The attempt to produce a workable contract is fully in line with the public sector's proper desire to standardise agreements and reduce bid costs. However, lenders, investors and contractors inevitably have their own interests to protect. For example, the contract assumes a greenfield site, so that, in the case of refurbishments, amendments to the provisions dealing with site investigation are inevitable (as noted by Simon Lewis, 16 February, page 72).
What other issues should be on the checklist of the alert sponsor and building contractor?
One of the cornerstones of PFI is that the obligations to the public sector are output-based. In other words, compliance is assessed by reference to clearly measurable performance criteria. But the NHS contract contains a number of input-based requirements, which are often imprecise. For example, the project company must perform in a manner with the trust discharging other functions undertaken by it "as may be notified to project company from time to time". That sounds like the equivalent of two men wandering around a football pitch holding a pair of goalposts.
The project company is asked to promise the trust that it will perform all its obligations under the various project agreements, including the construction contract and the funding agreements. This may seem innocuous. But just as a subcontractor should not agree to perform its entire subcontract for some third party (as opposed to merely warranting its workmanship and materials) so any parties to a PFI deal should be wary of open-ended agreements to perform the whole of their contracts for other parties. The danger of becoming liable for two lots of damages each time there is a breach of contract is obvious.
Time and money matters usually feature high on the agenda of contractors, at least. What is there to look out for here?
First, there is a typical problem associated with delay (or relief) events. This is that if the overall project period is not extended, then an extension of time to the completion date only half-helps the project company. It is released from paying delay damages, but still suffers a loss of income, since it is delayed in receiving its unitary charge payment for the period of the extension (which in turn increases its debt repayment obligations).
Some project companies try to pass this risk to the contractor, who would thus end up actually paying money for an event for which the project company is getting an extension of time. The better solution, as suggested in Treasury guidance, is for the project vehicle to take out loss of revenue insurance.
The delay events themselves are reasonably comprehensive. Some are compensation events (giving money as well) but the effect of the drafting is that the contractor only gets paid for a compensation event if delay to the completion date has been caused – it gets nothing merely for being disrupted. Given the problems outlined in the previous paragraph, the contractor may face the awkward choice of increasing resources to avoid any delay to the completion date caused by a delay event (but then not getting paid for those resources) or continuing to work at normal pace (but then causing the project company to be delayed in receiving some of its unitary charge).
Contractors may also be concerned about the powers of the independent tester to certify the completion date. The contract allows no challenge to this, except in the case of manifest error or bad faith. The project company should reserve the right to challenge this certificate and contractors should keep a close watch on what is being passed down here.
Project companies are often reluctant to propose too many amendments for fear of jeopardising their potential preferred-bidder status. However, if the alternative is higher tenders and inappropriate risk allocation, the public sector will not be getting value for money.
The reality seems to be that, despite its stated position, the public sector is not in fact treating this contract as cast in stone.
Postscript
Ian Yule is a partner in solicitor Wragge & Co.
