9.2.1 The Unitary Charge will usually be made on a broadly level basis in accordance with the principles of value for money, whereas the need for capital replacement will only occur at intervals. The Unitary Charge will accordingly include amounts to cover the Contractor's anticipated future expenditure on maintenance, such as servicing plant and other more major refit maintenance. The Contractor should undertake the renewal or replacement of Lifecycle Assets in accordance with a Lifecycle Schedule which has been approved by the Authority. However the risk of adequacy of lifecycle arrangements for the Lifecycle Assets remains with the Contractor.
9.2.2 The Contractor will therefore usually build up a lifecycle fund over some years, in anticipation of significant capital expenditure in future periods. It will usually be required to do so by its financiers, particularly where the maintenance risk is left with the Contractor and not passed to Sub-Contractors. The sums involved could be considerable.
9.2.3 Maintenance should be left firmly at the Contractor's risk. The Authority should ensure that the maintenance requirement is adequately protected through payment and termination provisions.3 The Authority will wish to ensure that the Contractor is equally incentivised to maintain the Assets in the later years of the Contract as in the early years. The Authority should have the ability to conduct a final survey towards the end of the Contract and withhold payment of the Unitary Charge if the Assets are not restored to the required maintenance standard.
9.2.4 Whilst the risk as to the adequacy of the lifecycle arrangements remains with the Contractor, every five years during the Contract Period and 12 -24 months before the expiry of the Contract, there should be an independent review of the appropriateness of the lifecycle arrangements.4 There should be an open book approach to the lifecycle arrangements between the Contractor and the Authority to ensure transparency of service provision and expenditure. On each Lifecycle Review Date, the Contractor should conduct a Lifecycle Review and provide a Lifecycle Funding Report to the Authority.
9.2.5 The Lifecycle Funding Report should be prepared, on an open book basis, to identify whether any surplus can be identified in Lifecycle funding, and should include:
(a) A comparison between lifecycle expenditure to date and the original lifecycle plan for the same period, identifying lifecycle replacement that has been deferred, and any costs above or below the planned cost.
(b) A forecast of lifecycle expenditure for the remainder of the Contract Term based on the expenditure to date, and the expected expenditure up to the end of the Contract Term taking account of the current view of lifecycle costs.
(c) Where a surplus is identified this is to be identified along with any previous surplus's to provide a summary of the surplus identified in the Lifecycle funding to provide a cumulative total at the end of the Contract Term.
(d) Where the Contractor identifies any shortfall in funding, this may be offset against any surplus previously identified (on an open book basis)
9.2.6 Where the Contractor fails to provide a Lifecycle Funding Report to a standard acceptable to the Authority, or the Authority has reasonable ground for questioning the accuracy of the analysis undertaken by the Contractor, the Authority may appoint independent technical advisors to carry out and independent review and produce an independent Lifecycle Funding report. The Contractor shall cooperate fully with the independent technical advisor and provide access to systems, copies or report and any relevant data to enable the independent technical advisor to complete their report. The costs of the Independent technical advisor shall be borne by the Contractor.
9.2.7 To the extent that the Lifecycle Review demonstrates that projected expenditure on periodic redecoration, replacement or renewal of Lifecycle Assets is greater than Lifecycle Spend, as set out in the Base Case, the surplus should be shared as set out below between the Authority on the one hand and the Contractor and Contractor Parties on the other hand. Lifecycle Reviews should in each case specify the previously accumulated surplus which should be aggregated with any new surplus arising. The Authority's share of the surplus should ordinarily be paid out at the end of the Contract or upon any earlier termination. On an Authority Default the Contractor will get a 100% share of the surplus; on a Contractor Default the Authority will get 100% share of the surplus; and on other terminations the parties will share it equally. It should be understood that the calculation of the surplus is done by reference to actual costs (on the ground) and assumed costs (in the Base Case) with an accumulated surplus (if any) aggregating over the term of the Project. The lifecycle fund itself is not used in the calculation. The actual lifecycle fund will be subject to a prior charge in favour of the Senior Lenders. 12 -24 months prior to Expiry, the Authority will begin to reserve its share of any expected Surplus out of the monthly Unitary Charge payments (see further Section 10 (Surveys on Expiry and Termination)).
