Given the length and scope of PFI contracts, change is inevitable, so the effective administration of PFI change management, in terms of both the change process and its associated costs, is fundamental to successful PFI contract management.
In this article we review the why, what and how of PFI change management – an area likely to take up a large amount of PFI monitoring staff’s time and one likely to have serious financial and reputational risks for you, as the client, if not managed effectively via our 5 recommended steps to help you cut your PFI costs and improve contractor performance.
PFI Change Management – Why it’s So Vital
The need to manage changes to a contract as lengthy and complicated as a PFI contract is obvious. What this means in practice, however, will depend on the experience and expertise of individual PFI contract managers, as well as their willingness to invest time and effort on managing variations effectively.
The reason why it is so vital to have an effective change management system is to achieve value for money for both the contracting organisation and end users.
This means ensuring that:
- The costs of works and services are reasonable
- Where the change results in a saving, this is passed on to the client as a credit
- Related fees are reasonable
- Timescales, from instigation to completion of change, are tightly controlled and align with your non-negotiable deadlines (e.g. the start of an academic year in the case of a school’s project)
- The change, once implemented, meets your needs.
The 5 Steps to Cut Costs and Improve Contractor Performance
The 5 steps to efficient and effective change control are set out below. The first 4 steps can be applied to any PFI-related changes and will help to reduce costs and/or optimise savings as well as improve end users’ confidence in the change management process. Step 5 is an ‘emergency measure’, to be used only if the contractor continues with bad practice despite robust management from the client side.
Step 1: Maintain a robust suite of standard documentation
The starting point for effective PFI change management is a suite of standard documentation that includes the following as a minimum:
- Change protocol – although every PFI contract has change control/variations clauses, these will seldom be in sufficient detail for efficient change management. It is therefore recommended that a detailed change protocol is developed in partnership with the contractor. This should capture all stages of the change process from beginning to end and the structure of the change control form should match it.
- Change control form – a robust and detailed change control form, which caters for all common eventualities, is essential to enable the client to retain control of the change process, reduce management time and ensure that the costs relating to the change are only paid once work is completed to the client’s satisfaction.
The change form should as a minimum (NB. A spreadsheet format is recommended for this change form; this should show the impact of the change on life cycle and FM service costs over the remaining contract period):
- Cover each stage of the change process from initiation to sign-off
- Require formal sign-off by the relevant parties, including end users, at each stage with sign-off on completion/ service commencement triggering payment
- Include a mechanism for capturing revisions to scope and price
- Have a section for queries, clarifications and comments regarding client requirements and contractor proposals.
- Change register – this is a key tool to retain control of live changes and keep a record of changes implemented to date.
The change register should include the following as a minimum:
- Details of end users, if any
- Details of the proposed change, including type of change (small works, standard, major, client managed)
- Key dates in the process
- Cost details
- Current status (e.g. with contractor for costing, with client for review, at implementation stage) to be updated at each stage.
Step 2: Ensure that your requirements are fully developed
To ensure that the contractor deals with the change proposal quickly and efficiently, it is essential that your requirements are fully developed before the change is proposed and that they are clearly articulated in the change notice. Particular attention should be paid to:
- Allowing sufficient time for implementation, otherwise you, the client, will be under pressure to accept costs that are too high
- Obtaining senior management authorisation and budget approval
- Assessing the impact of the change on FM, lifecycle and/or utility costs
- Obtaining advice from legal and/or commercial experts on major changes, particularly to check that there is no duplication of existing contractor obligations
- Discussing with the contractor whether a deed of variation is required, and validating this with your own lawyers. Where a deed is required, the related legal costs need to be agreed as a fixed fee, as part of the variation sign off process
- Where any capital works are proposed, ensuring that the initial instruction to the contractor includes a plan of the affected area, showing the impact of the proposed works
- Considering the impact of any works on end users
- Ensuring the instruction to the contractor is drafted using contractual terms so there is no ambiguity, especially where a change to the contractual terms themselves is proposed.
Step 3: Keep control over costs
To ensure VFM it is essential that you have a good grasp of the costs of the change management process and challenge any excessive and/or unjustified charges. As a minimum, you should review the following on at least a sample of changes:
- Management fees – levied by PFI-related parties (PFI company, FM contractor and, for major variations, the bank) – are they reasonable and in line with market rates? It is good practice to contact other organisations with similar PFI contracts, especially with the same contractor, and ask them what fees they pay. Fees are rarely specified in the contract, so if others are paying less this will provide a basis for challenge.
