Payment Mechanism

This payment mechanism seeks to provide effective legal drafting, which can be broadly applied to Housing PFI projects. Housing specific circumstances for each project will need to be taken into account through the scope of services as required from the Output Specification and the specific commercial aspects as per the Project Agreement. The Payment Mechanism should be able to be applied to both New Build and Refurbishment Projects, subject to the amendments listed below for non HRA projects.

In the case of refurbished housing units the Payment Mechanism assumes that services are provided shortly after financial close and that the contractor will provide services in accordance with the Output Specification from the services start date to an Initial Property Management Standard until the Dwellings are brought up to the Full Property Management Standard.

The approach adopted draws upon existing drafting of payment mechanisms on the HRA PFI pathfinder projects, including those that have already been signed as well as those that are in the process of procurement.

References to the Output Specification and Project Agreement refer to those model documents contained within this Housing PFI Procurement Pack.

Included within the model payment mechanism is an example table for rectification times and availability deduction ratchets.  These have been prepared based on a review of the rectification times and ratchets used in the projects which have closed to date and those which are very close to closing.  The have also been prepared on the basis that the availability deductions will apply from date of notification if the failure is not remedied within the rectification period (as opposed to applying from the day after the end of the rectification period).  

If any of these assumptions are changed, it is important that the impact of the change on other parts of the calculation assumptions are also considered to ensure the balance of incentives and value for money is maintained.  For example, if availability deductions were changed to applying only from the day after the end of the rectification period, it is expected that the escalation of the availability ratchet would be quicker to maintain an appropriate level of incentive to the Contractor to remedy the failure as quickly as possible.  Alternatively, if the rectification times are shortened, it is expected that the ratchet escalation may be changed to be slower so that the potential deduction is not excessive which may lead to risk pricing and a negative impact on value for money.