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The means in which savings in PFI contracts may be made
Trowers Public Insight

The means in which savings in PFI contracts may be made

Given the outcome of the Spending Review published on 26 November 2015, there is a drive for public sector entities to implement savings measures.  This includes an ongoing review of the terms of their PFI contracts with the purpose of reducing costs.

Local Authorities should make sure that they have a good understanding of the contractual terms prior to any changes to the PFI contracts being made. As value for money is a key consideration for PFI contracts, it is vital that public sector entities consider cost benefit issues when proposing changes so as to ensure that the services provided will not be adversely affected.

We are currently involved in a number of PFI contract reviews and set out below are our suggestions as to how savings could be made.

Areas in which savings in PFI contracts may be made

  • Management Contract Terms – Be certain that the terms in the ‎existing contract are up ‎to date and appropriate deductions are being made. Consider if existing insurance provisions are being implemented correctly.
  • Optimising the use of ‎asset capacity – It is important to ensure that costs of surplus capacity are avoided. Also consider the possibility of subletting or mothballing which may help to avoid variable service costs. Establish how the additional income may be treated under the contract and what the payment mechanism consequences will be.
  • Review the specification of soft services - Consider if more services are being bought than are required. Any changes made should not impact on the function of the project and both short and long term implications must be weighed up.
  • Agree value testing - Review standards when preparing for a value test to ensure changes can be repriced to offer the best value for money. However, be aware that the results of value tests are based on market pricing so could end up being ‎better or worse than contract terms.
  • Payment mechanism – The service provider's performance should be ‎reviewed against values ‎stated in the contract and the appropriate mechanism should be used where necessary.
  • Visibility of costs - Difficulty can arise when the authority must justify asking for information when provisions in contract are not specific. Cost visibility helps authorities understand the costs of services under the contract and where savings can be made
  • Advice from departmental PFUs ‎- Consider the nature of the contract. Earlier contracts are potentially bespoke and offer more scope for savings mechanisms.

Contract reviews and negotiation of any variations will require commercial, financial and legal expertise to assist. This will help public sector entities gain a clearer understanding of the inherent risks of changing contract terms before proceeding. Making variations to PFI contracts may enable public sector entities to make significant savings and adjust effectively to changing conditions in the market.

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