The payment mechanism is the primary means for ensuring a PFI contractor performs. PFI contracts distinguish between ‘Availability’ and ‘Performance’ and to control costs, it is therefore essential that clients keep track of Availability and Performance deductions in PFI contracts.
In this article we explain what Availability and Performance deductions are, why it’s important that clients need to keep track of them (to ensure they only pay for a high quality service) and how they should do so. Please note: The word “performance” with a small “p” covers both Availability and Performance in this article.
PFI Payment Mechanisms – A Précis of the Terminology
First off, clients need to be familiar with the concepts and terminology commonly used in PFI payment mechanisms…
Availability is about the contractor ensuring the asset is available for use and covers minimum standards, such as ensuring rooms and other spaces (e.g. outdoor areas) are safe to use, achieving minimum room temperatures, achieving basic standards of cleaning etc. In addition, unavailability of certain key areas (such as toilets or plant rooms) and services (such as water and electricity) usually results in the whole asset being regarded as ‘Unavailable’, with the maximum availability deduction applying until the relevant service/area is back in operation.
Performance is about the frequency and/or quality of service provided (such as cleaning standards, frequency of reporting, requirement for the contractor to attend meetings, and so forth).
Availability criteria is the criteria that the contractor must meet for spaces to be regarded as Available, e.g. ‘minimum temperature in offices to be 180C.
Unavailable/Unavailability is where the availability criteria are not met.
Unavailable but used. In most PFI contracts, where the Availability criteria is not met, the client may still choose to use the relevant space. In this scenario ‘Unavailable but used’ deductions usually apply. These tend to be considerably less than the full Availability deductions and clients need to be mindful that this reduces the incentive for the contractor to deal with any recurring problem, such as boiler failure or flooding. It may, therefore, be in the client’s longer term interest to ‘bite the bullet’ and choose not to use the relevant space, so that the contractor incurs the full deductions and has a greater incentive to commit to the considerable investment required for permanent rectification of the problem to avoid both the deductions and the risk of reaching a termination threshold based on the volume of deductions.
Availability deductions. Deductions made from the client’s payments to the contractor if the Availability criteria are not met. It is common in PFI contracts for the Availability deductions for individual spaces to be set at a level equivalent to a percentage of the unitary charge, so that if the whole asset is unavailable, the contractor loses the whole of the unitary charge for the period in question.
Availability deductions tend to be considerably higher than Performance deductions, based on the assumption that Unavailability should occur less frequently than Performance failures. To ensure that the deduction mechanism works effectively to achieve the required levels of service, clients need to be familiar with the criteria for both types of deductions, and ensure that the contractor does not classify incidents as Performance failures, when there has, in fact, been a failure to meet the Availability criteria.
Performance criteria is other service-related criteria that the contractor must meet, e.g. ‘annual maintenance plan to be submitted by 31 March’.
Performance deductions are deductions made from the client’s payments to the contractor if the Performance criteria is not met. They are usually based either on a points system (with each point equating to a fixed amount) or on a sliding scale priority model.
It is important to note that both Availability and Performance deductions are subject to indexation (look out for our forthcoming article focusing on 5 Tips for Controlling PFI Costs by Keeping Track of Indexation). In addition, the client should check that indexation is applied correctly, as the contractor has little incentive to do this!
Performance Deductions v User Satisfaction
Remember that the purpose of deductions is to ensure the contractor performs. Experience from many operational PFI contracts, however, shows that this is not automatic.
Where clients fail to monitor and enforce the payment mechanism, the contractor’s performance tends to worsen. On the other hand, where the client does enforce the payment mechanism, performance improves. The graph below, based on real project data, illustrates this point:
The temptation to ‘let sleeping dogs lie’ when performance is generally good should, therefore, be resisted as it is likely to result in a gradual slacking off in performance, which may be more difficult to rectify if bad practice becomes ingrained.
As deductions are the primary means for ensuring the contractor performs, it follows that monitoring the payment mechanism and ensuring deductions are enforced should be one of the key priorities for clients.
How to Encourage Good Performance
In a PFI contract it is good practice for both parties to work together to ensure that the performance regime operates as it is supposed to. This includes ensuring that both performance is monitored properly and that deductions are enforced when performance is poor. This will tend to encourage good performance, in which case the level of deductions should be low.
To encourage good contractor performance, clients need to:
- Understand the payment mechanism including:
- The Availability and Performance criteria
- How the Availability criteria apply to different parts of the asset, e.g. hospital wards, operating theatres, offices, corridors and stores
- Any provision for the whole asset to be deemed to be Unavailable if critical areas, e.g. operating theatres and wards, are not Available
- Any provision for a ‘ratchet’, i.e. for the level of deductions to be increased if they have passed a specified threshold within a specified period
- Any provision for the client to terminate the contract if deductions pass a specified threshold
- How deductions are calculated
- How the contractor is required to monitor its own performance.
- Set up their own systems for checking the contractor’s performance (e.g. qualitative and quantitative checks of helpdesk reports, joint inspections, spot checks, feedback from users).
- Check the contractor’s invoices each month to ensure that any deductions to which the client is entitled have been made and have been calculated correctly.
- Ensure they have common understanding of the Availability and Performance criteria with the contractor, to avoid on-going disputes relating to categorisation and duration of performance failures. If no agreement can be reached on major points of principle (such as setting priority categories for common incidents or the trigger for ‘starting the clock’ on the deduction period), it may be advisable to escalate the issue and/or seek legal advice, as this is likely to save time and improve performance in the long run.
- Enforcement of Availability and Performance deductions is the primary means of ensuring performance in a PFI contract and should be a key priority for PFI managers
- Clients need to understand the triggers for application of Availability and Performance deductions
- Clients and contractors need to have a common understanding of the Availability and Performance criteria to ensure they are applied effectively and have a positive impact on service and to reduce disputes
- Clients need to check that contractors correctly classify incidents as Unavailability or failures of Performance and that the formulas for calculating deductions are applied correctly.
For support and advice on PFI payment mechanisms, including checking that you are receiving the correct deductions under your contract, contact us on T. 0845 345 0130 or email email@example.com
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