AIIP Policy Position Paper: Contract and Performance Management
March 2024
Issues
1. It is recognised that there is a need for improved performance management measures in Private Finance Initiative (PFI) contracts (including skills and software based investments) to enhance reporting capability, communication and collaboration to deliver improved contract management. This also involves creating goals and objectives that are shared between the public and private sectors and clarify roles and responsibilities, to place a project on the correct pathway before the “end game” of expiry of the PFI contract and future service provision.
2. This Procurement Policy Note (PPN) sets out information and associated guidance on the performance management of PFI contracts for the benefit of all PFI stakeholders.
3. This PPN should be read alongside and in parallel with other PPNs on Management of Change, Relational Contracting, and Contract and Performance Management.
Dissemination and Scope
4. This PPN is applicable to all contracting authorities, including all central government departments, their executive agencies, non-departmental public bodies, local authorities, NHS bodies and the wider public sector (excluding Devolved Administrations). Together these are referred to in this PPN as ‘contracting authorities’.
5. Please circulate this PPN across your organisation and other relevant organisations that you are responsible for, especially ensuring that it is drawn to the attention of those with direct operational responsibility for PFI projects and those with a commercial role.
Timing
6. With immediate effect.
Background
7. PFI contracts are a form of public private partnerships used in the UK since the 1990s, as a way to finance and provide public sector infrastructure and capital equipment projects, such as roads, hospitals and schools. PFI projects involve the establishment of a new company that delivers the project, commonly referred to as a special purpose vehicle (SPV). The SPV finances, builds, maintains and operates the asset over the contract term, usually 20 to 30 years. During this period, Contracting authorities make regular payments to the SPV that comprise debt repayment (covering the cost of building the asset), through-life operation and maintenance costs, financing costs, insurance costs etc, (usually referred to as the Unitary Charge). In many PFI contracts, the SPV is, in addition to delivering the services associated with PFI, are also responsible for reviewing its own performance, and reporting back to the contracting authority.
8. Often, the management of PFI contracts involves different organisations across the public sector ranging from the contracting authority which entered into the original agreement (with primary responsibility for managing the contract, including the expiry process), through to sponsoring Government Departments. The Infrastructure and Projects Authority (IPA), reporting into HM Treasury and also the Cabinet Office, supports Government Departments and contracting authorities as the Government’s Centre of Expertise for Infrastructure and Major Projects. HM Treasury is responsible for PFI policy and fiscal decisions and co-owns the PFI strategy along with the IPA.
9. The Government announced in the 2018 Budget 2018 that it would no longer use PF2 (the most recent PFI model) for new government projects, but existing PFI and PF2 contracts did not end because of this announcement. Archived documents including the retired PF2 policy and standardisation of PF2 contracts are available at the National Archive. As a result of both the mass-deployment of PFI during the late 1990s through to 2017, there are 669 PFI projects across the UK with a total Unitary Charge value of £10,193m in 2024.
10. The IPA-commissioned White Fraiser Report, published in 2023, highlighted a range of areas in which some PFI projects were seen by both sides of the partnership to be working ineffectively, in ways which jeopardised value for money, eroded trust, diminished collaborative working and placed expiry and handback at risk. The report called for a ‘resetting’ of the operational basis in the case of these PFIs and the AIIP has responded separately and awaits the IPA’s formal position in regard to the recommendations.
11. One issue that was identified was performance management, the role for contracting authorities in auditing PFI projects and the distinction between self-monitoring and self-reporting.
Key Considerations
Contract Management
12. The National Audit Office’s “Commercial and contract management: insights and emerging best practice” report sets out four areas that are fundamental to contract and performance management, which are as pertinent to PFI contracts as any other contracting model:
1. Management of contracting authority obligations. Government must meet its own obligations for contracts to succeed. Supplier performance can depend on Government taking actions such as making critical decisions or designing a
process. Failure to deliver contracting authority obligations can lead to extra costs through projects being delayed or a limit to Government’s ability to hold suppliers to account.
2. Contracting authorities must know what suppliers are doing. To manage a contract it is important to understand performance and costs to the supplier of providing the goods or services. PFI contracts are described as self-monitoring and self-reporting, on the basis that SPVs are responsible under the contract for reviewing performance and reporting back to contracting authorities. It is important that contracting authorities do not, on this basis, rely solely on what is reported by SPVs. All contracting authorities must monitor and audit SPV performance. Audit and assurance by contracting authorities is fundamental to accurate performance reporting and successful management of the contract.
