LAWYERS TO THE
PROJECTS INDUSTRY
www.klgates.com
Autumn 2007
Projects Bulletin
Revised Guidance on PFI
contracts
The Treasury has issued a revised
version of its guidance on PFI contracts
- Standardisation of PFI Contracts
Version 4, or SoPC4 as it is known, was
issued in March. It is more and more
the case that PFI deals are required to
follow SoPC to the letter, so the
changes in SoPC4 are worth knowing
about.
Inclusion of soft FM
services
Soft FM services are services such as
catering and cleaning which are labour
intensive rather than related to the hard
fabric of the building. In the early days
of PFI the assumption was that all
possible services relating to the new
facility, whether a school or a hospital,
should be included in the services
provided by the private sector.
Over time the Government have
moved away from this position and
Section 3.8 of SoPC4 confirms, by
reference to a revised Treasury
document called "Value for Money
Guidance", that awarding authorities
need to consider carefully whether to
include soft FM services in the
package. It must be said that much of
this shift in policy is driven by politics,
namely the opposition of trade unions
representing FM service employees to
the transfer of staff across to private
sector providers.
Early works agreements
There is an interesting new section on
early works agreements (Section 3.10).
It points out that in a well planned
project there should be no need for
such a document. Entering into an
early works agreement is undesirable in
many ways, not least because it shifts
the negotiating balance towards the
private sector party that has entered
into the agreement. There are also
potential difficulties with the EU
procurement rules, since the original
OJEU notice probably did not refer to
the award of an early works agreement.
PFU approval is required before an
early works agreement is entered into,
and the guidance recommends that the
works should be of a general nature not
specifically related to the project
solution of any particular bidder. That
way the enabling works will be of value
to the Authority even if the main
Project Agreement is awarded to a
different bidder.
Change procedures
Section 13 is a substantially new
section dealing with changes/variations.
This follows criticism from the market
that the Variations procedures built
into PFI project agreements have been
difficult and expensive to operate and
much too legalistic. The new guidance
suggests dividing changes into small
Welcome to the Autumn Edition of
the Projects Bulletin.
The revised guidance on the standard
form of project agreement was issued
in March 2007 (SoPC4). In this
Bulletin, we analyse the substantial
changes and lessons learnt from
previous PFI deals. You will also find
more on another common feature of
the PFI market in the UK, the subcontractors’ cooperation agreements
(page three), as well as an analysis of
property issues in PFI transactions
(page six), a brief review of the issues
raised by the current tenders for
nuclear decommissioning works (page
eight) and an update on the
Competitive Dialogue (page ten).
Contents
Revised Guidance on PFI contracts
1
An uncooperative approach?
3
£310m Major healthcare PFI project 5
Underlying property issues in PFI
transactions
6
EU proposals for new standstill
periods
7
Competition for Magnox Nuclear
Decommissioning
8
Competitive dialogue: A minefield 10
or level playing field
Who to contact
12
Projects Bulletin
value and large value changes, and
using a catalogue or schedule of rates
approach for calling off and pricing
small value changes. For large value
changes SoPC4 recommends that
authorities choose between three
different approaches for ensuring value
for money from the new work, namely
benchmarking, appointing an
independent technical adviser who will
evaluate the cost of the change and
competitive tendering of the new work.
Market testing
Section 15 on price variations now
confirms that market testing is the
preferred method for adjusting the soft
FM elements of the unitary charge to
market, and that benchmarking is out
of favour. Since market testing may
lead to the original provider losing the
contract, it is worth noting that the
Treasury guidance on this area is
entitled "PFI: Strengthening Long
Term Partnerships". Sir Humphrey
would be pleased.
Authority break points
Section 21.5.4 contains a controversial
proposal that authorities should seek to
introduce "break points"; in other
words, a pre-priced option to terminate
the project early at specified intervals.
