As the second wave of projects under the Government's Building Schools for the Future programme goes out to tender, we take a look at some of the implications for the supply chain of this new approach to the procurement of new and refurbished secondary schools.
The new approach
Building Schools for the Future has introduced a new approach to the procurement of secondary school facilities. It follows an extensive consultation process conducted with local education authorities and the private sector by Partnerships for Schools, a body set up by the Department for Education and Science and Partnerships UK.
The key document in this new approach is the Strategic Business Case prepared by the local education authority ("LEA"). This outlines the authority's anticipated capital requirements for its secondary schools estate over a period of the coming ten years. It forms the basis of the authority's invitation to the private sector to negotiate.
The procurement essentially takes the form of the selection by the LEA of a private sector partner to develop and implement the authority's capital works programme. The successful private sector partner, the LEA and Partnerships for Schools will establish a joint venture company, called the Local Education Partnership ("LEP"), in which the private sector partner will own eighty percent of the equity and the LEA and Partnerships for Schools ten percent each. The LEP will enter into a long term Strategic Partnering Agreement with the LEA under which the LEA and the LEP will work together to deliver the capital works programme over a period of ten years.
Project agreements
Some of the projects included in the LEA's programme are implemented immediately. These projects are known as the "initial projects". Other projects will be brought forward under the Strategic Partnering Agreement, which requires them to be taken through a two-stage approval process. The initial projects and the projects which achieve Stage 2 approval are implemented either on the basis that they will be financed on PFI principles or on the basis of "conventional" local authority financing. The LEA will enter into contracts for the delivery of the projects either with the LEP itself or, more probably, for each project, a separate project company, which will be a subsidiary of the LEP.
In the case of privately financed projects, supply chain members experienced in working under the PFI will be familiar with the role they will probably be expected to play: tough conditions of contract are likely to be passed down from the LEA's project agreement by funders and sponsors. As in other PFI projects, there are likely to be limited rights of relief and extensions of time, high rates of liquidated damages and tight restrictions upon the adjustment of payments under the contract.
Even where the project is conventionally funded, the terms of the contract between the LEA and the LEP are similar to many of the terms of the PFI project agreement. So in this case too, it is likely that the LEP or its project company will ask the supply chain to contract on similar terms and conditions to those which normally apply in a PFI project. The main difference is likely to be limited to making the provisions relating to the effects of uninsured "Relief Events", such as delays by utility companies, more favourable to the supply chain.
Issues relating to the allocation of the risk of unforeseen ground conditions, latent defects and the presence of asbestos in existing buildings will be negotiated on a project specific basis, usually based on surveys carried out either by the LEA or the supply chain itself.
Strategic Partnering Agreement
But in addition to its responsibilities in relation to the delivery of approved projects, the supply chain is likely to play a key role under the Strategic Partnering Agreement in developing proposals for new projects.
Under the two-stage approval process, the LEA may request the LEP to prepare a Stage 1 proposal for a project. When making the request, the LEA indicates a target cost and identifies the other requirements that the proposal must satisfy. The LEP can decline to prepare a proposal at his stage, but if it does so, the LEA may procure the project from other suppliers. If the LEP decides to proceed, its Stage 1 proposal, when submitted, must contain, among other things, outline designs, indicative costings, and estimated programmes for the project. In addition, the proposal must include a fixed Management Fee, with a breakdown, representing the estimated cost of taking the project proposal from inception through to final approval, contract signature and financial close.
The LEA is required to consider the Stage 1 proposal in good faith and may not unreasonably withhold its consent to the proposal proceeding to the next stage, having regard to all relevant factors. If the proposal is validly rejected, the cost of preparing it must be borne by the LEP and the LEA may develop the project outside the Strategic Partnering Agreement.
If the project goes on to Stage 2, the LEP prepares detailed designs, obtains detailed planning permission, prepares detailed price estimates, a financial model, a value for money assessment, programmes and method statements, site and building surveys, and completed risk registers. The LEA is required to measure the proposal against specified approval criteria: the target cost and the other requirements stipulated by the LEA at the start of the process, value for money, conformity with the Strategic Business Case, departures from Building Schools for the Future's standard contract terms, and compliance with the law.
If the proposal is rejected for non-compliance with the approval criteria, the LEP must bear the cost of preparing both the Stage 1 and Stage 2 submissions. The LEA may develop the project outside the Strategic Partnering Agreement, but without making material changes to the specifications.
If the proposal is rejected for reasons other than non-compliance with the approval criteria, the LEA reimburses to the LEP that part of the Management Fee which it has actually incurred in preparing the Stage 1 and Stage 2 submissions. In this case, the LEA is not entitled to implement the project outside the terms of the Strategic Partnering Agreement.
If the proposal is accepted, the parties then proceed to implement the project and, if the contracts are signed and financial close achieved, the LEP can then recover its fixed Management Fee through the project. Thus, if a project company has been set up, the LEP will charge the project company the Fee and the project company will recover this from the LEA as part of the payments due to it under the project agreement with the LEA.
Development cost
It is likely that the LEP will pass down to the supply chain a significant part of the responsibility for preparing proposals and taking them through the approval procedures. This will involve the supply chain in potentially significant development cost, even at Stage 1. A considerable period may elapse between that cost being incurred and its recovery and there are a number of circumstances in which the cost may not be recovered at all.
Although the Strategic Partnering Agreement contains procedures and language designed to encourage co-operative working and the successful delivery of projects, ultimately the LEA has the greatest influence on whether a project goes forward. For example, the LEA specifies its requirements for a project at the beginning of Stage 1 and again at the beginning of Stage 2. A proposal can be properly rejected for non-compliance with these requirements. The LEA also sets the target cost, and if at Stage 2 the proposal exceeds the target, it will not meet the approval criteria and can be rejected without giving rise to liability on the part of the LEA for payment of the cost of preparing the proposal.
A balance
Of course, the risk associated with this from the supply chain's point of view has to be weighed against the benefit of the exclusivity granted by the Strategic Partnering Agreement to the LEP to prepare project proposals for the LEA. However, it can be argued that such exclusivity will only be real exclusivity if the circumstances in which it will no longer apply can be objectively determined, i.e. if the tests for acceptance or rejection of Stage 1 and Stage 2 proposals are objective tests. If the LEA wishes to have the flexibility or discretion under the Strategic Partnering Agreement as to whether to proceed with the LEP and its supply chain in relation to a particular project or to seek tenders elsewhere, then the supply chain might argue that there should be more certainty in relation to development cost recovery.
As Waves 2 and 3 of the Building Schools for the Future Programme pass through the procurement process, it remains to be seen how the balance will be struck between objective and subjective tests, exclusivity and development cost reimbursement.
For further information please contact Peter Long on +44 (0)20 7367 2507 or at [email protected]
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