The move towards a standard form of PFI contract for IT projects can make procurement simpler and cheaper, but commercial flexibility should not be forgotten, say Colin Lynch and Paul Webster

The NHS's national IT strategy Information for Health envisages major investment in IT systems, and NHS hospitals will spend£2.74bn on new computers over the next six years, according to industry estimates of the cost of upgrading systems to meet the strategy's targets (see 'Slow, slow, quick-quick slow', news focus, page 14, 11 November 1999).

Partly because the strategy mandated easier procurement, and partly in recognition of the improvement in IT business cases, the Department of Health published a circular - HSC 1999/066 - in March 1999, slightly relaxing the Treasury's control over NHS IT procurements. It introduced two changes to the approval process.

The first, already in operation, is that Treasury approval is now only required for IT projects with a wholelife cost of more than£20m (rather than those with a capital value of£1m and above). The second is the phased introduction of a simplified approval process specifically for IT projects.

At the moment, trusts are faced with different approval pathways for IT procurements, depending on their size. Only trusts with a turnover of more than£80m have internal authority to procure projects up to£1m. Small trusts (with a turnover of less than£30m) can only go up to£250,000; for all other procurements they have to submit a full business case to their regional office.

Intermediate trusts (with a turnover of£30m-£80m) can self-authorise up to£600,000.

The new rules will wipe away these complexities, extending the£1m threshold on IT projects to all trusts, irrespective of turnover. All larger procurements will need regional office approval of a business case (the Treasury will still intervene for very large projects worth more than£20m).

The revised thresholds are now in pilot operation in North West region and the plan is to extend it throughout the country by the end of the year. These changes should speed up the procurements approval process, particularly at smaller trusts.

After a shaky start, the private finance initiative is building a track record of enabling NHS bodies to procure new and improved healthcare facilities, for which public capital would not have been made available or which would otherwise not be affordable through conventional procurement.

Several IT projects have already been completed and, in particular, smaller schemes in the£1m-£5m range are being developed on a regular basis.

But there have been high-profile failures in IT PFI projects across a number of sectors (mainly non-NHS projects, such as last summer's problems at the Passport Office).

Those failures are largely attributable to poor project management, inadequate scoping of the project and poorly defined specifications. They are not problems exclusive to IT PFI projects and are not caused by PFI itself.

Standardising contracts One acknowledged difficulty in PFI is that time is needed to negotiate the complex contracts involved. There is now a move towards contract standardisation to avoid some of these obstacles.

Last July, the Treasury taskforce launched its guidance on the standardisation of PFI contracts. This was followed by a consultation document on draft guidance for IT projects, which sought to highlight the fundamental differences between IT projects and building projects for new hospitals or sites.

A follow-up consultation document was issued in December, incorporating draft guidance and contract wording. Running parallel to this was the development of the standard-form PFI project agreement for health schemes, which was finally issued in December. This project agreement is to be mandatory for all projects with a capital value in excess of£25m, and will form the contractual basis for all other NHS projects.

As HSJ goes to press, final-form IT specific guidance and contract drafting has not been published, but we are clearly very close to a standard-form PFI contract for IT schemes. That contract will accord with Treasury taskforce guidelines and will apply to the NHS.

The IT standard contract will aim to achieve a balance between the parties and should reduce the time and costs of finalising the transaction.

Indications are that it will not greatly favour the public sector over the private, or vice versa, and that it will be 'bankable'. It will create greater certainty and should therefore reduce the reliance on 'agreements to agree' - issues left to be resolved between the parties during the life of the contract.

It also means that all those submitting tenders are bidding on the same informed basis. Prices are likely to be firmer, and less time will be needed to negotiate certain contractual issues, some of which may have little practical relevance.

For example, disputes over exactly when 'force majeure' (in which unforeseen events prevent the contract being fulfilled) kicks in have sometimes become bogged down in improbable scenarios.

Instead, the time can be used to work up the tenderers' proposals before selecting a preferred bidder, while still retaining competitive tension.

The introduction of a standard contract will also allow the NHS body to focus more on its own service delivery requirements, making sure that its specifications, couched in terms of outputs not inputs, are clearly defined and that effective service management and monitoring arrangements will be put in place.

More attention can be given to the payment mechanism, too. This will include developing and agreeing the definition of 'unavailability' - when the relevant system is deemed not to be fully operational or 'available', meaning that deductions will be made from the unitary charge. The definition should be both objective and linked to the output specifications.

In addition, trusts and other NHS bodies may be more encouraged to look at the 'bundling' of IT schemes.

These offer the NHS an improved bargaining position through economies of scale and can avoid duplication of effort and reduce costs.

Previously they have been reluctant to go down this route, because of perceived problems with timing , increased bureaucracy and negotiating difficulties. The standard form will reduce negotiation time and thus make bund ling moreattractive.

All the same, a standard contract will not address all legal and contractual issues. There will always be a number of project specifics that need to be negotiated, resolved and documented. The draft taskforce IT guidance highlights a number of IT specific issues, including:

Change control procedure - The procedure dealing with service variations often has to be more complex and is likely to be used more frequently in IT projects than, for example, in relation to the provision of catering or laundry services. This is due to changes in the NHS body's operational requirements, fast-developing technology and the amount of collaboration needed between customer and contractor.

A failure to manage change properly is a frequent cause of IT-related disputes. Much thought needs to go into the situations where the private-sector contractor can legitimately refuse to comply with a request for change and also how the financial implications of change are to be managed. Given the technical nature of the services and amount of collaboration needed, there is often a need for more flexibility in the change-control procedures for IT PFI projects than for other schemes.

Technology refreshment - IT-heavy projects require the contractor to keep up-to-date with technological advances, without automatically increasing the unitary charge. This is especially true in the provision of high-technology imaging and other diagnostic equipment and their associated services. Although the method used to provide the service on day one might still be able to deliver it at the end of a 10 or 15year contract, it probably will not be the most cost-effective method, and certainly will not represent current practice. This can damage the cost savings and service efficiencies that the NHS body is after.

So a balance needs to be found between a too-onerous obligation on the supplier to match technological advances and all such improvements going through the change mechanism, particularly as, under this procedure, the financial implications are likely to be met by the NHS body. The draft taskforce IT guidance suggests a movement towards passing nearly all changes of this nature through the change procedure.

A possible solution is the use of a state-of-the-art commitment to ensure the use of the latest generation of commercially available technology. This needs to be balanced against the pricing implications of taking on such a commitment. This issue is a central one where IT is an integral part of a larger PFI project.

Phased implementation - With traditional procurement, IT companies often require staged payments as the installation of the system reaches pre-set milestones, but before the system is fully operational. This presents a risk to the NHS body if the service is never actually delivered, which is why it is contrary to standard PFI practice, where no payment should be made until the service is available. But the draft taskforce IT guidance envisages the idea of including milestone payments in the contract, if appropriate.

If th is happens , then it will be particularly important to make sure that the contractor has strong incentives to deliver the completed system, particularly as a partially completed IT system is potentially of far less use and more difficult to rescue than, for example, a half completed hospital. So any stage payment would have to reflect the proportion of work still to be completed.

There should be considerable optimism about the new move towards aligning PFI IT documents with other sectors and developing a standard form contract. After a period of bedding down, attention can be focused more on service delivery, payment and management issues.

Still, it is important not to lose the commercial flexibility which IT contractors have shown in the past, particularly when they have taken projects on their own balance sheet.

Standardisation does give advantages, but in a competitive and dynamic field, a degree of flexibility will still be needed if the NHS is to get the best deals on these projects.

Colin Lynch and Paul Webster are partners at the law firm Capsticks.