The PFI booster

Conspiracy theorists could no doubt have a fruitful time discussing why it was that the revised Office of Government Commerce's Guidance on Standardisation of PFI Contracts was published on 31 July, when most good people were thinking about their holidays rather than about the PFI. Certainly the lengthy (two-year) consultation period preceding this has generated some debate, particularly in controversial areas affecting lenders and investors, such as refinancing gain, compensation on termination and whether the successful bidder should be required to hold competitions for its debt funding.

However, the guidance also has something to say on the topic of construction risks (see below). Much of this is by way of suggestions about the contents of the project agreement, but the building contractor, a level in the chain "below" the project company, still has to take an interest here. This is partly because it often has some equity involvement at the higher level, but more because a project company will quickly parcel up any construction risks that arrive on its desk from the authority (in other words, the public sector) and toss them over to the contractor.

Some of the points are common sense. For example, a passage stresses that compensation events in the construction phase will be "very much the exception". Contractors will be expected to get used to working around other third parties engaged by the authority on site, especially where it includes occupied buildings, and must factor any delays into their programme. These delays are acceptable, so long as the contractor has a proper indication in advance of what other work is planned.

Contractors may also take some comfort from the redrafting of the relief events clause. In the earlier Treasury taskforce guidance, the project company had to demonstrate that neither it nor the building contractor could reasonably have foreseen the occurrence or consequences of a relief event (which includes fire, flood, power shortages, the failures of statutory bodies and so on) if it wanted to have an extension of time. This could be onerous. It deprived the contractor of any redress where it had foreseen the events and the consequences at an early stage, and indeed had warned the authority of them. The new guidance removes this clause.

Changes and variations
As the OGC notes: "In all PFI contracts, there is an inevitable tension between cost and flexibility."

In other words, if you want to change the design, it will cost. As with most modern contracts, the emphasis is on agreeing time and cost effects of proposed changes before work on them starts. Note that the contractor will have no right as such to be paid for the costs of preparing abortive estimates.

If you want to change the design, it will cost. The emphasis is on agreeing time and cost effects of changes before implementation. The contractor will have no right as such to be paid for the costs of preparing abortive estimates

The project company is now required to show that it has used all reasonable endeavours to minimise costs and, where appropriate, it must obtain competitive quotes for variations. Indeed, the drafting includes a provision that where the expected capital expenditure exceeds a set figure, the authority can require the work to be tendered.

This conjures up the slightly alarming prospect of a project company engaging a second building contractor to carry out a major change to the works. Plainly, this would be impractical (not least for reasons of liability and insurance) unless the change was for, say, the construction of an entirely separate building. It may be that use of this provision will be restricted to such circumstances.

One interesting aspect of the guidance is in relation to payment. The contractor usually has the right to adjudicate under the Construction Act if it is not paid, whereas the project company will have no similar right against the authority (because, in 1998, parliament excluded PFI contracts from the act).

That same act prevents the project company from inserting a "pay when paid" provision into the building contract. This problem has led some project companies to use a "parallel loan" agreement, under which the contractor agrees to loan to the company, interest-free, a sum equivalent to the value of the compensation event or variation in respect of which it seeks payment. The loan becomes repayable only when the project company is itself paid by the authority. The thinking behind this is that the loan agreement is not itself a "construction contract" as defined by the Construction Act, and therefore is excluded from it.

It must be questioned whether such an arrangement would survive an attack in the courts. There is a strong argument that it is a sham, designed to avoid the provisions of the act, and is therefore against public policy; alternatively, that it is an attempt to contract out of the act (and therefore unlawful). It is slightly surprising that the guidance mentions it without adverse comment.