2.8 The contract provided that should Arteos fail to hand over the Embassy to the FCO by the end of February 2000, the FCO would not make any payments to Arteos until the Embassy was ready (unless delay was caused by the FCO or by force majeure). To achieve handover and thereby commence payments to the supplier, the FCO must first certify that construction has been completed and services are fully in place to their satisfaction. In the absence of this certification, the FCO can under most circumstances terminate the project agreement without payment of compensation. In the event of late delivery of the Embassy, the contract also provided for Arteos to pay the FCO liquidated damages at a rate of about 30,000 German marks a day for a maximum of 100 days. Capped liquidated damages are considered normal in Germany. Following handover, the FCO will fit out the secure zones in the Embassy which are required to enable the Embassy to function. It is expected this process will take from three to four months.
2.9 It is preferable that departments entering into PFI agreements review the main suppliers' arrangements for subcontracting work which is vital to the delivery of the overall project. The purpose of such a review is to ensure that the risks borne by key subcontractors and the incentives to manage those risks are consistent with the structure of risks and incentives in the main contract. If this is not the case, the subcontractor may not be properly incentivised to achieve the Department's objectives.
2.10 The FCO's advisors reviewed the supplier's main subcontracts for the construction and maintenance of the Embassy and the supply of facilities management services. They concluded that Arteos had transferred practically all the risks contained in the project agreement. The FCO considers that the more important protection, of FCO interests, arises through obliging the supplier to comply with the output specification.
2.11 As a result of the novation agreements with the architects and engineers (see paragraphs 1.22-1.24) the FCO transferred risk associated with completing the design after novation to the supplier. The FCO did, however, warrant to the supplier that to the best of its knowledge the architect and the engineer had met all of the FCO's requirements and that no statutory authority had objected to the FCO or to its agents in respect of the existing design of the project. The FCO recognised that the architect and the engineer were in a strong negotiating position and that making such a warranty was required if they were to make progress in novating the agreements which was a key step prior to securing the PFI deal.
2.12 The FCO obtained collateral warranties from the main subcontractors: Bilfinger + Berger as the building contractor and Johnson Controls as facility manager, and a bank guarantee from Bilfinger + Berger up to a maximum of £2.2 million during the construction phase.