10 May 2006 | Paul Snell

The National Audit Office (NAO) has criticised the Department of Trade and Industry's procurement process, following the cancellation of a private finance initiative (PFI) contract to provide new facilities for the National Physical Laboratory.

In its report published today, the NAO said problems during the procurement stage concerning the design of the laboratories and a weak bidding process were partly to blame for the deal ending.

Responding to the report, Edward Leigh MP, Conservative chairman of the Committee of Public Accounts, said the Department of Trade and Industry (DTI) had signed the PFI contract despite being concerned that the private sector could not deliver what it promised.

The report, The Termination of the PFI contract for the National Physical Laboratory, said when the contract ended in December 2004, it was the first example of a major PFI deal being cancelled as a result of "serious non-performance".

After the DTI shortlisted four of the 10 interested firms, two pulled out leaving the department with only two to choose from. The NAO said that left the DTI with little scope to encourage Laser, the eventual contract winners, to improve the technical quality of its bid, because there was little competition in the bidding process. However, the DTI told supplymanagement.com it had "maintained competitive pressure" by keeping these two bidders.

One problem was that neither of the bids met the requirements of the DTI concerning temperature controls in the laboratories. The bid evaluation team suggested both bidders design a single laboratory to show how to improve this, but this was rejected by the DTI.

Despite the designs from Laser, the company charged with building and managing the facilities, not meeting the exacting specifications for the laboratories, the DTI did not raise its concerns.

The NAO report said: "Following the award of the contract the department did not seek to resolve its concerns by imposing a design solution on Laser."

The report said this was because the DTI wanted responsibility for the project to remain with the private sector. The DTI said that this was in keeping with the principles of the PFI, and it was concerned that if it contributed to the design, it might be responsible for some of the cost of correcting defects.

The NAO report also outlined that the DTI believed that transferring the risks of the project to Laser would focus it to deliver what was required. Because of this transfer, the reported private-sector losses of at least £100 million were not passed to the DTI, but the problems caused by the contract meant the DTI had to invest a further £18 million in the facilities.

The report recommends that for complicated bids, contractors should demonstrate that designs work fully during the procurement process.