11.1.1 The Service requirements set out in the Contract should take into account the Authority's long-term (and not just its current) requirements, anticipating any changes in Service that can reasonably be foreseen. Accordingly, an appropriate amount of flexibility should be designed into the initial bid solution to cope with anticipated changes, and a well-developed change mechanism put in place in the Contract to cope with the residual unanticipated changes to the Service over the length of the Contract Period. See Chapter 4 of "PF2 - A new approach to Public Private Partnerships" for an explanation of the greater flexibility that the PF2 model brings.
Flexibility
11.1.2 In order to improve the flexibility of service provision the number of Services included in a typical PF2 are now limited. Services excluded from the Contract will be provided separately via shorter term contracts providing the public sector with the flexibility to alter their service specifications over time more easily. Key new measures improving flexibility of PF2 contracts are listed below:
• Soft services, such as cleaning and catering, should ordinarily not be included in PF2 projects (see further Section 7.1 (Introduction and Range of Services to be provided));
• Authorities do however have discretion on the inclusion of certain minor maintenance activities such as redecorating, at the project outset. There is also additional flexibility to add or remove certain Elective Services, on a pre-priced basis so as not to require updating of the Base Case, once the Contract is in operation; and
• To provide flexibility at the Contract's end Authorities may also adapt their requirements over the condition of Assets at the end of the Contract (see Section 10 (Surveys on Expiry and Termination)).
Examples of Elective Services would include internal finishes, periodic redecoration and handyman services (see further Section 7 (Range of Services)).Considerations the Authority should take into account when deciding whether to retain relevant minor maintenance are as follows:
• whether the cost to the Authority providing these maintenance services is lower than the expected cost charged by the Contractor;
• whether there are potential flexibility benefits of excluding these maintenance activities from the Project;
• whether the Authority has existing resources capable of carrying out the maintenance activities (such as caretakers or janitors), and
• whether the exclusion of certain maintenance activities has the potential to create interface risks. If so the Authority will need to consider whether the benefits of excluding these maintenance activities outweigh the interface risks (see further Section 7.11 (General Interface Obligations)).
Types of Service Change
11.1.3 Changes in Service can take various forms in PF2 projects (see below), but may broadly be categorised into at least three distinct types as follows:
• Changes in use or functionality, for example:
o conversion of non-teaching to teaching areas;
o greater community use of schools; and/or
o conversion of general ward areas into an operating theatre.
• Changes in capacity or throughput, for example:
o more classrooms;
o additional operating theatres or ward spaces;
o more prison places;
o increase in waste processing capacity; and/or
o partial terminations (in grouped schools projects).
• Changes in service specifications or performance standards, for example;
o changes in construction standards;
o higher recycling targets (in waste management);
o introduction of new services (e.g. offender management in prisons).
11.1.4 Authorities should consider carefully whether anticipated changes in its Service requirements are capable of being specified, designed and priced as part of the initial bid solution, ideally at a stage where there is some competitive pressure in the procurement. This will ensure that the desired flexibility is priced efficiently, and will enable the change to be processed and implemented effectively at the appropriate time, imposing minimum disruption on the Project.
11.1.5 In some projects, changes to requirements may be quite foreseeable (e.g. in street lighting projects, demographic projections may suggest that the Authority is quite likely to require new units to be brought into the scope of the Contract as housing increases in the area). In such circumstances, the Authority should consider the feasibility of requiring the Contractor to commit to pricing pre-specified changes as part of the Contract (e.g. unit prices for new lamp posts). Similarly, it is feasible in some cases to include within the Contract a formulaic method of adjusting the Unitary Charge for increases or decreases in capacity. In the housing sector for instance, dwellings can exit from a housing PFI/PF2 contract as a result of the exercise by tenants of their right-to-buy their property. To cope with this foreseeable change, housing PFI/PF2 contracts often contain formulaic adjustments to the Unitary Charge (based on changes in underlying fixed, variable and semi-variable costs) as the number of units managed by the Contractor changes. Similar techniques could be applied to other sectors where there is a reasonably well-defined relationship between the outputs of the Contract and the cost structure of the Contractor.
11.1.6 However, many changes, even if anticipated, may not be amenable to specification, design and pricing during the initial procurement - for instance, an Authority may anticipate a phased expansion of capacity to accommodate expected increases in demand, but may not be in a position during the procurement to specify the scale of expansion required. In such circumstances, Authorities should carefully assess if additional flexibility can be created within the Contract to deal appropriately with changes in Service that can be anticipated but not specified up front with any degree of precision. The following elements of the Contract could be reviewed for greater long-term flexibility:
• well-developed change mechanisms;
• shorter Contract lengths;
• financial structures with lower levels of leverage, shorter term hedges and/or lower breakage costs; and
• early termination rights (including the ability to terminate parts of a Contract and/or Authority Break Points).
11.1.7 In general, greater flexibility in PF2 Contracts will usually come at a higher price. Well-designed Contracts therefore need to strike a balance between price, long-term flexibility and certainty of whole-life costs, and so consideration of all these issues should form an important part of procurement design and evaluation.
11.1.8 With PF2 Contracts ranging from 20 to 30 years, it is inevitable that changes will occur that cannot be anticipated at the start. Provided long-term requirements have been well thought through and adequate flexibility built into the design of the Contract (as discussed above), the frequency and impact of unanticipated changes should be limited and manageable.
11.1.9 All PF2 Contracts can and should deal effectively with a limited volume of unanticipated change, and this is best achieved through well-developed change mechanisms written into the Contract. Good change mechanisms should seek to achieve at least the following four outcomes:
• Clear process, with clearly defined roles, responsibilities and timescales;
• Quick and efficient procedures (appropriate to the scale and complexity of the change required), with transaction time and cost kept to a minimum;
• Transparent pricing; and
• Value for money.