The intention is to give the public
sector certainty as to the cost of
terminating projects prior to their
expiry date. Bidders will be required to
specify a fixed sum (i.e. not a figure to
be determined in the future through
the operation of some calculation),
which they will be paid in the event of
termination at a break point. The
intention is that bidders will compete
to bid the lowest price for terminating
at these break points. This approach is
not likely to be attractive to the private
sector, which in most cases will have
invested a large amount of money in
securing what was planned to be a 25 or
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30 year contract. Also the rationale
assumes that competitive bidding will
lead to tenderers reducing the amount
they receive, compared with what they
would have received under the old
calculation of compensation for
voluntary termination. It is hard to
argue with the economics, but in an
environment where it is becoming
increasingly difficult to find three or
four bidders for large PFI projects, one
queries whether it is sensible to
introduce provisions which are likely to
make bidding less attractive rather than
more.
Commitment letter
Section 32 contains a revised
"commitment letter" which is the letter
written by the authority to its "selected
bidder". The letter has been revised to
take into account the competitive
dialogue procedure which will
increasingly be used for PFI deals.
As expected, it attempts to commit the
bidder even more firmly to the words
of the project agreement at the time
the letter is issued.
Bond funding
There is a helpful new Section 36,
setting out permitted revisions to the
standard drafting applicable if the
project is being financed through the
issue of bonds as opposed to bank debt.
Since PFUs in the different funding
departments will be keen to enforce
the new SoPC4 document, we can
expect a number of these points to
come up in negotiations over the next
few months.
For further information please contact
Christopher Causer
christopher.causer@klgates.com
+44 (0)20 7360 8147
www.klgates.com
An uncooperative approach?
'Co-operation' or interface agreements
("IAs") are becoming an increasingly
common feature of PFI/PPP projects.
They are agreements entered into by
Project Co and all subcontractors
engaged on a project with the purpose
of creating direct contractual
relationships between the
subcontractors which would not
otherwise exist. The key purpose of an
IA is to impose a contractual duty on
each subcontractor to co-operate with
the others, and to impose sanctions if
they do not.
liabilities, liability caps and detailed
requirements regarding design review,
access and inspection of works.
At subcontractor level, the popularity of
IAs depends to a large extent on which
side of the fence you sit on. They are
generally seen as beneficial by the major
service and equipment providers who
will be working together for a 20-30 year
period. The issue is often somewhat
different however if viewed from a
building contractor's perspective, whose
involvement in the project is
comparatively short-term.
Whilst there is certainly merit to the
argument that subcontractors focussed
on working well together will serve the
'greater good' of a project, the
negotiation of IAs can be a timeconsuming, unco-operative and
disproportionately expensive process as
efforts are made to reconcile the various
parties' competing interests.
The building contractor's work is geared
towards the beginning of the project,
and a delay to construction has the
potential to delay subsequent service
and equipment providers. As such,
building contractors may be inherently
more likely to be on the receiving end of
claims under IAs than to benefit from
them.
IAs are popular with and often required
by Project Co, authorities and funders as
a way of allowing claims and disputes
between subcontractors to be dealt with
directly and thereby reducing the
administrative burden on Project Co,
and the risk that it will be left with
residual liabilities. In the absence of an
IA, a claim by subcontractor A that it has
been delayed by subcontractor B would
need to be passed 'up the line' from
subcontractor A to Project Co, and then
back down by Project Co to
subcontractor B. Under an IA however,
subcontractor A can claim directly
against subcontractor B.
Key issues for a building contractor to
bear in mind when negotiating an IA
include the following:
As well as obligations to co-operate, and
a domestic claims procedure, IAs also
typically include provisions dealing with
indemnities, the treatment of pass-down
The number of parties to the IA - as a
general rule, the more subcontractors,
the greater the complexity of the IA.
A large number of service providers
can mean a disparity in the bargaining
power between the 'lone' building
contractor and the various service
providers who do, to an extent, have
common interests. It also increases
the likelihood that the building
contractor will be on the receiving
end of claims by sheer virtue of
numbers.
Extent of subcontract obligations - in
addition to an undertaking to observe
and perform the obligations in the IA
itself, IAs commonly seek to impose
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3
Projects Bulletin
obligations to comply with the
underlying subcontracts as well. This
is frequently a contentious issue from
the building contractor's perspective,
as it means it is warranting to the
various service providers that it will
comply with the terms of the building
contract. This presents an associated
risk of 'nuisance claims' being brought
under the IA in respect of subcontract
matters which do not really concern
the service providers.
