Discussion

In risk terms, there are two main effects of setting longer contract terms:

•  it necessarily increases the probability of the business context changing (and the risks that go with that) over the full extent of the term.  The baseline contract itself exists to provide protection against most eventualities but the Authority will need to consider whether a longer term risks the possibility of:

o  significant changes in either the Authorities need for the services (because of machinery of government or policy changes) (consider Authority right to terminate for convenience) or

o  the Contractor's ability to deliver (because of the business's financial performance) (consider provisions relating to Financial Distress and/or Parent Company Guarantee);

•  there is increased likelihood that the value for money of the services will diverge from the market norm (consider benchmarking and/or continuous improvement provisions).

Provisions to consider

Provision and reference

Considerations

Authority termination right for convenience

Reference: Model Agreement Clause 55.3

Where the Authority reasonably believes there is a significant risk that changes to government policy or organisation could invalidate the need for the services provided under the contract before the end of the contract term, it should consider introduction of an authority right to terminate for convenience. Because it is a threat to otherwise secure revenue, the inclusion of this right - especially if it is unfettered - may lead to an increase in price.

Users should read Section 3 of "A negotiating guide for the public sector", published by OGC in March 2010 with support from Partnerships UK and Intellect.

Compensation on Termination

Reference: Model Agreement Clause 58 and Schedule 7.2

The reintroduction of an Authority termination right for convenience will need to be reflected in the drafting for compensation on termination.

Financial Distress

Reference: Model Agreement Schedule 7.4 (Long Form)

Incorporating a full set of Financial Distress provisions in MISMA is likely to introduce a significant additional workload to the negotiations, especially if the bidders do not all possess Credit Ratings.  Properly tuned and effective provisions may also require the input of professional financial advice.

Guarantee

Reference: Model Agreement Clause 46 and Schedule 10

An alternative form of protection against any inability of the Contractor to continue delivering the services is a Parent Company Guarantee. If the Contractor has a financially strong parent, then a Guarantee may offer a simpler solution than the Financial Distress provisions.  The Guarantee may however be difficult to obtain and may not even be possible in certain cases.  If consideration is to be given to include a guaranteed, this should be investigated with bidders as early a possible in the procurement process.

Benchmarking

Reference: Model Agreement Schedule 7.3

It is assumed that many users of MISMA will include benchmarking provisions and the longer he term of the contract, the more compelling the argument for including them becomes. Self-evidently, the less the contracted services are standard/commoditised, the less valuable the benchmarking provisions are likely to be and the more difficult they are likely to be to negotiate.

Continuous Improvement

References: Model Agreement Clause 14 and Schedule 2.4

Continuous improvement provisions may look to improve performance over time (to reflect expected improvements in the market norm) or reduce price (again to reflect expected market trends and/or to allow for learning benefits). They may be set at specific levels as contractual obligations and/or they may exist simply as an obligation on the Contractor to look for and propose improvements on a regular basis (with any activity arising passing through change control).