2.24 Modus became preferred bidder in January 1999 but it took a further 16 months before the deal was closed in May 2000. Up to just before financial close Modus' price had increased by £99 million (2000 price levels) (or 15 per cent) because of additional work required, an increase in the level of debt and reserves required to reflect these increased capital costs and an increase in financing costs. About £60 million of the £99 million increase can be attributed to interest rate increases, an increased funding requirement as a result of additional capital expenditure, and other movements in the financial markets.
2.25 £37 million of the price increase arose because of additional work required, mainly as a result of the surveys Modus carried out after it became preferred bidder which identified further building work that would be required because of the condition of Main Building. Modus' equity investor told us that surveys are important to contractors and investors in PFI redevelopment projects because there is a risk that undetected problems with the building may add to the private sector's costs in completing the required work on a contract where there is minimal scope for price variations after the contract is signed. MOD had commissioned various surveys, such as an external condition survey and dimension surveys of each building, during the competition and made the results available to the bidders. MOD had also sought to carry out additional surveys at the Invitation to Negotiate stage on behalf of the shortlisted bidders to enable all building work to be identified and priced competitively. It decided not to do so due to the bidders' inability to agree on scope and because of the intrusive and disruptive nature of the surveys which the bidders then required. MOD was advised that this would have breached Health and Safety rules if carried out whilst the building was occupied. Acceptable additional extensive survey work was scoped and carried out by Modus after it became preferred bidder. But in order to control any price increases arising from Modus' survey MOD asked quantity surveyors Bernard Williams Associates to review any proposed price change by Modus for additional building work against an agreed baseline. MOD only approved such price increases after it was satisfied the work was necessary, could not reasonably have been foreseen or deduced by Modus when bidding and could be demonstrated as value for money by reference to external benchmarks of building costs and Modus' prevailing bid rates.