Scope of indemnities - IAs will
contain a clause providing that each
subcontractor indemnifies the others
against specified losses and damages
arising from negligence or a breach of
the IA by the indemnifying
subcontractor. Issues to consider
when negotiating these clauses
include whether or not the indemnity
is limited to direct losses, the
circumstances where the indemnity
does not bite (for example,
contributory negligence and if
insurance proceeds are recovered in
respect of the damage) and whether
the value of certain elements of the
indemnity (such as in relation to
property damage) are capped.
Re-allocation of Pass Down
Liabilities ("PDL") - IAs include a
mechanism for the reallocation of
liabilities incurred by Project Co at
project agreement level and passed
down to the subcontractor Project Co
considers responsible. Where
subcontractor A does not accept that
Project Co's initial assessment of
responsibility for the PDL is correct,
the IA enables it to seek a reallocation
of that PDL to subcontractor B and/or
back to Project Co. The extent of the
grounds agreed for reallocating a PDL
to Project Co will depend on the
collective bargaining power of the
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subcontractors. Project Co will want
to minimise the risk of being left
with any PDL, whilst each
subcontractor to whom a PDL has
been wrongly allocated will want to
ensure that if there are any reasons
why the PDL cannot be allocated to
the responsible subcontractor, the
PDL does not by default remain with
them.
Domestic claims and liability caps where subcontractor A is in breach of
its obligations under the IA and this
causes subcontractor B to suffer loss,
subcontractor A is obliged to
compensate subcontractor B for its
loss (for example, for the additional
costs incurred as a result of delayed
handover). Caps on liability for such
claims need to be agreed, included in
the IA, and can frequently result in a
complex matrix of liability. Different
caps may apply in respect of each
subcontractor, be different for the
construction and operational phases,
and there may also be a separate cap
for delay damages. It is not
uncommon for a building contractor
to have a high cap on its liability to
each service provider, but only have
the benefit of relatively low caps on
those service providers' liability in
return. A key risk for a building
contractor is in its liability for any
delay caused. It may face claims
under the IA for the additional costs
incurred by the other subcontractors
as a result of delay caused as well as
liability for liquidated damages under
its subcontract to Project Co. This
needs to be considered when
negotiating the value and coverage of
the IA caps.
Detailed obligations - IAs contain
detailed 'statements of requirements'
regarding each subcontractor's
technical and access requirements of
the others, and forms the focal point
of the obligation to co-operate.
Project Co should also be bound by
an express duty to co-operate with
the subcontractors, but this is often
resisted (an approach typically taken
by Project Co is that its obligations
and liabilities under an IA should be
as limited as possible). An issue for
building contractors is likely to be
how far the duty to co-operate
extends, particularly in the context of
design review and inspection of
works. Service providers are
involved in design review prior to
financial close, and are obliged to set
out their various design requirements
in FM assumptions which then form
part of the building contractor's
obligations at subcontract level.
Service providers also often seek to
obtain a right to comment on design
under the IA. It is not in the building
contractor's interests to have service
providers raising new issues late in
the day or having a 'back door' way
of submitting comments which
circumvents the formal design
review procedure set out in the
building contract.
The negotiation of IAs can be a
complex process, and an understanding
of the interrelationship between the
terms (and liability caps) in the IA and
the underlying subcontract is crucial to
assessing the true exposure to risk
which signing an IA represents to a
building contractor.
For further information please contact
Inga Hall
inga.hall@klgates.com
+44 (0)20 7360 8137
www.klgates.com
£310 million major healthcare PFI project signed
by Laing O'Rourke Construction North Limited
A team from K&L Gates, led by
Projects partner Trevor Nicholls,
advised Laing O'Rourke Construction
North Limited on the £310 million PFI
construction contract for the design
and construction of new hospitals in
Stoke on Trent for the two Trusts,
University Hospital of North
Staffordshire NHS Trust and the
Stoke on Trent Primary Care Trust,
which was signed on 8 June 2007.
Financial close was reached on 12
June 2007.
