The Exclusive Attribution Test: Determining “Directly Incurred” Costs and Third-Party Income in PFI Waste Management Agreements
Commentary on Buckinghamshire Council v FCC Buckinghamshire Ltd [2025] EWCA Civ 921

1. Introduction

Buckinghamshire Council v FCC Buckinghamshire Ltd is the latest skirmish in a protracted dispute over a 30-year “energy-from-waste” Private Finance Initiative (PFI) style project. The Court of Appeal (Newey, LJ; Jeremy Baker, LJ; Sir Launcelot Henderson) was asked to revisit two inter-related questions that resonate across long-term infrastructure contracts:

• What counts as “costs directly incurred” that the private contractor may deduct before sharing income with the public authority?
• When is income generated within an affiliated corporate group sufficiently connected to the project so that it must be shared?

By approving an exclusive attribution test for deductible costs and by reaffirming a broad view of “Third Party Income”, the Court has set an important precedent for PPP/PFI contracts in the waste, energy and wider infrastructure sectors.

2. Summary of the Judgment

The Court dismissed FCC Buckinghamshire Ltd’s (FCCB) appeal and partially allowed Buckinghamshire Council’s cross-appeal:

• Deductible Costs: The Judge at first instance had correctly limited deductible items to those that were exclusively tied to the specific income stream. Overheads, apportioned costs and other “general” expenses remained non-deductible.
• Haulage Costs: The Court overturned the trial Judge on this point. Transporting third-party waste to the facility is “handling” within proviso (c); those costs therefore cannot be deducted.
• Luton Unitary Charge: A proportion of the unitary charge received under a separate Luton Borough Council contract is Third Party Income and must be shared.

The net effect: FCCB must credit the Council with its 75 % share of a significantly enlarged pool of income (including certain group companies’ receipts) without corresponding deductions for most claimed costs.

3. Detailed Analysis

3.1 Precedents Cited

• O’Farrell J’s 2021 judgment – Established that income earned by group affiliates (FCCWS, FCCR) from waste ultimately treated at Greatmoor falls within “Third Party Income”.
• Wood v Capita Insurance Services Ltd [2017] UKSC 24 – Confirmed modern principles of contractual interpretation (“objective meaning of the language”).
• Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 – Cited for the contextual approach to construing commercial contracts.

Although not new, these authorities were deployed to emphasise that:

• a term must be construed in its documentary and commercial context, and
• when a definition is clear, ancillary formulae cannot cut it down.

3.2 Legal Reasoning

(a) The “Directly Incurred” Requirement

The Court adopted a two-step framework:

1. Exclusive Attribution Test.
   A cost is “directly incurred” only if it can in its entirety be traced to generating the specific third-party income in question. Mixed or apportioned costs – even if they would be incurred but for the income – are outside the definition.
2. Proviso (a) Gatekeeper.
   Even if a cost passes step 1 it must also be “specifically and solely related to the generation of Third Party Income additional to that modelled in the Base Case.” Because most overheads serve both guaranteed and additional income streams, they fail this test as well.

(b) Application to Particular Cost Heads

The Court upheld the trial Judge’s exclusion of 11 specified cost categories (manpower, site costs, SHE, plant hire, fuel, rent, divisional and corporate overheads, depreciation, operational support). Only haulage costs had survived below – and even those were now struck out under proviso (c).

(c) Haulage and the Scope of “Handling”

Proviso (c) disallows “costs of handling or processing the Third Party Waste … by the Contractor or Affiliate.” The Court held that:

• The phrase is unqualified by location; it is not confined to the Greatmoor facility.
• Transporting waste from transfer stations to Greatmoor is “handling”.
• Because base-case modelling already compensated FCCB for a notional haulage path, allowing a second bite would defeat commercial balance.

(d) Unitary Charge from Luton Borough Council

Even though the Luton contract was multi-service and pre-dated Greatmoor, the Court followed O’Farrell J’s “broad association” approach:

• If waste ends up at Greatmoor, all income “arising from” that waste – however remote in time or geography – is Third Party Income.
• Where an “indivisible” contractual sum covers a range of services, a “rough-and-ready” apportionment based on tonnage is permissible.

3.3 Impact and Forward-Looking Consequences

The decision will reverberate well beyond Buckinghamshire:

• PFI/PPP Contractors must now evidence that every deducted cost is exclusively incurred for the extra income; spreadsheets showing percentages or allocations will be insufficient.
• Public Authorities gain a powerful precedent for challenging opaque deductions and demanding transparency across corporate groups.
• Drafting Implications:
  • Future contracts may insert explicit wording permitting apportionment or defining “direct” costs more broadly.
  • Parties might require periodic open-book audits to head off disputes.
• Accounting Treatment: The case underscores the difference between cash-based deductions and cost-allocation models familiar to management accountants.
• Sustainability Projects: Energy-from-waste and recycling contracts often rely on affiliate revenue stacking; this judgment tightens the evidential bar for withholding shared gains.

4. Complex Concepts Simplified

• PFI / PPP: Long-term contracts where a private entity finances, builds and operates public infrastructure in return for a “Unitary Charge”.
• SPV (Special Purpose Vehicle): A ring-fenced company (here, FCCB) created solely to deliver the project.
• Unitary Charge: Regular payment from the authority to the SPV covering capital repayment and service delivery.
• Base Case: The financial model embedded in the contract setting expected costs, revenues and financing assumptions.
• Third Party Waste: Waste, other than the authority’s own, processed at the facility.
• Third Party Income: Income earned (by SPV or affiliates) from handling that waste, selling electricity, metals, etc.
• Provisos (a)–(c):
  • (a) Costs must relate solely to income not already in the Base Case.
  • (b) Costs must be incremental – over and above those assumed in the model.
  • (c) Costs for handling or processing third-party waste cannot be deducted.

5. Conclusion

The Court of Appeal has drawn a bright line: only costs exclusively generated by incremental income may be netted off, and transport of third-party waste is not among them. By cementing an expansive view of “Third Party Income” and a restrictive view of deductible costs, the judgment recalibrates the risk-reward equilibrium intended by many PFI style agreements. Contractors must now keep granular evidence of incremental expenditure or accept that the public partner will share in the gross, not the net, of wide-ranging affiliate revenues. For public authorities, the decision offers a robust template for reclaiming value where complex corporate structures have previously obscured it.