A 2008 UK study14 found that State-initiated modifications in some UK projects have historically provided poor value for money. Contributing factors include the lack of a competitive tendering process, the impact of overheads and mark-ups on small changes, insufficient resources, and a lack of contract management skills.
Modifications initiated during the construction phase and service delivery phase may not benefit from the competitive tension that existed before the project deed and associated contracts were signed, and there is a risk that the pricing of a State-initiated modification may reflect a non-competitive margin.
Competitive tendering for State-initiated modifications is one method to alleviate this risk. Contracts developed in accordance with the National Public Private Partnership guidelines (2008) typically give the government party tools to achieve competitive pricing. The contract director should understand the tendering requirements in the relevant project deed. In some projects, the project deed requires the private party to provide the government party with a price for the works together with 'evidence that it has used reasonable endeavours' to obtain competitive funding for the cost of the works or services. If the government party is not satisfied with the proposed cost, it has the right to request a competitive tender for the works, which will be conducted by the private party, and it has the right to have the works delivered by the tenderer that offered best value for money. In other projects, the project deed requires that the private party carries out a tender process where the cost of the works or services is likely to exceed an agreed threshold, unless otherwise agreed by the State.
Contract directors may be reluctant to require competitive quotes or to run a competitive tender process, either due to time constraints, the cost of the tender process, or concerns about the risk of integrating assets built by a third party with existing project assets. However, any decision not to evaluate the proposal's costs using competitive processes should have sound justification, and should be based on a robust consideration of how value for money can best be tested and achieved.
Even if the private party uses some form of competitive quoting in developing its proposals, the contract director should be aware that the private party's incentives might not be aligned with the government party's in seeking best value for money. The private party may be concerned to ensure that the State-initiated modification will not put at risk its ability to meet its contractual obligations and service standards, and so might be inclined to favour quotes that offer higher standards than the government party might consider 'fit for purpose.' Furthermore, because the private party may be charging a margin (refer below) for managing delivery of a State-initiated modification, it may not have any incentive to minimise government party costs.
Some elements of pricing for State-initiated modifications are inherently unsuited to competitive tendering - for example, changes to the remuneration of existing staff for changed duties, or changes to existing software systems. In these circumstances, the contract director should seek to use benchmarking and negotiation to achieve value.
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14 Making changes in operational PFI projects, report by the Comptroller and Auditor-General, National Audit Office, 17 January 2008.