05 June 2008 | Richard Auton

Richard Auton examines the latest guidance on drafting changes to PFI contracts, and what these will mean for purchasers working within the public sector

The issue of dealing with changes in Private Finance Initiative (PFI) contracts has always been an important one. They are the most frequently used form of Public Private Partnerships - projects that involve private sector investment in delivery of public services - and are very complicated, typically lasting 20 to 30 years. Without the ability to make changes on a sensible basis, it is arguable that a public body could not lawfully enter into such a long-term arrangement.

The previous standard drafting for PFI contracts had some required wording for changes. There was little flexibility or tailoring to recognise the complexities of a sector or of certain types of changes.

There were provisions to deal with low-value "small works" changes that could be charged based on a schedule of rates (small works procedure) but other than this, any change needed to follow the prescriptive change procedures.

The current standard PFI contract (SoPC4) guidance has removed the standard change wording. It gives advice on areas that a change protocol should cover, recommending that drafting deals with changes in capacity, functionality and service specifications and considering the value and the impact of the changes. This gives far more flexibility to agree suitable procedures.

At the end of last year, 4ps (public private partnerships programme) published some pro forma change protocol wording for accommodation projects. It is now recommended that this wording should be used for all PFI accommodation contracts and it is being further tailored for each type such as schools and housing, so we may be back to standard drafting after all.

For changes sought by a public authority, the protocol envisages different procedures depending on whether the value is low, medium or high. Low value changes are similar to the small works procedure.

Medium value changes follow a process similar to the old change control procedure: request, estimate, and confirmation. High value changes can be priced through competitive tendering, benchmarking or valuation by an independent technical adviser.

There are several points to note with regard to the new protocol. Using competitive tendering potentially offers a transparent costing mechanism for the public authority but presents the contractor with potential issues to manage should a body not part of the existing structure win the contract.

Traditionally the project company will look to pass all liability down for defects and require an interface agreement between the building and the FM sub-contractor to divide the risks. A third sub-contractor will upset that carefully controlled balance. Another issue is the attempt to restrict the ability of the funder to conduct due diligence on the change or to cap the costs for which they might seek reimbursement.

While SoPC4 laid down principles, it implied a degree of flexibility to meet the needs of individual projects. Some commercial issues will need to be settled across the market to make the accommodation pro forma work. It is hoped there is not too rigid a stance to defend standard drafting until that has happened.

* Richard Auton is a director at law firm Walker Morris. Julie Muscroft, partner, and Elizabeth Wood, associate, also contributed