3. Contracting authorities must communicate what they care about. Client leadership encourages emphasis on the right business outcomes. Effective client leadership can keep suppliers focused on what really matters to them and service users, and ensure alignment between client and supplier.
4. Contracting authorities must understand suppliers’ motivation. Contracting authorities must use other levers to get the best from suppliers, recognising that government contracts can also offer suppliers public recognition alongside opportunities to fulfil wider values and objectives, such as those relating to Environmental, Social and Corporate Governance (ESG) aims or working with contracting authorities on delivering Social Value.
13. The above and the related, and supporting business procedures and processes should, according to the National Audit Office and Crown Commercial Service (CCS), be set out in a Contract Management Plan.
14. All of the above needs to be delivered by a sufficiently resourced and suitably trained and dedicated team.
Relationship Management
15. Successful performance management of a PFI project is reliant on more than just ensuring compliance with the provisions of the contract and clearly communicating organisational priorities and motivations. Relationships, both organisational and personal, are essential to the effective performance of a Project. The White Frasier Report emphasises the need to collaborate in the resolution of issues, and the importance of using judgement to exercise a degree of contractual flexibility.
16. To achieve this there needs to be formalised structures to manage the relationship between the parties effectively and strong professional working relationships between individuals.
17. This involves having a clearly defined governance structures, with each component having clear Terms of Reference, delegated authority limits and clarity on how it fits in with the wider structure. Both parties fully understanding the counterparty's internal processes (such as the approval of variations) will help manage expectations and avoid frustrations caused by what are sometimes perceived as unanticipated delays.
18. Establishing strong working relationships requires a collaborative, pragmatic and output-driven mindset among individuals working on a Project. Measures also need to be in place to ensure the relationships between stakeholder organisations can endure changes in individual staff, such as regularly maintained stakeholder maps, meeting calendars and clear and agreed notes of meetings, covering actions and key decisions.
Actions
Management of contracting authority obligations
19. Contracting authorities should develop a PFI Contract Management Plan that establishes principles and business procedures and processes for managing their PFI contract. DRAFT
According to the NAO and CCS, best practice involves:
Developing a clear understanding of all contracting authority obligations.
Attaching milestones that show clear accountability, roles and responsibilities.
Using a project and programme management approach to establish formal processes for meeting contractual and wider obligations.
Allocating resources (as required) to manage each party's contractual obligations.
Knowing what suppliers are doing
20. Contracting authorities should review:
1. Monthly performance reports, primarily to ensure that reporting is in line with the contractual requirements.
Both the SPV and the contracting authority should jointly review the contract documents to refresh their understanding of the reporting and monitoring regime, and to ensure all parties within the supply chain are clear on their specific responsibilities, as well as the elements of the service that must be reported on, and in what format. As part of this review, the parties should work collaboratively to better understand real-time and self-service reporting and the efficiency impact this may have on the current reporting regime, with a view to automating as much reporting as possible, while enhancing transparency.
Contracting authorities should ensure that they have an adequate process for robustly reviewing and understanding the contents of the reports, enabling identification of trends, recurring issues, underlying causes of sub-optimal performance and any potential issues as early as possible.
As the reporting regimes, in general, were created before the formation of the supply chain, the timescales and deadlines may not account for the chain of subcontractors reporting into FM Cos who in turn report through to the Project Co, who then report to the contracting authority. Where this causes issues, the reporting timeline should be changed to afford enough time for each part of the supply chain to scrutinise and challenge their aspect of the report to ensure the contracting authority is provided with accurate reporting in accordance with the contract, importantly, focusing on supporting narrative and actions to improve service rather than purely focusing on compliance and deductions.
2. Service quality plans/quality management plans, to ensure that the manner in which the services are delivered matches what is set out in the most recent version of the plans.
This process will facilitate a dialogue with the supply chain around how services are delivered, getting into the detail of what suppliers are doing, how they are doing it and why this is their approach to delivery, along with establishing whether improvements have been made against the most recent service quality/quality management plans, or whether further improvements can be made.
Having this detailed understanding will aid contracting authorities in understanding exactly why services are delivered in the way they are, enabling greater equity in the position from which conversations around performance management are approached. This in turn creates a richer conversation and is more likely to produce better outcomes.
3. Maintenance and lifecycle plans, to understand how these key aspects of PFI service provision are being managed and to enable their delivery through management of service users and facilitation of access where required.
