PFI subcontracts need to be more carefully negotiated to restore equilibrium between the FM contractor and other parties. Here are the golden rules for making it work.
by Matthew Dillon
10 December 2009
Most FM contractors understand that the risk profile of PFI contracting is significantly more onerous than with traditional procurement. But many are unaware of the true risks or how to mitigate them when negotiating contract terms with a special purpose vehicle (SPV).
Unfortunately key players in the industry do not help when they accept such excessive risk, often through ignorance, thus setting a benchmark against which others are judged.
Limitation of liability
Liability, including for deductions, should be capped at a sum equivalent to 100 per cent of the annual fee paid to the FM contractor. If the contract is terminated then the FM contractor's liability should be increased by no more than a further 100 per cent of the annual fee. Liabilities excluded from the cap should be restricted to insured losses, fraud, prohibited acts, abandonment, wilful default and certain indemnities in respect of physical injury or damage to property.
Deductions and defects
The FM contractor should not accept liability for unavailability caused by defects, particularly if the lifecycle fund is managed by the SPV. There must be a clear delineation between liability for maintenance and lifecycle replacement so that the FM contractor is not exposed to increased costs because the SPV is unwilling to dip into lifecycle reserves.
Any dispute as to whether the FM contractor is liable for deductions should be resolved with the SPV. The FM contractor should not bear the risks of recovery, insolvency or limitations by having to pursue the building contractor in respect of a defect.
Business interruption insurance (BII) is often overlooked by the FM contractor. This indemnifies the holder for losses suffered in the event that the facility is unavailable due to the occurrence of a material risk.
Such policies are of potential benefit to the FM contractor, although they usually only cover the interests of the SPV and funder, with the insurer preserving rights of subrogation against the FM contractor.
Such policies only provide indemnification to the extent that the SPV is unable to recover its losses elsewhere, precluding indemnification where the FM contractor is liable for deductions. With a bit of imagination these problems can be overcome, despite heated exchanges with the SPV's advisors.
These are often seen by building contractors as a conduit for passing liability to the FM contractor so their provisions require careful consideration.
The rules for interface agreements are:
¥ They should not increase the FM contractor's liability over and above that in the FM contract.
¥ They should not impose liability on the FM contractor for design or entitle the building contractor to claim damages for alleged delay.
The interface agreement should address the issue of building contractor access to the facility post-completion and the costs associated therewith. It should also address the reporting and rectification of defects both during and after the defects liability period.
The FM contractor should also be permitted to undertake minor remedial works and recover the cost of these from the building contractor after the event.
Utility risk can be significant and the FM contractor must understand the risk placed on it in the event that energy consumption exceeds expectations. The FM contractor should not be liable for any increased energy usage outside of its control or for reason of the design simply not being able to achieve the promised efficiencies.
The FM contractor should request a duty of care from the independent certifier (particularly if the building contractor secures one). If the independent certifier wrongly certifies completion the FM contractor may be left with an incomplete facility and be exposed to increased costs of working and potential deductions. If the independent certifier owes the FM contractor a duty of care he will have to give equal weight to the interests of the FM contractor when certifying completion.
All-embracing 'sweep-up' clause in respect of project agreement risks should be resisted; the FM contract is a stand-alone document. General indemnities in respect of breach of contract, damages or losses should not be given.
The FM contractor should ensure it has extensive rights to participate in any dispute between the SPV and the public sector which has an impact on any dispute between the FM contractor and SPV. This may be achieved in a number of ways, such as name borrowing or a robust commitment from the SPV to progress FM contractor disputes with the public sector and not to compromise any dispute without FM contactor approval.
Matthew Dillon is a consultant at law firm Silver Shemmings LLP
Don't get dumped on
Within PFI contracts the FM contractor is often seen as an easy target- one that that SPV can dump risk on. There is rarely any commercial justification for this- the defence of bankability is little more than an excuse. FM contractors are well advised to take a harder line in negotiations, and that includes those entities engaged as subcontractors. The risk allocation as advocated herein is perfectly acceptable to the PFI sponsors although it will not be achieved without the FM contractor taking a robust stance.