3 Management fees and the pricing of small changes

17. In addition to changes over £100,000, public sector authorities pay for a large volume of smaller changes. Such changes often attract management fees. Special Purpose Vehicles (SPVs) are paid out of the unitary payment agreed when the deal was signed for the day to day management of PFI projects, including staff and other administrative costs. The company providing facilities management for a PFI building will implement most changes, especially small ones, while the SPV usually manages the process.17

18. For most small changes, SPVs simply act as conduits, passing requests for changes from the public authority to the facilities management provider and back again. SPVs have, however, increasingly sought to charge additional management fees for processing change requests. These fees ranged from 2% to as much as 25% of the value of the changes, adding up to an estimated £6 million to the cost of changes made in 2006.18

19. In most cases the costs of processing changes are small and come within the functions that an SPV carries out under the original contract. For instance, where only small changes have been made, public authorities should not require the re-running of the financial model for the PFI deal. Nevertheless, it is one of the reasons put forward by SPVs for charging management fees.19 On occasions, however, SPVs have acted unreasonably in trying to impose management fees for small changes, employing spurious arguments and not relating fees to work done. SPVs should only be entitled to recover the cost of additional work done where this cost is actually incurred.20

20. The latest Treasury guidance on PFI contracts, published in March 2007, recommended that the proper payment of contractors for providing an effective change management service should be part of the original contract. There should then be no need for additional SPV fees on individual changes unless these are particularly complex. The Treasury's current guidance makes it clear that such fees are unjustified and should be removed from existing deals. The Treasury could not guarantee that every public authority would comply, but it expected the March 2007 guidance to have a major effect across PFI deals.21

21. Partnerships UK is now working with public sector authorities managing existing PFI deals that were agreed without the benefit of the latest Treasury guidance. It is too early for Partnerships UK to say how far their actions will reduce or eliminate SPV fees, although the Comptroller and Auditor General's Report identifies one instance where this has happened (Figure 4).22

Figure 4: Changes made to the structure of management charges

A fee of 8.5% was charged by the SPV on all changes at the PFI hospital in Blackburn, which became operational in 2005. In 2007, the hospital began implementing its "meeting patients' needs" programme, which involved considerable changes to the estate. The hospital used this as an opportunity to renegotiate the SPV fee. Changes over £5,000 now attracted a fee based on a sliding scale from 4% to 8.5% and the hospital is seeking to bundle changes together, thus attracting the lower fee. In addition the SPV had agreed that it should never have charged fees on changes under £5,000 and has repaid £17,000 to the hospital.

Source: C&AG's Report, Case Example 4

22. As well as management fees, the public sector incurs direct costs for small changes. For approximately half of small changes, contract managers were using a schedule of rates, agreed at the time the contract was signed, to validate costs. In many cases, this was seen as an efficient way of ensuring costs were reasonable, although such schedules could only anticipate the most common jobs. Public sector contract managers considered that there was a trade-off between seeking to challenge the costs of changes and avoiding delay.23

23. In a small number of projects, public sector contract managers had not sought to validate the cost of minor changes, either because there were too many changes, or because their low value could not justify the time. Overall, there were striking variations in the cost of carrying out similar small changes, such as the installation of additional electrical sockets and data points, across PFI projects.24

24. Treasury guidance now makes it clear that a schedule of rates for small changes should be agreed between the public sector and the private sector, and the schedule should be revisited at the beginning of each year. Even if schedules of rates have been agreed, the guidance stresses that public authorities should bear in mind that some changes may fall outside what is defined in the schedule and that a separate negotiation will then have to take place.25

25. The Treasury aims to encourage sharing of knowledge and expertise between public authorities. However, the Comptroller and Auditor General's Report draws attention to the need for wider guidance than is currently available. Around half of the contract managers surveyed by the National Audit Office in 2007 called for practical guidance on a variety of areas relating to the change process. In many cases, contract managers were looking not for formal guidance but for examples of good practice and indications of what other projects were paying, for instance in management fees.26