2 An estimated £180 million was paid by public authorities to PFI contactors to undertake changes in 2006. In our examination of these changes we found that:
a PFI deals are offering sufficient flexibility to the public sector. Contractors had handled urgent requests in a timely manner and around 90 per cent of contract managers responding to our survey were satisfied or very satisfied with the quality of work done to implement change requests.
b The timescales for agreement and completion of larger changes compare well with conventionally outsourced refurbishment or upgrade work in the public sector. Timescales were slower for minor changes than for equivalent conventionally outsourced work. This was an occasional source of frustration for front-line users, although service delivery was not affected.
c Taking all projects together, some achieve better value for money than others but several components of the cost of changes were problematic:
i higher value changes were not always competitively tendered, partly because of timing, cost and the difficulties of integrating new work with the existing set of obligations under a long-term contract, though other provisions to validate costs were sometimes in place. Contractual provisions in existing PFI deals do not always give the public sector adequate rights to insist on competitive tendering, although this has now been rectified in the latest guidance issued by the Treasury on standardised terms for future PFI contracts.
ii For minor works, there was little consistency in the methods used by public sector teams to validate costs and in some instances there was no validation. Base costs for the installation of electrical sockets, a common example of a minor change, varied widely between projects and, for the projects we reviewed, were on average higher than benchmark prices published by the Royal Institution of Chartered Surveyors.
iii The cost of replacing an item throughout the life of the contract was usually calculated at the point of requesting the change. This "lifecycle cost" has the advantage of improving transparency of costing but it was applied inconsistently and sometimes added inappropriately.
iv In addition to mark-ups to cover overheads and profit added by service providers, the Special Purpose Vehicle (SPV - a company set up by a consortium of contractors to design, build, finance and operate the asset) often charges a fee, typically 5 to 10 per cent of the cost of the change. In total, an estimated £6 million was paid in such fees in 2006. Usually, this fee was not specified in the contract, although the most recent Treasury guidance requires that this is clear at the outset. Although in principle, the private sector should be able to charge an appropriate fee to cover the overhead cost and profit for work that they have not already contracted to do, we found that this fee often related to work that was carried out by sub-contractors rather than the SPV and was very often not justified.
d Overall, we found that if the change process is managed well and there is a good relationship between the parties, changes are more likely to be cost-effective and implemented quickly. Some public sector authorities do not employ a full-time contract manager, risking false economy in the case of contracts that are worth up to £10 million in payments to the private sector each year.