3.2.1 The Authority will wish to specify a duration which is expected to result in the best value for money solution for the Project. Factors to be taken into account when deciding on the duration of the Contract will include:
• the Service requirements of the Authority (see Section 7 (Services and Service Commencement)) and the Authority's ability to forecast quality and quantity outputs in the longer term;
• the expected life of the assets underpinning the Service and any possible residual value (see Sections 3.2.2, below, and 25 (Treatment of Assets on Termination and Expiry)) and the need for and timing of major refurbishment or asset refreshment programmes during the Contract (see Section 9 (Hard FM Maintenance Services));
• the importance of maintaining performance incentives over time;
• the ability of the Contractor accurately to forecast its base cost; and
• the possibility of an option to extend the term of the Contract by entering into a further contract period with the initial Contractor (this can equally be structured as a no cost early termination option - see Sections 25.2.5 and 25.6 (Valuation of Terminal Payments on Expiry where Residual Value Risk has been transferred)) even if there is no alternative use.
See further paragraph 3.10 of HMT's Value for Money Assessment Guidance November 2006.1
3.2.2 Some Assets (e.g. vehicles or property) may have an alternative use which means that they can generate revenue for the Contractor after the Contract expires (see Section 25 (Treatment of Assets on Termination and Expiry)). If this is the case, the Contractor should not expect to recover the full cost of financing its investment (i.e. debt and equity return) over the life of the Contract, as it will be able to recover the balance by putting the Assets to such alternative use after the Contract expires (e.g. selling them). The price the Contractor charges to the Authority can therefore be lower and the Contract duration shorter than would be the case if the Contractor needed to recover all of its costs over the life of the Contract (see Section 25.2 (Assets where the Authority retains Residual Value on Expiry)).
3.2.3 Given the rapid pace of both technological change and Authority functions (particularly in projects such as hospitals), the Authority should ensure that the Contract is sufficiently flexible to allow changes to the Service over time (see Section 11 (Flexibility and Change)) and, where necessary, build in break- points (see Section 23.5.4 (Authority Break Points)). Where however radical changes are expected, this is an indicator that the project is not suitable for PF2 treatment (see "A New Approach To Public Private Partnerships", on the HMT web site, Chapter 7 (Delivering Value for Money)).
3.2.4 The impact of certain events on the duration of a Contract is dealt with in the Sections on Compensation Events (see Section 15.2 (Compensation Events)), Relief Events (see Section 15.3 (Relief Events)) and Force Majeure (see Section 23.3 (Termination on Force Majeure)). A delay in the Service Commencement Date should not lead to an extension of the Contract (see Section 15 (Supervening Events)).
Required drafting is as follows:
3 Duration of Contract2
(a) This Contract and the rights and obligations of the parties to this Contract shall take effect on the [date of this Contract] [Effective Date].
(b) The Service Period will commence on the Service Commencement Date3 and terminate on the earlier of:
(i) the Expiry Date; and
(ii) the Termination Date.
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1 See HMT website www.hm-treasury.gov.uk.
2 It is often possible for contract signature and financial close to be simultaneous. If there are project specific reasons for conditions precedent being required (i.e. a condition such as planning must be satisfied), then the concept of conditions precedent and "Effective Date" will be needed (and the effect of pricing of interest rate fluctuations, between the date of contract signature and financial close, will need to be addressed). If conditions precedent do exist, the obligation to use reasonable endeavours to satisfy these (to the extent this is needed) should take effect prior to the conditions precedent being met. Other obligations (such as those of confidentiality) may also come into effect prior to the satisfaction of any condition precedent.
3 See footnote 2 above.