Facilities Management Services contract change

Report: 17
Date: 23 June 2011
By: Director of Resources on behalf of the Commissioner

Summary

Following Metropolitan Police Authority (MPA) approval in December 2010 to enter into negotiation with the MPA’s facilities management suppliers, this Report seeks Members approval to changes to the Facilities Management Services contracts that will incentivise the suppliers to maximise the financial benefits for the MPA/MPS.

A. Recommendations

That members

1. Note and approve the opportunities to;
   1. Agree a more flexible volumetric measurement process to meet the future changes to the estate with real-time cost adjustment;
   2. Secure savings through the removal of the Fixed Chargeable React Fee Contract for South London and realign the two Contracts to enable the MPS to identify and realise further cost savings from the FMS supply chain and obtain more cost certainty and cost visibility from the financial reports
   3. Agree an Annual Management Fee to be paid to the two suppliers and
   4. Put arrangements in place to renegotiate Annual Management Fee at each contract anniversary
2. Note the Financial Benefits on the attached exempt appendix 1.
3. Delegate authority to MPS to finalise contract Deeds of Variation with each supplier to achieve contract savings in line with the proposals detailed in this report.

B. Supporting information

Background

1. In 2007, the MPA entered into two service contracts with the two Facilities Management Suppliers (FMS) details in Exempt Appendix 1 to provide facilities management services (including maintenance and repair of the MPA’s estate) for a seven year period. In addition the MPA entered into a contract with the Metropolitan Police Information Centre provider, to provide a number of services in support of the management and oversight of the two FMS contracts.

2. The contracts were negotiated independently and there are slight variations to the terms of both. Following MPA approval, MPIC contract was extended in November 2010 to align with the expiry of the FMS contracts April 29th 2014, taking benefit of specific financial opportunities.

3. In December 2010 the MPA Finance & Resources Committee considered certain opportunities identified to realign the two FMS contracts and supported further work in regard to the renegotiation of contract changes. This paper seeks to update members on the progress made since December 2010 and proposes a number of contract changes to bring clarity and more flexibility to the existing contractual provisions to support the maintenance and repairs of the MPA’s estate.

4. The costs within the Contracts are contained in each Supplier's Pricing Schedule - with declared management, overhead costs and margin. These costs can be varied using the quarterly volumetric adjustment mechanism or through the Contract Change Control process to reflect changes to the MPA estate. Separately, significant contract changes have been agreed through Deed’s of Variation with each supplier.

5. FMS costs can only be reduced through the volumetric measurement mechanism, by adding or removing buildings or services. Cost reduction by changes to scope or service levels requires a formal contract change notice by mutual agreement with the suppliers.

6. Under current contractual arrangements the volumetric mechanism is applied quarterly in arrears with any financial impact commencing in the next quarter.

7. In addition, and in regard to the contract relating to the MPA’s south London portfolio, the FMS contract only permits reductions to the volumetric mechanism above a certain volume of change. The contract was originally negotiated on the basis of a growth in the MPA estate, and made no provision for reduction. The same contract also includes certain fixed reactive fee charges which have already been negotiated out of the contract for the North London portfolio.

Contract changes

8. During the last 18 months and as reported separately through Estates Update papers, Property Services have explored a number of savings opportunities. These are separate to the work of the Government Property Unit and the Cabinet Office’s Efficiency forum, but Property Services have ensured the opportunities include all those identified through Central Government. Indeed both the FMS suppliers and the MPIC provider have suggested that the cost efficiency solutions developed and the proposed way of integrating these changes will ensure a collaborative approach in realising savings for the MPA.

9. During the course of our discussions and with an open approach in explaining the proposed changes to our estate both suppliers have expressed their concern that the impact the reduction of the estate and service levels will have on their contract value and their resources, which has and will directly impact their cashflow, turnover and margin.

10. Both FM suppliers have been supportive of the cost reduction programme through the normal contract change process. The proposed change to contract terms is considered to be outside of the routine CCN process. This therefore requires MPA approval in order for the contracts to be varied by negotiation through a Deed of Variation.

11. The contracts have less than three years to run, and there are a number of opportunities the MPA can take advantage of. Through negotiation both suppliers have confirmed they are prepared to alter the real time volumetric threshold applied under current contracts - enabling changes to be effective immediately, not on 3 months notice. In addition the contractor supplying services for the South London contract is in agreement to remove the fixed chargeable reactive fee volumetric threshold from their contract. Both terms are subject to paragraph 13 below.

Management fee

12. Members raised concern in the December 2010 committee meeting that the suppliers profit would be protected. Negotiations with the suppliers have come to an in principle agreement that the Management Costs, Overhead and profit costs in the contract will be replaced by an Annual Management Fee of an equivalent value to today’s level.

13. The introduction of a fixed management fee will incentivise the suppliers to drive variable costs down improving their profit margins. Both suppliers already ensure staff / employees benefit from London Living Wage; opportunities to reduce costs have been identified through alterations to service provision / changes in provision of goods / services. Financial modelling shows that this can further benefit both the MPS/MPA and the suppliers if savings are delivered early in each contract year. The negotiations to date propose that the Fixed Management Fee will be reviewed on an annual basis to ensure the agreed levels of savings are achieved and give more cost certainty and greater clarity and cost visibility to the financial reporting from the suppliers reflecting the supplier’s overhead, management and margin on the contract over the remaining three years of the contract; no greater than the existing level within the contract.

