running the competition for Sub-Contract work packages;
• evaluating and selecting the preferred suppliers;
• negotiating and finalising appointments of suppliers; and
• managing the implementation of the change order.
The Authority should have the following rights in respect of the tendering procedure:
• the right to approve the tendering procedure (including the evaluation criteria) for suppliers to ensure that it is fair and transparent;
• the right to prevent the selection of any person as a prospective tenderer if it reasonably believes that such person does not (or could not reasonably be considered to) comply with the evaluation criteria;
• the right to prevent the selection of any person as a tenderer on the grounds that the prospective tenderer has committed a Prohibited Act;192
• the right to review the list of prospective tenderers. The Contractor should provide the Authority with an explanation of the reasons behind the non-inclusion on the list of prospective tenderers of any person identified as suitable by the Authority, if so requested by the Authority; and
• the right to dispute the Contractor's decision on the selected tenderer.
Where any company associated with the Contractor, its shareholders or its Sub-Contractors intends to bid, the Authority may require that an independent tender process manager is appointed to manage the tendering process.
13.4.4.11 Authorities involved in the BSF, LIFT and similar partnering-based programmes should also explore the possibility of implementing large-value changes through the project development processes set out in these partnering contracts. One of the merits of the partnering approach is that it allows for projects that cannot be specified fully at the start to be developed over time using an open-book collaborative framework that is designed to test value for money.
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190 See e.g. the standard PFI Project Agreement for the BSF programme (available at the Partnerships for Schools website www.partnershipsforschools.org.uk) for an example of this approach.
191 See e.g. Part 18 of the MOD Standard Form Project Agreement, which gives the Authority the option of two other techniques in the form of a full technical and cost audit, and/or requiring the Contractor to seek competitive quotes from substitute Sub-Contractors.
192 This may also include breach of security requirements in certain sectors. See Section 21.4 (Termination on Corrupt Gifts and Fraud) for the definition of Prohibited Act.