An estimated £180 million was paid by public authorities to PFI
contactors to undertake changes in 2006. In our examination of
these changes we found that:
- PFI deals are offering sufficient flexibility to the public
sector. Contractors had handled urgent requests in a timely manner
and around 90 per cent of contract managers responding to our
survey were satisfied or very satisfied with the quality of work
done to implement change requests.
- The timescales for agreement and completion of larger changes
compare well with conventionally outsourced refurbishment or
upgrade work in the public sector. Timescales were slower for minor
changes than for equivalent conventionally outsourced work. This
was an occasional source of frustration for front-line users,
although service delivery was not affected.
- Taking all projects together, some achieve better value for
money than others but several components of the cost of changes
were problematic:
higher value changes were not always competitively tendered,
partly because of timing, cost and the difficulties of integrating
new work with the existing set of obligations under a long-term
contract, though other provisions to validate costs were sometimes
in place. Contractual provisions in existing PFI deals do not
always give the public sector adequate rights to insist on
competitive tendering, although this has now been rectified in the
latest guidance issued by the Treasury on standardised terms for
future PFI contracts.
- For minor works, there was little consistency in the methods
used by public sector teams to validate costs and in some instances
there was no validation. Base costs for the installation of
electrical sockets, a common example of a minor change, varied
widely between projects and, for the projects we reviewed, were on
average higher than benchmark prices published by the Royal
Institution of Chartered Surveyors.
- The cost of replacing an item throughout the life of the
contract was usually calculated at the point of requesting the
change. This “lifecycle cost” has the advantage of improving
transparency of costing but it was applied inconsistently and
sometimes added inappropriately.
- In addition to mark-ups to cover overheads and profit added by
service providers, the Special Purpose Vehicle (SPV – a company set
up by a consortium of contractors to design, build, finance and
operate the asset) often charges a fee, typically 5 to 10 per cent
of the cost of the change. In total, an estimated £6 million was
paid in such fees in 2006. Usually, this fee was not specified in
the contract, although the most recent Treasury guidance requires
that this is clear at the outset. Although in principle, the
private sector should be able to charge an appropriate fee to cover
the overhead cost and profit for work that they have not already
contracted to do, we found that this fee often related to work that
was carried out by sub-contractors rather than the SPV and was very
often not justified.
- Overall, we found that if the change process is managed well
and there is a good relationship between the parties, changes are
more likely to be cost-effective and implemented quickly. Some
public sector authorities do not employ a full-time contract
manager, risking false economy in the case of contracts that are
worth up to £10 million in payments to the private sector each
year.
Conclusion and Recommendations