14. It is therefore recommended that a Deed of Variation is agreed with the service provider to the contract for North London to remove the Management, Overhead and Profit costs from the Contract sum and pay an annual management fee of equivalent value as calculated 1st May 2011; that a Deed of Variation is agreed with the service provider to the contract for South London to remove the Management, Overhead and Profit costs from the Contract sum and pay an annual management fee of equivalent value as calculated 1st May 2011. The Deed of Variation with IFM will also realign the South FMS contract with BBW in the North and would be conditional on the Removal of the Fixed Chargeable Reactive Fee and 2.5%+/- Volumetric Threshold; and the introduction of Real-time Volumetric measurement.

Exempt appendices:

1.  Financial Summary
2.  Michelmores Commentary
3. BBW proposal for draft Heads of Terms
4.  IFM proposal for draft Heads of Terms

C. Other organisational and community implications

Equality and Diversity Impact

1. There are no Equality or Diversity issues that impact on the MPA/MPS or its employees or the employees of the suppliers as a direct result of this proposal.

2. The proposed service changes and planned occupational changes to the estate within SIP’s will have an impact on the supplier’s employees. Both suppliers have provided an Equality and Diversity impact statement that has been appended to the FMS SIP’s EIA. In order to mitigate the impact both suppliers have asked for at least 120 days advanced warning of any change that may have such an impact, and this will be incorporated within the Deed’s of Variation.

Consideration of MET Forward

3. The proposals detailed herein aligns with the intent of Met Forward Section 7 - Met Support - in particular demonstrating value for money through the amendment of a number of existing contractual conditions.

Financial Implications

4. The Financial Implications from this report are indicative and have been calculated using the known changes to scope and service levels that can be assessed by the MPS commercial management team using the two contracts’ financial models.

Revenue Impacts

5. The estimate savings are detailed in the exempt Appendix 1 and are based on the known volumetric changes and proposed service level and scope reductions.
Cost

6. External legal fees have been estimated at approximately £60,000 (plus VAT). This figure will be subject to the extent of the contract changes required in the Deed’s of variation. These costs will be met from within the existing FM budget.

7. Any additional costs will be reported through the quarterly DoR - Property Services Estates Update papers.

8. Any payments made to the FMS suppliers in regard to contract changes will be contained within the agreed contract values or from within identified savings and within the Property Services, Facilities Management budget. Therefore there will be no additional FMS costs to the MPA/MPS as a result of this paper.

Legal Implications

9. The legal issues have been identified within the body of this report.

10. External legal advice has been obtained in respect of the proposals, and was attached as an appendix to the previous committee report. An updated commentary is available as exempt Appendix 2.

11. As the cumulative effect of the recommended changes to the FMS contracts intend to reduce the overall value of the FMS contracts, and therefore will not change the economic balance in favour of the Contractors, the external legal advice suggests this would not be considered a material change under EU law which would require a new procurement exercise to be undertaken. In view of the above, the external lawyers also confirm any likelihood of legal challenge in relation to the public procurement law is considered low. However, this view might need to be re-assessed if the final terms agreed differ significantly from the draft terms proposed in particular regarding the ‘ring-fencing’ of the suppliers’ profit-margins.

12. External lawyers will be instructed to complete the Deed of Variation which will be required to give effect to the changes required to the contract.

13. On the basis of the information contained within the body of the report and the external legal advice, DLS are content for the recommendations to be approved.

Environmental Implications

14. It is not anticipated that there would be any Environmental challenges as a result of this paper. Any change to the Environmental implications will be assed for each Change Control Notice and reported through the Estates Update Paper.

Risk Implications

15. On the basis of external legal and Procurement Services’ advice the removal of the Fixed Chargeable Reactive Fee, Average Order Fee and Average Order Threshold provisions from the FMS Contracts are not perceived on their own as being likely to constitute a material change to the FMS Contracts; - although they could be challenged as part of an accumulation of changes, but the risk is considered low.

16. The removal of any one or combination of services that reduce the value of an FMS Contract by 10% or more, could be considered by the incumbent Supplier as a challengeable material breach. Alternatively an unsuccessful bidder or supplier could launch a challenge arguing that without a requirement to provide a certain service, they could have submitted a more competitive tender.

17. Should the contract values, of FM North and South, fall markedly below that stated at tender stage there may be an opportunity for legal challenge from suppliers. The lower limits stated during tender were £30m pa, which includes both planned and unplanned spend. It is unlikely that the total contract values will fall below this limit. If this does occur then the fixed management fee is thought to mitigate against the risk of challenge.

Mitigation

18. It is anticipated that the risk of challenge will be low - due in part to the substantial changes that prevail as a result of the ongoing and significant financial constraints that could not have been predicted at the time of offer of these contracts for tender.

19. The MPA awarded the FMS contracts through a compliant procurement process, including appropriate Alcatel actions at award. To date the MPA/MPS have not received any challenges, over the award of either contract or during the period the two contracts have been in existence from external third parties.

20. The procurement position will continually be risk assessed and reviewed with MPS Legal Services, and Finance and Procurement Services through the usual governance processes.

21. This proposal addresses the continuing anomaly in the South Contract Financial Model and the North contract provides an annual declared margin and overhead further reducing the risk of challenge

22. By setting the Management Fee at the equivalent sum to the contract annual management, margin and overhead costs for both contracts, the annual profit level for the suppliers will be no higher than present contract levels.

23. Risk assessments are carried out for each Contract Change Notice business cases.

Further action

24. A Deed of Variation will be prepared for each contract for signature and sealing by the MPA Chief Executive Officer.

25. The outcome and savings from these changes will be monitored as part of the DOR SIPs workstream.

D. Background papers

• MPA Finance & Resources Committee - 16 December 2010 - Facilities Management Services - Contract Change

E. Contact details

Report authors: Howard Evans, Property Services, MPS

For more information contact:

MPA general: 020 7202 0202
Media enquiries: 020 7202 0217/18

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