The military philosophers

The use of PFI in the defence sector has been a growth area over the past 10 years. The Ministry of Defence’s review of PFI last year noted that more than 50 projects, valued at £4.3bn, have been signed with nearly as many again in the process of negotiation.

However the MoD has differed from other departments in its procurement approach by not fully adopting Standardisation of PFI Contracts, version 3 (SoPC3), which was issued by the Treasury and, as the name suggests, sets out standard terms for PFI procurement. This can lead to delays in the negotiating process.

A guidance note was issued in 2003 by the MoD incorporating some specimen drafting, but no standard contract has been available. This will now change with the issue in August of MoD’s Project Agreement, version 1 (PAv1). This is a hybrid document incorporating the MoD’s own drafting and those sections of SoPC3 that apply to the ministry.

PAv1 has been endorsed by the Treasury despite its derogations from SoPC3. This is good news for bidders as it should promote greater certainty in contract terms. PAv1 contains core clauses that are compulsory and must be used unless approved by the MoD’s private finance unit. Treasury approval is only needed as well if the amendments do not comply with SoPC3.

It is intended that 60-70% of the scope of project agreements will be covered by PAv1 with 30-40% developed on a project-by-project basis. The document indicates which sections are appropriate for construction and which for specialised equipment agreements. Some clauses are optional, leading overall to a modular structure.

So what is different about PAv1? Terminology is always a good place to start. There is no mention of “construction” or its “phase”; the preferred phrase is “service levels” indicating groups of services to be provided. PAv1 is intended to aid project management by encouraging project teams to create a “core table” listing the phasing of services that will be adopted by bidders responding to the invitations to tender or invitations to negotiate.

In the highest rated security category a list of those of who are ‘unacceptable’ (list X) is maintained

The scope of MoD projects is something of a moveable feast and so the issue of change looms large. The MoD’s review of its PFI projects in December 2005 noted a variable approach to the change process, sometimes extending to instructions being given “outside the contract as work-arounds or add-ons”.

To avoid the need for ad hoc arrangements the MoD has refined the way in which changes are arranged by introducing a unified procedure whatever the source of the instruction. This is accompanied by a change notice for estimating, into which the MoD and its contractor enter details in turn. The contractor may not have exclusive rights to carry out changes and major changes will be procured on by competitive tendering.

Where changes require urgent compliance a full estimate need not be given; a rough estimate may suffice.

Security and anti-terrorism precautions will rarely be far from the top of the agenda of any MoD contract and suitable provision has been made as to change of ownership and record keeping to reflect this. Within one year after the start of the service level, ownership of the contractor (probably a special purpose vehicle) cannot be changed. There are some exceptions for stock exchange or lender’s security transactions. After this period transfer is possible to a “suitable” third party but some security restrictions still apply. In the highest rated security category of “secret matters” a list of those who are “unacceptable” (“list X”) is maintained.

PAv1 makes much more detailed provision than SoPC3 in respect of records. The MoD will have wider access to contractor information so as to enable it to take account of open book accounting and to be able to monitor subcontractor prices.

An increased measure of standardisation of contract clauses should be a positive step for the industry in leading to a reduction in time spent on negotiation and bid costs; it should also enable all concerned to focus on the minority of issues that are genuinely project-specific.