A revised Treasury document on PFI contracts makes some useful changes – for instance, on variations and on dispute resolution. It should make life slightly easier for building contractors
It’s not in the agreed heads of terms! is a standard tactic used during contract negotiations to reject a clause that you don’t like. With PFI contracts, the equivalent put-down is “It’s not in SOPC”. This is a reference to the Treasury document Standardisation of PFI Contracts, which was originally issued in 1999. The third version of this has now given way to SOPC4.
This booklet contains guidance and drafting, much of it mandatory, for all PFI projects that reached preferred bidder or final bid stage after 1 May. What are the main changes that affect the building contractor? The chapter dealing with variations or “changes” as they are more usually called, has been revised. Building contractors (which in PFI are “subcontractors” to the project company) will be encouraged by two points.
First, there is now explicit reference to the overhead and profit element of the contractor’s price. The guidance suggests that one option for the authority (that is, the public sector) is to embed this element into the change procedure at the outset, thus easing valuation of changes when they arise.
Second, there is an acknowledgement that where the authority decides to withdraw a request for a change in the services, and the project company has incurred significant third-party costs in developing proposals (for instance, consultants’ fees for working up a design), the authority should reimburse the project company for these.
This will help the contractor where, as sometimes happens, it incurs substantial abortive costs in preparing an estimate for a change that the authority then decides not to proceed with.
Small-value changes have always been treated by a shortened procedure. For large-scale changes, especially during the services stage, the guidance notes that a separate deed of amendment may be a better plan than trying to cram the change into the contract procedure.
Of course, where further building works are needed after the original building works are finished, and services have commenced, a separate arrangement with the building contractor will be required anyway.
What about letters of intent? For an employer to let a contractor work to one of these before contracts are signed is risky at the best of times. It happens even in PFI, but unsurprisingly, the guidance discourages it, calling it “bad practice” and noting that it can cut across the principle that the authority should pay nothing until services have commenced. I also notes that there may be Official Journal implications.
There are a number of small but signficant points in the third version of Standardisation of PFI Contracts that will ease the contractor’s position
The guidance goes on to say that where such arrangements cannot be avoided, the authority should instruct only “essential” early works that will benefit it even if the project does not proceed, for instance, surveys, making safe, and enabling works.
SOPC3 had appeared to come close to endorsing the “pay when paid” principle in PFI building contracts. The offending paragraph has now been deleted, probably as a result of Midland Expressway vs Carillion. In that case, the court held that a project company could not rely on a clause (which in fact was typical for PFI building contracts) that said it need only pay out to the contractor after it had enforced various rights under its head contract.
This, the court said, was contrary to the Construction Act and therefore unenforceable. SOPC4 now suggests that, instead, the project company should ensure that the building contract timetable is aligned with that under the main project agreement, at least in terms of notices and certificates.
Parallel loan agreements are still being used in PFI to try to avoid the effect of the Midland Expressway decision. They may work, but the paragraph in SOPC3 that appeared to actively encourage their use has now been deleted.
What about dispute resolution? Under SOPC4 the authority and project company must still consult in good faith in an attempt to head off any dispute, but this is no longer a precondition for adjudication. This small change will help protect companies where they face a contractor that wants to adjudicate first and talk later.
Also, the rather odd provision that an adjudicator under the project agreement should not give reasons for their decision has now been deleted. Plainly, most parties like to have reasons, win or lose.
The points listed here are key ones that affect building contractors (as opposed to people whose involvement is on the investment or facilities management side). All in all, there are a number of small but significant points that will ease the building contractor’s position.
Ian Yule is a partner in solicitor Wragge & Co