- Cost of works – the contractor should provide a full breakdown of any capital and revenue costs relating to the change, as well as evidence of quotes obtained for works above the small works threshold, demonstrating that it has obtained VFM for you. Normally at least three quotes should be obtained; less than three should only be accepted in exceptional circumstances where there is a good reason. In the case of major variations, the contractor should conduct a full tendering process (i.e. produce a tender pack and invite bids by advertising on the open market). It is also advisable that you obtain advice from technical experts (either in-house or external) on the estimated capital cost of the change, as well as to benchmark the cost against similar variations on this and other contracts.
- FM, life cycle and utilities costs – most changes initiated under PFI are likely to have an impact on one or more of these costs. To achieve VFM, it is important to:
- Ensure the contractor includes details of existing FM, life cycle and utilities costs in its costed response and that these are reconciled with the revised costs that the contractor proposes
- Ensure that where the change results in a saving due to reduced or discontinued provision, the unitary charge is reduced accordingly
- Obtain a cost breakdown and challenge any excessive or unreasonable costs
- If the contract provides for benchmarking/market testing of utilities, ensure that any variation-related utilities costs is reconciled as part of this process to avoid double charging.
- Legal, technical and funder fees – these are often charged where there is a major service or capital variation. They are often excessive, as funders use their approval as leverage for increased income. In many cases the fees are proposed on the basis of scant knowledge of the works/services required, so it is worth requesting a detailed breakdown and a list of assumptions made in calculating these fees, and to challenge them if appropriate. Where the contracting organisation has the capacity and expertise within its own legal team, the option of drafting any deeds of variation and other formal documents in-house should be considered, as this may be a way to reduce legal fees. It is also advisable to ‘bundle’ such changes together, as far as possible, to achieve economies of scale on any funder-related and legal fees.
- Other fees – in addition to those listed above, the contractor may charge specialist fees (i.e. for technical advisers, insurance advice, etc). These require detailed review, as in some cases (such as fees for financial model re-runs) they may already be included in the existing unitary charge.
- Caveats – contractors often add caveats to the quoted fees, such as ‘the price is valid until…’, ‘estimate subject to…’, ‘fee exclusive of…’, ‘subject to funder fees and approval’. This small print should be scrutinised carefully and challenged where appropriate.
Step 4 – Hold regular change control meetings
In PFI contracts with a large asset base and/or wide scope of services, it is likely that you will have to process dozens, if not hundreds of variations a year. Due to the number of steps required for each variation and the lead time from initiation to sign off, it is easy to lose track of individual changes. It is, therefore, recommended that regular meetings are held with the contractor to review progress on all open variations and ensure the parties are agreed on the current status of each change. This will avoid any proposed changes ‘falling between the cracks’, with works/services stagnating, while each party assumes the ball is in the other’s court.
Step 5 – Use persistent breach provisions if necessary
If, despite the controls above, the contractor is failing to meet its responsibilities in terms of change notice response times and/or VFM, you may choose to invoke the persistent breach provisions available in most PFI contracts. This is likely to swiftly focus the contractor’s mind on the severity of the situation. It is also likely to bring senior representatives of the PFI company and funder to the table, with the power to enforce improvements to resourcing and performance of the FM contractor, ultimately resulting in quicker turnaround and more stringent costing of the instigated changes.
Remain in Control…Summary
Implementing and managing an effective PFI change control procedure is a worthwhile undertaking and, hopefully, you will never have to carry out step 5, the emergency measure. These key steps, as summarised below, are, however, only as effective as the staff responsible for PFI monitoring, who need to ensure that the process is managed diligently from start to finish.
- Maintain a suite of standard documentation including:
- Change protocol
- Change control form
- Change register
- Ensure client requirements are well developed before submitting the change to the contractor for costing and development
- Review and challenge fees where appropriate
- Hold regular change review meetings with the contractor
- In case of persistent poor performance, invoke the persistent breach provisions.
If you, or your colleagues, would be interested in receiving further information on how you can instigate your PFI contract savings and contract management initiative, please visit our PFI support page, download our free white paper or contact us for further information.