There are significant costs involved in bidding for a major PFI contract. The process involves the development of detailed proposals in response to a public sector specification, complex contract and financing documentation and lengthy negotiation through the various phases to financial close. Bid costs can vary significantly between projects. However, with all projects, the expenditure increases significantly between the preferred bidder (PB) stage and financial close. This is due mostly to the high legal costs associated with the detailed drawing up of final contracts, and the crystallisation of advisor success fees where relevant.
The costs will often be recovered at financial close in the case of successful bids, although when not successful, they represent a direct cost for the business. In order to mitigate these, John Laing carefully targets and selects the projects that it bids to ensure the highest chance of submitting a successful bid. Where possible, we use internal resources, which can also reduce costs.
Before 2001, there were no formal accounting rules regarding whether costs relating to PFI bids should be expensed or capitalised. This was resolved in Urgent Issues Taskforce Abstract (UITF) 34 - Pre-contract Costs. Under these rules, until preferred bidder status is achieved, all costs must be expensed as they are incurred, i.e. written off to the Profit & Loss account.
During the PB stage all costs can be capitalised and an asset created on the sponsor's (e.g. John Laing) balance sheet(s). When financial close is reached, a recoupment of the bid costs and a development fee are charged to the project company by the sponsors. The element of deferred income is calculated, and is then released to the Profit & Loss account over the construction period of the asset. Alternatively the sponsor may expense the costs as incurred, recognising the revenue as earned at financial close.