9.2.8 The Authority will need to consider (with its technical advisors) the precise extent of the lifecycle works to be included in the Lifecycle Schedule and the precise Assets to be covered in the definition of Lifecycle Assets. The Authority will need to settle this with the Contractor and, indirectly, with funders who will also have an interest in the provisions to the extent that they affect their sinking fund arrangements. The Authority will need to decide if it is prepared to use the Technical Advisor appointed by the Senior Lenders as the Independent Surveyor for the purpose of opining on matters relating to Lifecycle.
9.2.9 To protect themselves in the event of Contractor Default, the Senior Lenders will have a charge over the lifecycle fund as security (see Section 14.5 (Financers' Security)). The Contractor should look to its own resources first to repay its Senior Lenders, and so any compensation payable to the Contractor by the Authority on a termination should be reduced by all cash held by the Contractor, including amounts in the lifecycle fund (see Section 24 (Calculation and Payment of Early Termination Payments) and the definitions of "Base Senior Debt Termination Amount" and "Revised Senior Debt Termination Amount" in Schedule 1 (Definitions)).
Suitable drafting on Lifecycle Reviews and sharing of any surpluses is as follows:
9.2.10 Lifecycle Profile and Lifecycle Spend
(a) The Contractor shall keep detailed records of the replacement and renewal of Lifecycle Assets and Lifecycle Spend. Each year the Contractor shall deliver to the Authority a proposed Lifecycle Schedule, together with a report on any differences between the Lifecycle Profile and Lifecycle Spend for the previous year and a prediction of any differences between the Lifecycle Profile and Lifecycle Spend for the following year.
(b) The Contractor shall upon written request permit the Authority and/or Independent Surveyor to inspect any part of the Facility and/or access to all the Contractor's records, receipts, invoices, reports, drawings, technical specifications and performance logs relating to any Lifecycle Asset and Lifecycle Spend, so as to enable the Authority and/or Independent Surveyor to obtain an accurate assessment of any of the figures quoted. The Contractor shall provide all reasonable co-operation and assistance to the Authority and/or Independent Surveyor to allow it access to such documents and information and shall in a bona fide manner respond promptly to all reasonable requests for further documents and information made by the Authority and/or Independent Surveyor in respect of any Lifecycle Asset and the condition of the same and Lifecycle Spend.
(c) At least [60] Business Days prior to a Lifecycle Review Date, the Contractor shall submit to the Authority a report containing:
(i) a survey of the state and condition of the Facilities and Lifecycle Assets by comparison to the Contractor's maintenance and lifecycle obligations under this Contract;
(ii) a revised projection for any alteration to anticipated replacement or renewal of Lifecycle Assets in respect of:
(A) the period from the relevant Lifecycle Review Date until the next Lifecycle Review Date; and
(B) the period from the relevant Lifecycle Review Date until the Expiry Date.
(iii) confirmation of any differences between the Lifecycle Profile and Lifecycle Spend, to the date of Survey, explanation of lifecycle activity and costs that have taken place during the previous Lifecycle Review Period and, accordingly, a log of all Surpluses already accrued;
(iv) confirmation of the Lifecycle Profile for the Lifecycle Period up to the next Lifecycle Review Date and any potential Lifecycle Surplus in that period;
(v) confirmation of the Lifecycle Profile from that Lifecycle Review Date to the Expiry Date and any potential Lifecycle Surplus in that period;
(vi) a summary of how the Contractor has achieved the Lifecycle Efficiencies Plan in the period since the previous Lifecycle Review Date,
(vii) a log of all accrued savings generated from any relaxation of maintenance requirements in accordance with Clause 9.6 (Relaxation of Handback Requirements) in respect of the period to the Expiry Date.
(d) On the Lifecycle Review Date, the Parties shall discuss the contents of the Lifecycle Report, and the Contractor shall make such revisions to the Lifecycle Report as the Parties agree are necessary and supply the Authority with a copy of the same within twenty (20) Business Days of the Lifecycle Review Date.
