The contract is doing what you asked it to do
By webmaster · · 6 min read
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The National Audit Office put the problem in one sentence in June
2020, and it has not been bettered since:
Deductions can only be made on the grounds of non-performance and
unavailability, meaning that if the school building is not being
maintained, but remains operational, the authority cannot withhold any
payment.
Read what that describes. The payment mechanism pays for the doors
opening. It does not pay for the building being looked after. A school
can decay quietly for years and, so long as it stays operational, the
full charge falls due every month.
Enforcing
harder is not the answer, because the lever is small
The instinctive response is that someone should have applied the
deductions. That reply is foreclosed by the government’s own current
guidance. NISTA, the body that replaced the Infrastructure and Projects
Authority in April 2025, published contract management guidance on 26
March 2026 which states: “Even if all KPI failure points are triggered,
deductions usually represent only a small proportion of the total
unitary charge.”
That is maximum theoretical enforcement, and it is still small. The
same guidance explains why, and it is worth sitting with: deductions
“are part of the contract design, not a penalty”. They exist to
compensate, partially, for a service not received. They were never built
to discipline anyone. Attacking a partial-compensation mechanism for
failing to deter is a category error, and it is the error most
performance conversations start from.
The reporting is thinner than the enforcement. The NAO records that
the PFI model “is designed to be self-monitoring”, and NISTA confirms
the operator’s own duties include “the self-reporting of failures,
calculating financial deductions and submitting monthly invoices”. The
party being measured writes the measurement, calculates its own
deduction, and invoices net of it. Across a survey covering 107
contracts, the NAO identified only one performance bond in use.
The
obligation is not in your KPI regime. It is in the Scope
Here is where this stops being a PFI story, because the same split
runs through the NEC suite that most estates teams are actually
administering.
NEC4 Term Service Contract, clause 20.1: “The Contractor Provides the
Service in accordance with the Scope.” The obligation lives there. Not
in the Incentive Schedule, not in the dashboard, not in the monthly
performance pack.
Now look at what the incentive machinery can and cannot do. Option
X20, Key Performance Indicators, sets out the target and “the amount to
be paid to the Contractor if it is achieved”. There is no deduction
limb. NEC’s own guidance on X20.3 is candid: “the Service Manager cannot
coerce the Contractor into achieving a target at any cost.” Under X20.5
the client “cannot remove or reduce any incentive already offered”,
achieved or not. The downside sits in a different, optional secondary
Option, X17, Low service damages, which a client has to have chosen at
the outset.
So the KPI regime adjusts money around an obligation that was defined
somewhere else. No performance table can convert an attendance
obligation into an outcome obligation. If the Scope says attend
monthly, attendance is the obligation, and it is fully and lawfully
discharged by attending.
NEC’s own illustration of X17 makes the point better than any
commentary: “if the Scope specifies that grass should not exceed 40mm in
height, allowing it to grow above this level results in a Defect.” Note
what NEC chose. Grass height is an outcome. Had the Scope said cut
monthly, a contractor cutting monthly would be in full compliance in
front of a meadow.
NISTA’s taxonomy names the trap precisely. Service criteria cover
activities, “e.g. responding to helpdesk requests within a set time”.
Performance criteria cover standards the asset must meet, “e.g.
cleanliness or temperature levels”. Most FM dashboards are dominated by
the first. Responding within two hours and the room being clean are
different claims, and only one of them is what you wanted.
The contract is doing exactly what you asked it to do. You
wrote the Scope, and the standard form did not supply it. That
is not a defence of contractors. It is the observation that in most of
these arguments, the contractor is the only party in the room behaving
predictably.
The law now
compels the report, not the consequence
Section 52 of the Procurement Act 2023 requires an authority, before
entering a public contract worth more than £5m, to set at least three
key performance indicators. Section 71 requires it to assess performance
against them at least once every twelve months and publish the
result.
Reporting is now a statutory duty. Enforcement is not. The Act has
industrialised the measuring and left the acting exactly where it always
was, with a client who has to choose.
The strongest
argument against all of this
There is evidence cutting the other way, and an article that hides it
is marketing.
In January 2018 the NAO found that “the contractually agreed
standards under PFI have resulted in higher maintenance spending in PFI
hospitals”, and that reducing maintenance spend “is much more difficult
to do under a PFI contract”. Over the same period the estate without
that hard standard fared worse: between 2014-15 and 2015-16 health
trusts reported the critical infrastructure maintenance backlog rising
by more than 50% to £2.3bn, while HM Treasury allowed the NHS to move
more than £1bn of capital funding to day-to-day spending.
The contractual standard was the only thing stopping maintenance
being raided. A payment mechanism that rewards availability still beat
having no enforceable standard at all. The lesson is not that
specification fails. It is that what you specify is the whole game.
This is also why the canon is quoted more often than it is read.
Latham’s Recommendation 9, in July 1994, opens: “Endlessly refining
existing conditions of contract will not solve adversarial problems.”
Egan went further in 1998 and called for “an end to reliance on
contracts”, predicting formal contract documents would become obsolete.
Twenty-eight years on, the state’s answer is more contractual machinery,
not less, including NEC moving performance measurement out of the
optional Options and into the core of its FM contract, where it now sits
as a Performance Table that amalgamates X17 and X20.
What this does not settle
Two limits, both real.
There is no published UK evidence on whether clients select
X17 or apply Performance Table deductions in practice. The PFI
record is the best-audited material available, and it does not transfer
to NEC. Anyone telling you deductions are never applied under NEC term
contracts, including anyone in this firm, is offering an opinion.
And the contract was never going to do this on its
own. NISTA says it plainly: “While the contract sets out
obligations and incentives, these alone do not guarantee outcomes.” The
Scope is where the argument is worth having, before signature, when it
is still free.
