Procurement Bill Byte 6: Modifications to Public Contracts

The Procurement Bill was introduced on 11 May 2022 and is currently going through the parliamentary process. In this series of Procurement Bill Bytes we take a detailed look at some of the issues and draw out some of the key changes that contracting authorities and suppliers need to get to grips with. 

It should be noted that any of the provisions of the Procurement Bill might change as a result of the process of parliamentary approval. If changes occur to the provisions described in this article, we will update it on our website at the appropriate time. 

We are really interested in your thoughts on how these reforms will affect you and are particularly keen to hear any questions you may have on the topics covered in our Procurement Bill Bytes. Please send any questions to jessica.boardman@bevanbrittan.com and our procurement team will endeavour to answer as many as we can in our Procurement Bill Bytes Q&A Webinar later this month.

 

In this article we explore the provisions in the Bill that regulate when public contracts may be modified.   

As we noted in our Road to Reform article, the Green Paper stated that the existing rules on contract modifications (found in Regulation 72 of the Public Contracts Regulations 2015 (PCR)) could result in uncertainty for contracting authorities who find it difficult determine whether a modification they wish to make would be lawful. The Government said that the new law should provide greater clarity, flexibility, and transparency. The Bill generally achieves these aims.

WHERE ARE THESE PROVISIONS FOUND IN THE BILL?

The relevant provisions are found in sections 69 to 73, and Schedule 8, of the Bill:

Section 69: Modifying a public contract

Section 70: Contract change notices and publications of modifications

Section 71: Voluntary standstill period on the modification of contracts

Section 72: Implied right to terminate public contracts

Section 73: Contract termination notices

Schedule 8: Permitted contract modifications

WHAT CONTRACTS DO THE RULES APPLY TO? 

The rules apply to “public contracts” and “convertible contracts” (a new concept introduced by the Bill). A convertible contract is a (non-public) contract that will become a public contract when modified. An example of a convertible contract is a sub-threshold contract which, as a result of a modification, becomes an above-threshold public contract.  

WHEN CAN A PUBLIC OR CONVERTIBLE CONTRACT BE MODIFIED? 

A public or convertible contract may be modified if the modification is either:

• Not substantial;
• Below-threshold; or
• Permitted by Schedule 8.

WHAT IS “NOT SUBSTANTIAL”?

The current rule in the PCR (Regulation 72(1)(e) and 72(8)) describes five modifications that would be considered substantial. Many of these involve speculation about what would have happened had the modification been included in the original procurement. This is difficult to know, and even more difficult to prove. The Bill adopts a simpler approach. Section 69(3) says that a modification is substantial if it would:

• Increase or decrease the term of the contract by more than 10 per cent of the maximum provided for on award (i.e. the term including all possible extensions);
• Change the overall nature of the contract or materially change its scope; or
• Materially change the economic balance in favour of the supplier.

If the modification does none of these things then it is not substantial, and will therefore be permitted.

The “scope” and “economic balance” tests broadly reflect the existing position under the PCR, but with some subtle differences. For example:

• The existing “considerable extension of scope” test under the PCR is replaced with two alternatives: “change to overall nature” or “material change to scope”.
• The “change in economic balance” test in the PCR is subject to the qualification that the manner of the change “was not provided for in the original contract”. There is also no “materiality” threshold under the PCR.

It remains to be seen whether these definitions will be refined as the Bill progresses through Parliament. The meaning of these provisions will be a matter for the courts but the language of section 69(3) describes a more flexible regime than currently exists under the PCR.

WHAT IS “BELOW THRESHOLD”?

Section 69(4) of the Bill says that a modification is a “below-threshold modification” if all of the following are satisfied:

• It would not itself increase or decrease the estimated value of the contract by more than 10% (in the case of goods and services) or 15% (in the case of works);
• The aggregated value of below-threshold modifications would be less than the threshold amount for the type of contract in question;
• The modification would not change the scope of the contract; and
• The modification is not substantial (see above) or permitted by Schedule 8 (see below).

The restriction on changing the scope of the contract appears to be stricter here than in relation to “substantial” amendments because the word “material” has been omitted.

The Bill mirrors the current requirement in the PCR that the value of all “below-threshold modifications” will be aggregated in order to determine whether the 10% or 15% cap has been exceeded. In other words two modifications of a services contract that each increased its value by 5% could not be subject to any further below-threshold modifications (at least not any that resulted in a further increase in its value). This does not, of course, preclude modifications that may be permitted on other grounds.

WHAT MODIFICATIONS ARE PERMITTED BY SCHEDULE 8? 

Schedule 8 of the Bill sets out seven circumstances (sometimes called “safe harbours”) in which modifications will be permitted. They are:

1. Provided for in the contract

This broadly reflects the current rule in Regulation 72(1)(a) of the PCR, but does suggest a more permissive approach. The Bill does not contain the PCR’s requirement that the contract should state the “scope and nature of possible modifications as well as the conditions under which they may be used”. All that is required is that the modification is “unambiguously provided for in the contract as awarded”. There is, however, a further requirement which is that the possibility of the modification must also be “unambiguously provided for in the tender or transparency notice”. There is, ironically, some ambiguity in the use of the word “unambiguous”. What exactly has to be unambiguous? The fact that the contract may be modified, or what that modification might entail? One reading of this provision would create a very permissive regime, so it is likely that a court is going to have to decide which reading is correct. Or further clarity may be provided as the Bill moves through Parliament.

