1.42 Although the intention of the authority and contractor should be that the contract runs its full course, the contract must, as recognised in Treasury guidance6, deal comprehensively with events for which the contract may be terminated and the consequences of early termination. The contract should specify precisely the levels of compensation payable by either party depending on the reasons for early termination. Our survey did not identify any PFI contracts which had been terminated early.
1.43 The contract should also specify certain matters after the contract has run its full term. Such matters may include the quality of the assets to be transferred to the authority, the treatment of intellectual property rights, and the arrangements for re-tendering the contract if appropriate.
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| Example of the importance of change procedures |
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| The contract for the Defence Fixed Telecommunications Service In July 1997, the Ministry of Defence let a ten year contract to BT for the provision of a new Defence Fixed Telecommunications Service for the whole of the Department including the three Armed Services. Contracts for telecommunications and information technology carry risks because these markets are subject to rapid technological changes and purchasers may want new forms of service delivery. In view of these concerns, the Department required BT and other bidders for this contract to consider future changes and to incorporate in their proposals the ability to expand and to include new services and types of technology. Working arrangements were also put in place to enable the Department and BT to meet regularly to consider jointly whether service changes are desirable throughout the contract period. Since the letting of the contract, and the subsequent introduction of the new Defence Fixed Telecommunications Service, the Department has been placing much greater emphasis on exploring with BT how business benefit can be derived by exploiting emerging technologies under the terms of the contract. This is now the main area of discussion between the Department and BT. New services which have been introduced include the Internet Gateway Service, the Managed Public Switched Telephone Network Service, and the Managed Electronic Directory Service, and others are under consideration. Although the Department and BT had established in their PFI contract procedures for dealing with change they have both learned lessons in seeking to apply these procedures. The main lessons have been: ■ The need for robust procedures to demonstrate value for money in a non competitive environment. ■ The need to agree jointly at a very early stage the precise meaning of terms such as cost, price, fair business return and value for money. ■ The requirement for a thorough and shared view of the risk involved in new business, particularly in a demand led environment. ■ The need for the Department to keep in view the totality of the deal when negotiating small value service additions. ■ The need for the Department to understand that the management overhead of bringing new business onto contract must be in proportion to the value of the business to both parties. |
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| Source: National Audit Office survey of authorities and contractors |
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