The largest NHS bond deal after Bart's
and Birmingham, the North Staffs
project is financed by EIB and a bond
issue guaranteed by MBIA. The new
hospitals, based in North Stoke, will be
the largest PFI healthcare facility after
Bart's and Birmingham. Once
operational in 2014, they will provide
664 new beds, new operating theatres,
a new community hospital for the
Stoke on Trent Primary Care Trust,
care facilities for the elderly, out
patients, and a walk-in centre. The
project is challenging as it is spread
over two sites, involves two Trusts, and
requires close co-operation between
the construction contractor, equipment
supplier and IT provider. Advance
works have been underway since 2005
including construction of a multi-storey
car park, demolition of existing
Victorian healthcare buildings, piling
and the diversion of utilities.
The K&L Gates team led by Trevor
Nicholls and projects associates Inga
Hall, Sophie Charveron and Peter
Dzakula, included Steven Cox
(property partner), Sebastian Charles
(planning and environment partner)
and Ashley Mather (associate property).
accommodation on the campus of
Loughborough University. The new
student halls, once operational in
2008-09, will provide 1,300 new
student rooms. The team was led by
Trevor Nicholls, assisted by Sophie
Charveron, Eleanor Smith (associate property) and Martyn Hanmore
(associate - planning and
environment).
For further information please contact:
Trevor Nicholls
trevor.nicholls@klgates.com
+44 (0)20 7360 8177
The same week, Laing O'Rourke
Construction North Limited signed
the £49 million PPP construction
contract for the design and
construction of new student
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5
Projects Bulletin
Underlying property issues in PFI transactions
The property lawyer's role in a PFI
transaction is to review the ownership
of the land where the facility is to be
built, check access to it and what rights
others may have over it. If there are any
potential hindrances or delaying factors,
these need to be highlighted to the
team at an early stage so that risk can
be appropriately allocated and/or a
pragmatic solution found.
The form of Certificate of Title
(currently the City of London Law
Society Standard Form Sixth Edition)
or report on title provided by the Public
Authority/Project Company offer the
recipient a contractual remedy against
the author for misrepresentation or
inaccuracy, and look similar to those
used in institutional property
lending/sale and purchase transactions
but the issues can be slightly different.
Sites may have been acquired
piecemeal by the public body
landowner over the years, and part or
even the whole of the facility may not
even be registered at the Land
Registry. Historically, as publicly
owned assets, they are unlikely to have
been subject to the scrutiny of a
mortgagee's solicitor's microscope, and
there is a likelihood that informal
arrangements at the site have not been
legally documented or recorded.
Is insurance an
adequate remedy
against defects in title?
Whilst an institutional owner may be
happy to insure against any likelihood
of a breach of a restrictive covenant
where a development is fully built out
and let, insurance is not an adequate
solution if a contractor client is
injuncted so it cannot access the site
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AUTUMN 2007
and fulfil its obligations to undertake
the demolition/ construction phase.
Trigger points could be that rights of
access are inadequate, rights of light
benefiting surrounding buildings are
interfered with or the proposed
development breaches a restrictive
covenant.
How can you work
around a restrictive
covenant?
If for example, with a hospital project,
the title deeds prohibit the use of part
of the site as an asylum/hospital or limit
the use to a single dwelling house, if
alerted early enough, it may be possible
for the team to amend the layout of the
facility. The affected land could
perhaps be made part of the
landscaping, car park area or another
non-breaching use.
Voluntary first
registration at the Land
Registry
If any part of the site is unregistered,
the Public Authority/Project Company
should undertake a voluntary first
registration. The cost is modest and
the Land Registry guarantees title.
This will clarify the boundaries and will
indicate any likely ransom strips or gaps
in the site without full documentary
title.
What about matters
that will not be
revealed by registration
or searches?
The landowner should provide full
responses to the relevant British
Property Federation set of CPSE
enquiries, particularly for matters which
the party relying on the replies cannot
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www.klng.com
obtain from elsewhere, either via
searches, inspections or survey. The
proliferation of companies providing
telecoms and electricity supplies means
that some third party rights could
otherwise slip through the net.
What level of replies to
enquiries is acceptable?
