2.5 Where there had been a construction related price increase it was mainly due to changes initiated by departments or other parties, rather than the consortium alone. For example, an alteration in the function of a building, an expansion of the building size or a change in legislation. Some of these specification changes were due to new factors affecting the department's needs, which arose after contract award. The eight projects where there had been a construction related price increase reported a total of 17 price increases. Departments were involved in initiating over half of the changes and none of the changes were led by the consortium alone (Figure 3).
2.6 Once a preferred bidder has been appointed then any price variation, whether before or after contract letting, will occur without competitive pressure. Given that PFI contracts are often for 25 years or more, departments may need to vary the contracts to take account of changing needs. This might involve commissioning additional buildings on a site or changing the use of existing buildings. Variations could result in price increases which are not value for money. In our previous report on managing PFI relationships, some public sector project teams which had experienced a decline in value for money after contract letting stated that the decline was due to high charges for additional services.10
2.7 OGC PFI guidance11 deals with issues departments need to keep in mind to deal with change during the life of a PFI project. These include :
■ Low price contracts may give departments little flexibility as the consortium may have little scope within the terms of the contract to absorb unforeseen changes;
3 |
| Price increases after contract award? | |
|
| The Figure shows that no price increases were led by the consortium alone. Departments were involved in initiating over half of the changes. The price changes mainly related to further work, which had not been part of the original specification, on additional or improved facilities or changes to the function of the buildings. | |
|
| Price increase led by: | Number of price increases |
|
| Department | 10 |
|
| Consortium and/or other parties (such as local authorities) | 6 |
|
| Consortium and department | 1 |
|
| Consortium alone | 0 |
|
| Total changes | 17 |
|
| Reasons for price increase |
|
|
| New Facilities | 5 |
|
| Extensions or enhancements to facilities | 5 |
|
| Change in function of prisons' role to take different categories of prisoners | 3 |
|
| Work on buildings which had not been expected to be retained | 2 |
|
| Refurbishment work | 1 |
|
| Design change | 1 |
|
| Total | 17 |
|
| Source: National Audit Office. |
|
■ To preserve flexibility departments should think carefully about mechanisms which will maintain value for money. These include agreed prices for defined options for additional work, agreed rates or profit margins for unspecified further work, the rights to benchmark the pricing of additional work and open book accounting;
■ Changes during the construction or development phase should be kept to a minimum unless a long period of time is scheduled to elapse before the service commences.
2.8 By benchmarking the price for a proposed change against available building cost data for similar work, departments will be able to assess the reasonableness of proposed construction price increases. But in only three of the eight projects we surveyed where there had been a construction related price increase had the departments benchmarked the price increases. In the absence of benchmarking it may be difficult for departments to demonstrate that price increases are value for money.
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11 OGC revised standardisation of PFI contracts (July 2002).