(e) On the Lifecycle Review Date taking place on the Final Survey Date the Parties shall also consider and agree a prediction of likely Lifecycle Surplus at the Expiry Date. The Authority shall from the Final Survey Date until the Expiry Date deduct from each monthly Unitary Charge payment due to the Contractor [1/36]5 of the predicted likely Lifecycle Surplus agreed in accordance with this Clause 9.2.10(e). On the Expiry Date, the Parties shall compare the Actual Lifecycle Surplus with the Lifecycle Surplus predicted pursuant to this Clause 9.2.10(e).6
(f) The overall amount which has been deducted from the monthly Unitary Charge payment pursuant to Clause 9.2.10(c) shall be deducted from the Authority's share of the Actual Lifecycle Surplus which, on Expiry, shall be 50%.7 If the result is a positive sum then the Contractor shall forthwith pay the Authority such amount. If the result is a negative sum, then the Authority shall forthwith pay the Contractor such amount provided that the Authority shall not be required to pay any sum greater that the aggregate of amounts deducted from the monthly Unitary Charge payments pursuant to Clause 9.2.10(e).
9.2.11 Vandalism is a form of damage which may need consideration, especially in the absence of the Contractor providing soft services such as security (see further Section 14.3 (Indemnities)). In these circumstances vandalism risk may not be one that the Contractor is able to manage and it may not therefore be good value for money for it to be borne by the Contractor; the approach to vandalism however differs from sector to sector and the Authority will need to determine how best to allocate this risk. One particular point to bear in mind however is the relationship between repair/replacement of vandalised items, which may be an Authority risk, and consequential savings to the lifecycle programme. Accordingly the Contract should provide that where this may occur the savings should be identified and set out in the next Lifecycle Report for potential sharing at the end of the Contract.
Suitable drafting is as follows:
9.2.11 On any occasion where the Authority believes that any repair or replacement of any asset or equipment used in the Project is likely to give rise to a saving from projected Lifecycle Spend, the Parties shall meet and, in good faith, try to agree the quantity of such saving, and the resulting agreed saving shall be specifically logged and taken account of in the next Lifecycle Report.
"Facility"
means the buildings and other facilities to be provided, maintained, and serviced in accordance with this Contract, located at the Site.
means the survey carried out pursuant to Clause10.5 (Surveys on Early Termination).
means each item of building fabric, plant and machinery, furniture, fittings and equipment (but excluding any Authority Equipment) to be renewed or replaced during the Contract Term as identified in the Lifecycle Schedule or as may be identified by the Parties applying Good Industry Practice;
means the plan for Lifecycle Efficiencies set out in the Contractor's Proposals:8
means the period between Lifecycle Review Dates;
means the amounts profiled to be spent by the Contractor on the replacement or renewal of Lifecycle Assets as shown in the Base Case [in row [ ]] from the Service Commencement Date onwards;
means the report prepared by the Contractor pursuant to Clause 9.2.10;
means the 5th, 10th, 15th and 20th anniversaries of the Service Commencement Date, and the Final Survey Date;
means the detailed annual lifecycle schedule showing when the Lifecycle Assets will be renewed or replaced, and forming part of the Schedule of Planned Maintenance;
means the actual amount spent by the Contractor on the replacement or renewal of Lifecycle Assets;
means, at any time, the Lifecycle Profile less the Lifecycle Spend, or provided always that if, at the date of payment of any surplus between the Parties, the result is a negative number, the Lifecycle Surplus shall be zero;
means the planned maintenance to be carried out by the Contractor or a Contractor Party at the Facility in accordance with the Schedule of Planned Maintenance;
"Schedule of Planned Maintenance"
means the annual schedule of planned maintenance as agreed between the Contractor and the Authority;
"Site"
means the area edged [red] on the Site Plan together with the Facility and the service ducts and media and all conducting media appliances and apparatus for all utilities servicing the Facility
means the plan of the Site in the Agreed Form.
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3 If, however, the size of the Project (including associated maintenance obligations) is comparatively large in relation to the financial resources of a Contractor which is not relying on third party Senior Debt financing, the Authority may want to consider requiring a sinking fund over which it has secured rights. Similarly, if the term of the Senior Debt is significantly shorter than the term of the Contract, the Authority may wish to have secured rights over a sinking fund once the Senior Debt has been repaid in full.
4 See Section 10 (Surveys on Expiry and Termination).
5 The fraction should be designed to reserve for 50% of the predicted likely Lifecycle Surplus over the unexpired period of the Contract until Expiry.
6 See further Section 10.3.3 (Retention Fund).
7 The 50% will be subject to the potential variations as referred to in Section 9.2.7.
8 Bidders may bid a plan for this and be evaluated on the efficiencies they expect to be able to generate, including efficiencies arising as a result of portfolio savings, group purchasing and aggregation.