If you are the recipient, attempt to
strike out any qualifications risk averse
lawyers framing the replies attempt to
insert, such as "in all material respects",
"all material information", "subject to
any qualifications in replies to
enquiries".
The warrantor of the information will
try to argue, in light of the decision in
William Sindall plc -v- Cambridgeshire
County Council (1994), that the parties
agree the expression "to the best of the
Trust's knowledge and belief" does not
warrant that the warrantor has made any
further enquiries into such a matter.
This means that you are accepting the
warrantor's actual knowledge rather
than the knowledge of everyone at the
organisation, information in archived
files or suppliers that the warrantors
might reasonably enquire of. This may
come down to a value judgement on the
part of the recipient as to how much it
estimates the warrantor actually knows
about its asset and its faith in the
continuity of its facilities management
as well as the complexity of the site and
its location.
Just because a claim has not arisen
historically or has not been triggered at
the planning stage does not mean that
the title information is comprehensive
and accurate and permits the scheme to
be completed as proposed. An early
review of the title and a site
inspection/study of aerial photos can
allow issues to be identified and risk
allocation to be resolved in a timely
fashion before the property issues
become deal critical.
For further information please contact
Ashley Mather
ashley.mather@klgates.com
+44 (0)20 7360 8215
EU proposals for new standstill
periods
As announced in our previous issue,
public contracts for works, services or
supplies that are awarded after a public
procurement tender cannot be
executed until the expiry of a ten-day
standstill period. The standstill period
commences on the day the contract is
awarded to the preferred contractor
and enables any claimant to bring a
claim for breach of the public
procurement regulations before the
contract is executed and comes into
force. The standstill period has led to a
rise in the number of challenges but
also levelled the negotiation playing
field between contracting authorities
and bidders.
decision in Alcatel (1998). A proposal to
amend the current Remedies Directive
has found its way to the EU Parliament
and suggested that the standstill period
is rolled across the EU to all European
Member States. The current proposal is
to impose a 12-day standstill period for
electronic communication and 17-day
period for postal communication.
Derogations are allowed and may result
in the contract executed during a
standstill period to be effective
nevertheless.
For further information please contact:
Sophie Charveron
sophie.charveron@klgates.com
+44 (0)20 7360 8154
The mandatory standstill period
applies only under the UK Public
Contracts Regulations 2006 and was
implemented folowing the ECJ's
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Projects Bulletin
Competition for Magnox Nuclear Decommissioning
The Nuclear Decommissioning
Authority (NDA) was formed in April
2005 to secure the decommissioning
and clean-up of the UK's nuclear sites
previously owned by British Nuclear
Fuels Limited (BNFL). The NDA is
under a duty to promote effective
competition by encouraging new
industry thinking. It has already
launched the initial competitions. The
contract for the Low-Level Waste
Repository (LLWR) near Drigg will be
awarded later this year, and the new
Parent Body Organisation (PBO)
contract for Sellafield is to be awarded
in the second half of 2008. The NDA
has now begun the competition for the
South Magnox reactor sites (Berkeley,
Bradwell, Hinckley Point A,
Dungeness A and Sizewell A). The
bidders are competing for a contract
worth over £3 billion, assuming it runs
for its full term of 17 years.
The South Magnox competition is to
select the PBO which will own the
shares of the new Site Licence
Company (SLC), Magnox South
Limited. The new Parent Body
Organisation (which will be owned by
the successful bidder) will be required
to enter into an agreement with the
NDA, under which it will acquire the
shares and nominate key staff to the
SLC. These staff are required to
improve the performance of the SLC
in accordance with the terms of its Site
M & O contract with the NDA. The
successful bidder will have the
opportunity to negotiate and agree the
terms of the M & O contract before
acquiring the shares.
How will all this be brought about? As
part of the bid process, three or four of
the short-listed tenderers will be
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AUTUMN 2007
invited to participate in a Competitive
Dialogue with the NDA, a new process
under the Public Contracts Regulations
2006. During this dialogue each bidder
will have an opportunity to explore
with the NDA the ideas and solutions
which it considers will best meet the
NDA's requirements. It is intended to
be an open dialogue leading to more
efficient tendering. The final contract
award, however, will be made strictly in
accordance with the objective award
criteria published in the OJEU Notice.
