1.14 We discussed recent construction experience with a number of major construction companies, construction industry bodies and academics. They confirmed that in their views PFI consortia are taking a long term view of contracts. In their experience, the design, construction and maintenance companies of PFI consortia are working closer together to protect their long term interests.
1.15 In line with the hypothesis outlined above, interviewees told us that PFI financial incentives were indeed very important in encouraging on time delivery of good quality projects, with no price increases to the department. The main driver behind finishing the construction on time is that payments do not commence until the service is being delivered. Construction companies told us that the risk transfer in PFI contracts encouraged them to manage construction risks effectively. There had, however, certainly been cases where they had borne cost overruns, for example due to unforeseen ground conditions or failures to accurately cost aspects of the construction work. Although the construction company, in pricing the contract, would have assumed an element of contingency for such overruns, in some cases these had been exceeded. In most cases, the overruns had not resulted in any price increase to the department.
1.16 Construction companies told us that two main factors had contributed to the greater cost certainty to the public sector achieved under the PFI. First, the terms of a PFI contract do not generally allow for any post-contract price increase for the services specified in the contract. Second, in order to raise private finance for a long term PFI contract, there has to be clarity for the funders over the nature of the work to be undertaken. Construction companies considered this had imposed a discipline on departments to think through the scope of the projects and to develop clearer output based specifications. The improved specifications reduced the need for post-contract variations to the work required which had contributed to price increases in previous public sector construction projects.
1.17 In some cases, there had been early problems with the built asset, leading to a failure to deliver the agreed service. However, the construction companies told us that the financial incentive of service payment deductions had generally resulted in the problems being rectified quickly and at no additional cost to the department. Construction companies, and other industry experts we spoke to, considered PFI contracts were, therefore, achieving risk transfer and delivering price certainty to departments.