Over the course of 25 years (the typical operational period for a PFI/PPP contract) it is almost inevitable that there will be significant changes to the prevailing economic, policy and/or legal context when the Contract was signed. This in turn may lead to a desire by the Authority to change the services it requires from its Contractor. Experience shows that such changes, are often agreed informally with the Contractor and if documented at all, are dealt with through informal correspondence rather than through a formal amendment of the Contract. This approach is not recommended as it can lead to ambiguity and subsequent disputes about the nature of the change. Best practice is to establish and maintain a formal change procedure from the date of financial close and use it for all changes whether seen as material or not.
The WIDP Contract contains a detailed Change Protocol (Schedule 21) for agreeing changes to the Contract. The appropriate process for agreeing the Change will depend on many factors, including the anticipated value of the Change, its timing (whether before or after the Services Commencement Date) and the party requesting the Change. The higher the value of the proposed Change, the greater the level of development work needed on both sides before the Parties can agree to its implementation.
The Change Protocol allows the Authority to request changes within the limits set out at paragraph 2 of Part 1 of Schedule 21, for example if proposing or implementing the Change would infringe legislation or cause a Consent to be revoked.
The Change Protocol at Part 6 sets out a procedure for dealing with Construction Changes initiated by the Authority and relating to the period before the Services Commencement Date. This will either involve changes to the Works or Architectural Enhancements within the terms of Schedule 26 (Planning).
The Change Protocol sets out the basis on which the Contractor should price and agree with the Authority a Change to the Facility and/or the Services during the Services Period, depending on whether its value falls within the bands for a Low Value Change (LVC), a Medium Value Change (MVC) or a High Value Change (HVC).
The Contract Management Manual should highlight the different bands, as set out in the Change Protocol. The WIDP Contract suggests the following bands:-
• LVC - cost is below £10,000 and does not affect the Unitary Charge or any completion date;
• MVC - cost is between £10,000 and £200,000 or requires an adjustment to the Unitary Charge which is less than 2% of the Annual Unitary Charge; and
• HVC - cost is more than £200,000 or requires an adjustment to the Unitary Charge that is greater than 2% of the Annual Unitary Charge.
The Contract Manager should also be aware that the Change Protocol includes Low Value Change Thresholds and Medium Value Change Thresholds. These thresholds are relevant to the recoverability of Senior Lender due diligence costs on the relevant proposal for an Authority Change. The thresholds specify the number or aggregate cost of LVCs and MVCs which, if exceeded, allow the Senior Lender to carry out due diligence of the proposed Change and pass on costs to the Authority. So, if the value of the LVC or HVC is below the relevant threshold, the Authority should not be charged for any due diligence costs incurred by the Senior Lenders if due diligence is in fact carried out.
The WIDP Contract at paragraph 6.2 of Part 1 of Schedule 21 assumes that the Authority's liability for the due diligence costs should never exceed 2% of the overall value of the relevant Authority Change. The Contractor may have improved on this overall cap as a bid back item. The Contract Manager should check the terms of its own Contract to see to what extent the Authority is liable to reimburse such due diligence costs.
If the Contractor fails to respond to an Authority request for a LVC, MVC, HVC or a Construction Change or fails to complete a Change in the agreed time period, the Contract Manager can claim liquidated damages through the Agreed Abatements regime. The WIDP Contract in the definition of Agreed Abatement at Part 1 of Schedule 21 suggests a daily rate of abatement to the Unitary Charge of £20 for a LVC, £50 for a MVC and £80 for a HVC. These are indicative only: the Contract Manager should check what was agreed on a project specific basis in the Authority's Contract.
In addition, the Change Protocol is relevant in a number of other circumstances.43
It is important that the contractual provisions for Authority Changes are followed closely as any failure to do so could result in adverse consequences for the Authority. The Contract Management Team should seek input from the Authority's Legal Department at an early stage if considering initiating an Authority Change.
It will be important that a robust approach is taken to challenging costings put forward by the Contractor but equally the Authority must respect the contractual provisions that will normally stipulate that the Contractor should be made no worse off as a result of the change, for example where the Change Protocol indicates it would be appropriate for the Unitary Charge to be revised in accordance with the procedure set out in Schedule 19 (Revision of Base Case and Custody) including Paragraph 6 which includes specific provisions setting out how Third Party Income should be taken into account when using the Financial Model to calculate the change in the Unitary Charge as a result of an Authority Change.
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Example The East London Waste Authority agreed with its Contractor that an automated system for segregating orange "survival" bags containing dry recyclables from the black bag residual waste stream was not working effectively. The parties agreed that the best option would be to decommission the system and separate the survival bags at the kerbside by using separate collection vehicles. The contract change resulted in a reduction in the Annual Unitary Charge in excess of £1m and the revised collection arrangements led to an increase in the Authority's recycling rate of approximately 4%. The collection arrangements were outside the scope of the PFI contract and hence the cost of the revised collection arrangements had to be offset against the saving on the Annual Unitary Charge. However taking this into account the Authority and its Constituent Boroughs were satisfied that the change offered value for money for each of the Authorities involved and Authority Change was duly implemented. |
A register of changes should be maintained throughout the contract term so that a reader of the original signed Contract can easily see which provisions have subsequently been amended. The procedures relating to this register should be included in the Contract Management Manual. These will need to address the fact that some changes to the Contract may require adjustments that cascade through the Contract including Schedules (e.g. Schedule 3 the Contractor's Proposals) to specify the operational effect.
As part of any change, the Authority's Contract Manager should consider with its Contractor whether or not there is a need to update any plans to reflect the newly agreed position. The Contract Manager should assess the impact of the change on the Authority's Final Business Case and its risk log.
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43 The circumstances that would be dealt with under the Change Protocol (Schedule 21) include where the discovery of fossils and antiquities leads to an Authority works requirement dealt with as an Authority Change (see Clause 14) ,where there is, or is anticipated to be, a Qualifying Change in Law (see Clause 44), where the Contractor amends the Design Proposals under the Review Procedure (see Clause 15.7), where required under Schedule 19 (Revision of Base Case and Custody) ,where the Authority and Contractor have agreed an Annual Services Plan in response to the Authority issuing a Best Value Services Change Notice under Schedule 15 (Best Value and Continuous Improvement), changes that the Contractor wishes to make to its design for the Facility, as set out in Schedule 29 (Design Proposals), unless these changes should be dealt with under Schedule 26 (Planning), and changes that the Contractor wishes to make to the Service Delivery Plan included within Schedule 3 (Contractor's Proposals).