Whilst this may be seen as free
consultancy for the NDA and an
unwarranted expense for unsuccessful
bidders, these are the only rules of the
game as set by the NDA. Looked at
positively, competitive dialogue offers
bidders in the words of Ian Roxburgh,
the NDA's Chief Executive, "a chance
to shape the exam question which they
will ultimately be required to answer".
Mr Roxburgh was also at pains to
emphasise at the recent Industry
Seminar on Magnox South, that there
would be "a totally level playing field"
during the bid process and that, for
example, the recent purchase by
Energy Solutions of the BNFL reactor
sites management company would not
alter the position or give ES or its
partners, Jacobs Engineering, any
advantage. Notwithstanding these
assurances, competitive dialogue will
plainly add to bid costs and so far the
NDA have not indicated they will be
making any contribution towards such
costs.
Although the proposals discussed
during competitive dialogue will not be
the basis of the final decision (which
will be made by the NDA on the basis
of the published objective criteria), the
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calibre of the bid negotiating team will
inevitably be assessed. The team may
be required to participate in role-play
exercises to test how it would react to
specific situations and the level of
team-working. As far as possible
therefore, the competitive dialogue
process should be undertaken by the
same individuals who will become the
management team, essentially those
who will be seconded to the SLC. The
NDA will want to explore with these
individuals what opportunities there
are for innovative solutions and
improvements to the way the M & O
contract works. It will want to be
assured that the team will be supported
by its parent companies (the owners of
the new PBO) and the extent of
expertise available to the SLC through
the management team from the parent
companies.
Although the team is expected to bring
its influence to bear on the SLC's
activities, it will not be the 'controlling
mind' of the SLC. The NDA is keen to
ensure that the SLC remains an
enduring and stable entity with its own
employees. These employees must be
capable of running the company
without interruption should the Parent
Body Agreement terminate. The
Agreement is subject to review at fiveyearly intervals and there is a risk it
may not be renewed. The intention is
that the individuals seconded to the
SLC should be senior management,
but not 'permanent staff'. If they are
directors of the SLC, their first duty
will be to the company and there may
be situations where they have to act
against the wishes of the PBO, for
example when asked by the PBO to
take on board an unacceptable risk.
An early example of this independence
is that the new PBO cannot commit the
SLC to changes in the M & O contract
without the approval of the SLC
Executive.
Following the appointment of the new
PBO, there is a six month transition
period during which the SLC (not the
PBO) draws up a transition plan for
approval by the Regulators. Once the
detailed changes have been negotiated
and agreed, the shares are transferred
from the outgoing PBO to the new
PBO and the revised contract
arrangements come into force. On the
assumption that final tenders will be
submitted at the end of 2008 and then
have to be evaluated, this change is
not likely to take place until towards
the end of 2009.
For further information please contact:
David Race
david.race@klgates.com
+44 (0)20 7360 8106, or
Sebastian Charles
sebastian.charles@klgates.com
+44 (0)20 7360 8205
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9
Projects Bulletin
Competitive dialogue:
A minefield or level playing field?
What do nuclear de-commissioning
works, a £370 million hospital PFI
project in Bristol and a new schools
BSF scheme in Islington have in
common? They are all currently
advertised under the new Competitive
Dialogue procedure. Competitive
Dialogue is a new form of negotiated
procedure used by public sector
authorities to award large or complex
contracts for works, services or
supplies.
The new Directives on public
procurement dated 21 April 2004 (the
Works, Supplies and Services Directive
2004 and the Utilities Directive 2004)
were transposed into English law in
January 2006. The Public Contracts
Regulations 2006 and the Utilities
Contracts Regulations 2006 replaced
and consolidated the existing public
procurement rules and case law. They
also introduced a new form of
negotiated procedure for major and
complex projects. Public authorities are
under an obligation to award contracts
under either an open or restricted
tender. In exceptional cases, they can
opt for the negotiated procedure, which
allows for negotiation of the terms of
the contract with the winning bidder.
