10 Tools and Techniques to Achieve PFI Savings via Efficient Contract Management
Byon January 7, 2014
With HM Treasury now allowing procuring organisations to keep all the savings they achieve from effective management and the realignment of PFI contracts, this provides an ideal opportunity for you to review the governance, structure and scope of your operational PFI contracts to ensure you achieve PFI contract management savings.
With this in mind, this article focuses on the 10 tools and techniques to help you achieve PFI savings via efficient contract management. This top 10 were identified as the most important ones following a series of PFI focus workshops involving more than 23 local authorities and other public sector organisations with many years of PFI management experience.
How to Achieve PFI Contract Management Savings – The 10 Tools
These tools and techniques, if used properly, are guaranteed to achieve a significant reduction in contract monitoring time and costs – reason enough to dedicate a little time today to reading this article…
1: Operations Manual
Having an up-to-date operations manual is critical for succession management and good operational governance in all outsourcing agreements, but is particularly important in PFI contracts, due to their length and complexity. The manual should include, as a minimum, baseline contract information, a ‘jargon buster’ of PFI-related terms and cross references to the location of frequently updated operational information.
For further detail regarding the content, structure and maintenance of the manual, please click here to read our article entitled: PFI Operations Manual – How to keep it simple and make it useful
2: Monitoring Calendar
Due to the large number of periodic and routine tasks required in a PFI contract, the only way to ensure that the client does not miss the opportunity to generate significant savings through a scheduled activity (such as benchmarking or market testing) or other critical activities, is to maintain a PFI monitoring calendar. To make best use of this tool, you should include not only contractual items, but also information about governance arrangements between the parties.
More detail about this can be found in our article – Using a PFI Monitoring Calendar to Reduce Costs and Improve Efficiency
3: Risk Register
Given the value, length and scope of PFI contracts, a risk register is essential to manage the risk of financial and operational failure – largely, in our experience, due to a lack of forward planning and preventative action. At Best Practice Group we have worked extensively with PFI contractors and risk managers to identify all the primary operational PFI risks and are happy for our clients to benefit from the templates we have developed.
4: Variation Management
Given the length and scope of PFI contracts, change is inevitable, so the effective administration of both the change process and its associated costs is key to successful PFI contract management. A set of documents, including change registers, change control forms and change protocols, is essential to ensure that change control does not consume too much of the contract manager’s time and that costs are kept under control. Negotiating the rate and scope of change-related fees is also critical in ensuring value for money from any additional works and services procured.
A separate article entitled PFI Change Management: 5 Steps to Cut Costs and Improve Contractor Performance covers PFI change control in more detail; click here to read.
5: Financial Monitoring
The current trend of centralising or outsourcing finance functions in public bodies can often result in a growing disconnect between PFI monitoring officers and the finance managers responsible for ensuring the contract is affordable. Such a disconnect poses a major risk, with PFI payments and credits getting increasingly out of sync with the changes to the contract, indexation, deductions and profit share. This can lead to escalating PFI fees and a deficit looming at the end of the contract.
As this is a critical aspect of PFI contract monitoring, we will be publishing a series of interconnected blogs, covering PFI financial management. lf you would like these to be sent to you in due course, please click here.
6: Standard Filing Systems
Although it may seem a minor issue, keeping a clear, standardised electronic filing structure is key for effective control of the hundreds of documents generated by various parties over the long life of an average PFI contract, as well as for continuity and succession management.
Best practice, including common issues and pitfalls, in PFI file management is covered by a separate article – How Good PFI Document Management Practice Saves Time and Effort – 5 Tips.
7: Meeting Structure
PFI contracts usually have detailed requirements for formal client/contractor meetings, but these often fall by the wayside for a variety of reasons including staff changes on both sides and lack engagement by end users. However having regular, formal meetings between the parties is critical to ensuring the contractor delivers all the services procured, outstanding issues are addressed and resolved, escalations happen promptly and end clients are informed of – and can comment on – critical issues.
PFI meeting structure and governance, as well as standard agendas and terms of reference, are covered by our article entitled: 5 Ways to Transform PFI Meetings from a Burden to an Effective Management Tool; click here to read.
8: Life Cycle Management
It is a fundamental principle of PFI contracts that the contractor is responsible for maintaining and replacing the asset. However, as the client and contractor often have conflicting priorities relating to the timing and quality of maintenance and replacement, this can lead to inferior or unsuitable provision and give rise to conflict. Therefore, keeping firm control of the annual life cycle/redecoration/maintenance programme and making sure it is fit for purpose is a key responsibility of the client’s PFI manager.
More detail on the techniques that you, as the client, can use to align the life cycle programme with your needs and priorities is provided in our article entitled: Key Tips to Maximise PFI Life Cycling to Get Best Value – to read, please click this link.
9: Benchmarking and Market Testing
As most PFI contracts span a period of 20 to 30 years they tend to have built-in provisions for periodic price realignment, based on market rates for similar services. Although the responsibility for managing this process rests with the contractor, the client must ensure that the contractor manages the process properly and that the post-realignment price offers value for money and opportunities for improved service.
For further detail, please refer to a separate blog article covering the principles and pitfalls of benchmarking and market testing: PFI Benchmarking and Market Testing – How to Get the Services You Need at Reduced Cost
10. Minimising Contractor Charges for Client Party Damage
Assets created under PFI contracts and used by client-related parties, are bound to break down occasionally. When this falls outside the scheduled lifecycle programme, contractors have been known to try to avoid their responsibility to replace components at their expense, blaming the failure on misuse or deliberate damage by a client party. The onus is on the client to ensure that it only pays for genuine damage and vandalism and not for breakage due to defective or inferior assets provided by the contractor.
Tools available to clients to manage such situations are covered in this article (click to read): 7 Steps to Minimising Costs of Vandalism and Damage in PFI Contracts
A Firm Hold on Contractual Issues Guarantees Results
Our extensive operational experience in the world of PFI and outsourcing has shown that keeping a firm hold on these ten tools and contractual issues guarantees a marked reduction in the time required for monitoring these PFI contracts, while at the same time improving contractor performance and reducing costs.
As previously mentioned, we will be creating a number of follow-up articles to provide you with more detail and practical advice on how to use each of these tools in your organisation’s daily PFI contract management. To register your interest in receiving further articles in this series please click here.
For no obligation support and advice on managing any of your operational PFI issues, including issues such as vandalism, please contact us on T. 0845 345 0130 or email Vicky firstname.lastname@example.org