19.1.1 The payment mechanism lies at the heart of the Contract. It puts into financial effect the allocation of risk and responsibility between the Authority and the Contractor. It determines the payments which the Authority makes to the Contractor and establishes the incentives for the Contractor to deliver the Service required in a manner that gives value for money. The key features of the payment mechanism are described in Section 19.2 (Features of the payment mechanism) and structuring options are discussed in Section 19.3 (Structuring the payment mechanism).
19.1.2 When procuring services through PF2 contracts, Authorities should assess not only their current requirements but also their requirements into the future. If there is uncertainty about the Authority's level of demand for the Services over the life of the contract it may consider whether this risk could be passed to the Contractor through the payment mechanism. However this would have major implications for the Contractor and its funders, the cost of the project and the payment mechanism and is not generally recommended. The issues relating to usage risk are explored in Section 19.4, (Usage-Based Systems).
19.1.3 For accommodation PF2 projects payment mechanisms normally involve two key determinants of payment - availability of the Service and performance of the Facilities. These two concepts are discussed in Sections 19.5 (Availability Requirements) and 19.6 (Performance Requirements).
19.1.4 It is always important that adjustments to the payment are proportionate to the seriousness of any problems with the Service and this issue is dealt with in Section 19.7 (Calibration). Over time there may be changes in the scope of the Services and it is sensible to design a degree of flexibility into the payment mechanism in anticipation of such changes. Hence Section 19.8 (Flexibility) sets out how flexibility can be built into the payment mechanism. Section 19.9 (Utility Costs) addresses the issues relating to variations in the cost of utilities arising from both changes in consumption and changes in tariff. Section 19.10 (Payment) deals with the making of the monthly payment and the consequences of late payment and Section 19.11 (Indexation) sets out how to adjust the Unitary Charge from time to time to reflect changes in the general level of prices. The relationship between the payment mechanism and other aspects of the contract are dealt with in Section 19.12 (Other Remedies for Poor Performance).
19.1.5 The standardised output specification2 and payment mechanism3 is required to be used in the accommodation sector only. As projects emerge in other sectors the Treasury will consider whether it is appropriate to develop a standardised specification for that sector. The standardised specification for accommodation projects will be in two parts to allow project specific requirements to be reflected in Part 2 whilst Part 1 covering the main requirements should remain in a standard form.
19.1.6 The design and calibration of the payment mechanism should be led by the Authority and informed by advice from appropriate advisers. The Authority should also involve relevant stakeholders (e.g. end-users) in the development process as appropriate.
__________________________________________________________________________________________
3 See Schedule 5.