The new Competitive Dialogue is
available for particularly complex
projects, where the nature of the
contract or the risk do not permit
overall pricing, because the contracting
public authority is not objectively able
to define the technical means capable
of satisfying its requirements or
objectives. This new procedure seems
perfectly adapted for major or complex
PFI and PPP projects in the UK.
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AUTUMN 2007
The first phase is the publication of a
contract notice in the Official Journal
of the European Union. This is then
followed by the qualification of
candidates who are selected to
participate in the dialogue on the
basis of social, economic and
professional criteria.
In a third phase, the invitations to
tender are sent to the candidates on
the basis of the Solution. The
Regulations require that at least three
candidates should receive the
invitation to tender. Alternatively, the
Department of Health guidelines on
the Competitive Dialogue
recommend that four bidders are
invited to participate in the Dialogue
and two are kept until the final stage.
The second phase consists of
detailed discussions on all aspects of
the contract with each selected
candidate, during which the
authority and bidders discuss fully all
aspects of the project until the
requirements of the contracting
authority (the Solution) are defined.
In the fourth and final stage, the
winning bidder is asked to clarify its
bid and confirm its commitments,
prior to being appointed preferred
bidder. According to the Regulations
2006, clarification means specifying
points, fine tuning or adding to the
bid, without altering or modifying
A dialogue in four
phases
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substantial aspects of the tender.
Clarifications must not distort or
create a risk of distortion of the
competition between the candidates.
The preferred bidder is appointed on
the basis of the Most Economically
Advantageous Tender, as in the
negotiated procedure. The contract
is awarded without further
negotiations, which means all issues
need to be resolved as early as
possible, and in any case, before the
appointment of the preferred bidder.
Competitive Dialogue is new and
raises several issues, both for the
candidates and public sector entities.
Negotiations after
appointment of
preferred bidder
In the Regulations, adjustments to final
bids are allowed after the dialogue
phase has been concluded, provided
that the basic features of the tender are
not fundamentally or substantially
changed. Discussions after the
appointment of the preferred bidder
may result in a contract different from
the one that has been advertised.
Discussions with the preferred bidder
must be limited to matters that are not
price sensitive and therefore, in theory,
there should only be limited scope for
discussions after the preferred bidder
stage. It is, however, well known in
commercial practice that discussions
with the preferred bidder in PFI
projects involve negotiations on price,
scope of work and other commercial
aspects of the bid, and may last for
months after appointment of the
preferred bidder, as may be the case in
some Competitive Dialogues.
For instance, the Treasury recommends
that funding competitions are held after
appointment of the preferred bidder.
The commercial reality is that bidders
and funders will only be prepared to
commit substantial resources to bring a
project to close after one tenderer has
been selected as preferred bidder, and
not before. Some authorities in
Northern Ireland or London currently
tendering under the Competitive
Dialogue do not follow the
recommendation. They ask that each
participant concludes its due diligence
up front and then submits a complete
offer, including full bank support.
Tenderers are asked to submit tenders
which are supported by funders, hence
removing the risk that they are
unpicked by the banks after preferred
bidder stage.
Negotiations after preferred bidder
stage may result in an increase in the
tendered price. The Regulations 2006
focused on price and payment
mechanism, but not the scope of work.
Prices may be changed as a result of the
application of the price variation
formula that was already in the draft
contract discussed before preferred
bidder stage. The key test is, as for
negotiated procedure, whether the
essential terms of the contract changed
after the preferred bidder was selected.
In the UK, certain contracting
authorities simplified the scope of the
project tendered on the basis of a
Competitive Dialogue to make it easier
to compare bids. For instance, a tender
for a large PFI hospital in Northern
Ireland is currently running and the
public authority applied for outline
planning permission on the basis of the
exemplar design prepared by its own
consultant. Bidders will specify their
own variations to the exemplar design
(rather than their own full designs). The
scope of the project was limited to new
build, and excluded refurbishment
work, the provision of equipment or any
prospect of a property developmenttype deal.
Increased bidding costs
The Regulations recommend keeping
at least three bidders (DoH Guidance
recommends keeping two bidders) in
the tender until the contract is finally
awarded under a Competitive Dialogue.
This is not always followed because it
may be impossible to reserve one or two
bidders, as this would result in huge
bidding costs for the reserved bidders.