A shared and detailed understanding will enable even more informed conversations about iterating plans in accordance with contracting authority wishes, creating circumstances in which Lifecycle funding is spent as effectively as possible.
4. Payment mechanism and UC calculations (including performance-related deductions), to ensure the processes in place to manage these mechanisms are operating in a way which discharges the relevant contractual obligations.
This also provides an opportunity to hold a conversation covering trends, recurring issues, and underlying causes of sub-optimal performance.
Demonstrating contracting authorities’ priorities
21. Gaining an even greater understanding of what suppliers are doing in the delivery of a PFI Project will enable contracting authorities to articulate what they want to prioritise with a higher degree of precision. Contracting authorities should clearly communicate their priorities through formal governance so that SPVs and suppliers can anticipate needs and respond efficiently and effectively to them. This should include a contracting authority ‘forward look’ or strategic business plan.
Understanding suppliers’ motivations
22. SPVs should clearly communicate the motivations and ambitions held by the entities across the supply chain to the contracting authority. This helps inform conversations about any changes that might be made to help achieve these aspirations.
23. In addition, understanding this broader picture, and the other contracts, both PFI and non-PFI, that they are involved in, builds a greater understanding of the pressures and competing priorities they are subject to. This allows better sequencing of peaks in workload and larger change initiatives that will necessarily absorb bandwidth and have to compete with these other priorities, particularly where it involves senior management and leadership that are likely to sit across multiple contracts.
Administration of the Project Agreement
24. Contracting authorities should consider the adoption of appropriate contract management software. The NAO Good Practice Contract Management Framework recommends the use of contract management software for recording key information to give search capability, and to retain and maintain contract documentation. Such tools can be used to track obligations, drive task completion, schedule the corporate calendar and maintain a fully conformed, up-to-date navigable version of the Contract. Software could be co-funded by all parties, recognising that all would be beneficiaries and it might drive better partnership working.
25. Where this is not already taking place, contracting authorities should consider formal correspondence in response to monthly performance reports and other submitted items for approval, such as lifecycle plans. This should be done even where there are no comments and the contracting authority is content. Most Project Agreements include the concept of “deemed approval”, where if something submitted by the SPV for approval by the contracting authority is not queried or disputed within a defined period, the contracting authority's approval is deemed to be given. While this is contractually sound as a basis for the SPV to define something as approved by the contracting authority, it increases the risk of disagreements arising later on, as there is no firm audit trail. It also does not lead to high-quality conversations ensuring priorities and longer term aims are achieved.
Governance and stakeholder management
26. Contracting authorities should create:
or refresh, formal Terms of Reference for each meeting that occurs on a regular basis between all involved parties;
and regularly update a Project Relationship Map, showing, per stakeholder group, the specific scope of responsibility, key roles and areas of responsibility plus immediate engagement points/peer groups;
a RACI Chart for each of the key contract and performance management tasks as defined by the project in order to make clear who is doing what, and the various communication pathways required to enable high performance; and
a shared risk register that is contributed to, and visible to, all parties involved in the Project, charting risk likelihood, impact, and mitigation plan, which is regularly reviewed at the appropriate governance fora.
Contract Management Training, Resourcing and the IPA PFI Centre of Excellence
27. Contract Managers should either be accredited Government Commercial Function specialists or alternatively enrol in the Government Contract Management Capability Programme7.
28. Both parties should review current resources deployed throughout the supply chain and within the contracting authority to ensure the key contract and performance management tasks are adequately resourced, with the necessary capacity to effectively manage the Project. Where not, the relevant party should prepare a business case for the deployment of more resources.
29. Where targeted and technical PFI support is required contracting authorities should consider contacting the IPA PFI Centre of Excellence.
Relationships
30. Performance management should reflect the "The Seven Principles of Public Life” (also known as the “Nolan” principles), especially the seventh principle, “Leadership”, which provides “Holders of public office should exhibit these principles in their own behaviour and treat others with respect. They should actively promote and robustly support the principles and challenge poor behaviour wherever it occurs.”
31. Commercial posture or style of management should reflect “relational” contracting, given that effective working relationships are important to improving the delivery of public services and hence social outcomes9. This mode of operation will take time to deploy and involve trust being formed across all parties, but an effective starting point is the definition of shared goals and alignment of objectives, and remove any fear of limiting reporting due to the threat of deductions. Consideration should therefore be given to instigating a moratorium for known/reported issues so the PFI supply chain is encouraged to be open without the fear of incurring any consequential performance deductions.