2. Urgency and the protection of life, etc

This permits modifications whose purpose could be achieved by a direct award of a contract under section 40, and that such an award could be made by reference to paragraph 13 of Schedule 5 (extreme and unavoidable urgency) or regulations made under section 41 (direct award to protect life). This is useful cross-referencing which avoids the current situation of having to consider whether a modification either falls within Regulation 72 of the PCR or if not would be permitted as a direct award under Regulation 32.

3. Unforeseeable circumstances

This broadly reflects the current rule in the PCR but with two interesting changes. Firstly the current threshold of unforeseeability in Regulation 72(1)(c) (“a diligent contracting authority could not have foreseen”) is lowered to one that is partly objective and partly subjective (“could not reasonably have been foreseen by the contracting authority”). And secondly, the point in time at which foreseeability is considered is “before the award of the contract.” This second condition raises some interesting questions. In a 20-year contract, for example, the circumstances giving rise to a need to modify after (for example) year 15, could have been unforeseeable before the contract was awarded, but may have in fact been foreseen by the contracting authority in year 10. Does this mean that the authority can modify the contract in year 15, rather than using the 5 years from year 10 to plan a procurement for the additional services? That appears to be at least arguable on the current drafting, it would appear so. The current rule in the PCR about not increasing the value of the contract by 50% is preserved.

4. Materialisation of a known risk

This is a new one. The Bill permits modifications if the contracting authority considers that:

• a known risk has materialised otherwise than as a result of any act or omission of the contracting authority or the supplier;
• because of that fact, the contract cannot be performed to the satisfaction of the contracting authority;
• the modification goes no further than necessary to remedy that fact;
• awarding a further contract under Part 3 (instead of modifying the contract) would not be in the public interest in the circumstances; and
• the modification would not increase the estimated value of the contract by more than 50 per cent ignoring, for the purpose of estimating the value of the contract, the fact that the risk has materialised.

A “known risk” is a risk that that the authority considered could jeopardise the satisfactory performance of the contract but could not be addressed in the contract as awarded, and was identified as such in the tender or transparency notice which must include the possibility of modification under this provision.

Before modifying a contract under this provision the authority must consider whether a new contract could provide more value for money, and may take into account technical and operational matters.

This is highly prescriptive and one wonders in what circumstances all of these requirements would be met. An example that comes to mind is contracts for recycling services and how these might be affected by the “known unknowns” to be brought about by the Environment Act. Authorities will need to ensure that there is a good audit trail of the known risks, and careful drafting in the published notices.

5. Additional goods, services or works

This quite closely mirrors the current rule in the PCR. It is arguably more permissive because the authority does not have to show that the additional services are “necessary”. The objective tests in the PCR (a change of contractor cannot be made and would cause significant inconvenience or duplication of costs) are replaced by the authority’s subjective assessment of whether the difference or incompatibility of goods, services or works obtained from a different supplier would result in disproportionate difficulties and substantial duplication of costs. Challenging such a subjective assessment is likely to be difficult as long as the authority has a good and comprehensive audit trail setting out its considerations and conclusions.  

6. Transfer on corporate restructuring

This reflects the current rule in the PCR but with the welcome clarity that it applies following corporate restructuring “or similar circumstance” as opposed to the rather tortuous descriptions of some such circumstances in Regulation 72(1)(d)(ii) of the PCR. Also reflecting the current rules, the new supplier must not be an excluded supplier. 

7. Defence authority contracts 

Two special grounds for modifications apply in relation to Defence contracts. These are:

• Where the modification is necessary to enable the authority to take advantage of (or mitigate the adverse effect of) developments in technology; and
• Where the modification is necessary to ensure the continuous supply of the goods, services or works, which is in turn necessary to ensure the ability of the Armed Forces to maintain operational capabilities, effectiveness, readiness for action, safety, security or logistical capabilities. 

WHAT ABOUT LIGHT TOUCH CONTRACTS?

Section 69(2) of the Bill appears to give carte blanche to modify light touch contracts. This is a little surprising. It would be surprising if contracting authorities could extend a one-year light touch contract for a further ten years, and/or extend its scope to include unrelated (but also light touch) services, as this would leave the award of such contracts very lightly regulated indeed. Further clarity (which is expected in secondary legislation) will be welcome.

CONTRACT CHANGE NOTICES 

The Bill introduces far greater transparency requirements in relation to modifications. Under the current regime contracting authorities may (but do not have to) publish transparency notices (VEATs under the Directive). This is often a tactical decision balancing the benefits of providing a defence to a claim for ineffectiveness against the risk that publication may prompt a challenge to the modification. This anxiety is removed by the Bill which straightforwardly requires as a general rule that:

Before modifying a public contract or a convertible contract a contracting authority must publish a contract award notice.

This is subject to exceptions. It does not apply to:

• Modifications that increase or decrease the estimated value of the contract by 10% or less (for supplies and services) or 15% or less (for works).
• Modifications that increase or decrease the term of the contract by 10% or less than the maximum term provided for on award (i.e. including all possible extensions).
• Light touch contracts.

In England, there will also be a requirement (section 70(6) and (7) of the Bill) to publish a copy of the modified contract if the modification results in a contract with a value over £2 million.

A contracting authority may (but does not have to) provide for a voluntary standstill period in the contract change notice. If it does so then it must not enter into the modified contract before that period has expired. As under the PCR, the remedy of set aside under the Bill (ineffectiveness under the PCR) will not apply to a modification if the authority observed a voluntary standstill period provided for in the contract change notice.