Participants who are invited to tender
under the Competitive Dialogue are
likely to incur substantial costs and
have to mobilise resources which could
be applied elsewhere. The bidding
costs incurred by a bidder during a
Competitive Dialogue may not
necessarily exceed those incurred
during a negotiated procedure but they
are incurred much earlier on in the
project and before any tenderer is the
preferred bidder. It completely changes
the risk profile for the private sector,
which ultimately impacts on the value
for money delivered to the public
sector.
The Regulations allow (but do not
oblige) contracting entities to provide
payment of a prize or contribution
towards bidding costs. Bid cost sharing
arrangements are not unusual in
complex large PFI projects, such as
healthcare projects. It would be
interesting to see whether these will
find a way into the Competitive
Dialogue and become standard practice.
Confidentiality
It is feared that contracting authorities
cherry pick the best ideas from outline
submissions made by the participants in
a Competitive Dialogue, and
incorporate those ideas into an optimum
set of output specifications for the
Invitation To Negotiate. Authorities
should require the consent of the
participants before disclosing their
confidential information, but neither
AUTUMN 2007
11
Projects Bulletin
the Directives nor the Regulations
define exactly what confidential
information is. Cherry-picking ideas
would give the other candidates an
opportunity to tender on the basis of a
solution they have not designed. Why
would potential bidders disclose
exclusive know-how and intellectual
property rights for the design of
solutions during the initial stages where
they may not even be appointed
preferred bidder?
This does not stop designers from
entering into design contests and never
stopped French design and build
contractors from participating in "appel
d'offres sur performance", which allow
early contractor involvement. The use
of Competitive Dialogue in France is
thriving as it allows competitors to test
their design ideas as well as the
appetite of the market for innovative
solutions. Bidders value being involved
in defining the public authority's
output requirements, even though they
are competing with other bidders to
win the contract. Discussions during
the Competitive Dialogue ought to
take place without disclosing the
solutions proposed or any confidential
information to the other participants.
Any disclosure has to take place with
the participant's consent. It is up to the
contracting authorities to ensure
equality of treatment and that the same
information is given to all bidders. It
seems from our experience that the
only solutions workable in practice rely
on:
the bidders' good understanding of
English intellectual property law;
the existence of a strict protocol, set
up and monitored by the contracting
authority to ensure that participants'
confidential information is not
disclosed to the other bidders.
Electronic data rooms and passwords
can be used in order to store and
circulate tender documentation, as
well as circulate clarification requests
and responses to clarification
requests; and
as in some of the recent Competitive
Dialogues taking place in the UK, a
waiver of confidentiality at the outset
of the tender. This would however
Who to Contact
provide little comfort to bidders
when they are confronted by a
contracting authority cancelling a
tender, and re-launching it on the
basis of the confidential information
obtained during the first Dialogue.
Competitive Dialogue presents clear
risks, not to mention dangers, and also
offers exciting opportunities to engage
with bidders at an early stage and to test
the appetite of the market.
Competitive Dialogue is time and
resource intensive, it is expensive for
both the contracting authority and the
bidders, and it is still new, therefore
risky. At the end of the day, there is
still the ten-day standstill period and
the remedies available to unsuccessful
bidders at any stage of the Competitive
Dialogue but this is for discussion
another day.
For further information please contact
Sophie Charveron
sophie.charveron@klgates.com
+44 (0)20 7360 8154
K&L Gates
For further information contact the following
110 Cannon Street
Christopher Causer
christopher.causer@klgates.com
T: +44 (0)20 7360 8147
London EC4N 6AR
Stuart Borrie
stuart.borrie@klgates.com
T: +44 (0)20 7360 8155
www.klgates.com
Trevor Nicholls
trevor.nicholls@klgates.com
T: +44 (0)20 7360 8177
T: +44 (0)20 7648 9000
Kevin Greene
kevin.greene@klgates.com
T: +44 (0)20 7360 8188
F: +44 (0)20 7648 9001
David Race
david.race@klgates.com
T: +44 (0)20 7360 8106
Sebastian Charles
sebastian.charles@klgates.com
T: +44 (0)20 7360 8205
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AUTUMN 2007
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