A missed opportunity for substantive reform?
In the next two ebriefings, we explore the sections in the Procurement Bill on frameworks and dynamic markets. These will replace the rules in the Public Contracts Regulations (PCR) 2015 that apply to framework agreements and dynamic purchasing systems (DPS), two commercial purchasing tools that have been used widely across the UK in recent years.
Let’s look at the objectives behind the reforms in this area and the practical implications of the new rules in their draft form at the time of writing. This first ebriefing focuses on frameworks.
What problems were identified with the current rules on framework agreements?
It is important to note that the Green Paper consultation was very limited on this topic. Its focus was on the Government’s proposals to introduce a new ‘open framework’ option with multiple joining points and a maximum term of eight years.
Other proposals were outlined such as the introduction of a central register of all commercial purchasing tools and confirmation that charges to framework suppliers could be levied providing certain conditions are met. However, the absence of any proposals or questions relating to how the existing framework agreement procedures were working was rather striking. No questions were asked, for example on the perceived benefits or drawbacks of the current framework agreement model, on any issues encountered when applying the rules on making direct awards or running mini-competitions, or on the roles and responsibilities of central purchasing bodies who set up and manage commercial purchasing tools.
Given the wide scope of the consultation, this is perhaps understandable. It means, however, that any changes to this tool have not been properly informed by feedback relating to the current operation of the rules. They are unlikely, therefore, to address the range of issues that contracting authorities have been grappling with in practice and which, we are aware, are placing an increasing strain on capacity and resources.
What is the new framework definition?
The Procurement Bill defines a ‘framework’ as ‘a contract between a contracting authority and one or more suppliers that provides for the future award of contracts by a contracting authority to the supplier or suppliers’.
This definition is conceptually different from the current EU-derived definition in the PCR 2015 which provides that ‘the purpose’ of a framework agreement is to establish the terms of future orders under the framework. It brings into question the extent to which the terms of a framework are required to be settled when the framework is awarded.
As a full procurement procedure must still be used to award a framework (itself a ‘public contract’), the rules in the Bill on awarding a public contract following a competitive procedure will apply. When appointing suppliers, therefore, contracting authorities will need to base the award on the ‘most advantageous tender’. This remains the key distinguishing feature of a framework compared to a dynamic market although a question mark remains over how substantive the competition needs to be to appoint framework suppliers. We have witnessed the emergence of some very loose frameworks in recent years that involve very little substantive competition at the appointment stage. The increased flexibilities outlined below suggest that this trend may be set to continue.
We have also spotted an apparent loophole in the current drafting. Clause 44(1) provides that a contracting authority may award a public contract in accordance with a framework and a ‘framework’ is defined in clause 2(3) as a ‘public contract’. This seems to authorise a ‘framework within a framework’. Does this mean, for example, that a contracting authority could use a multi-supplier framework agreement to set up a sub-framework with some of the framework suppliers or award a single supplier framework to one of the framework suppliers? We expect that this drafting glitch will be corrected as the Bill progresses through Parliament!
Will below threshold call-offs be completely unregulated?
Under the PCR 2015, ‘contracts based on a framework agreement’ have to be awarded following the rules on frameworks in Regulation 33 irrespective of their financial value. This makes sense since, for aggregation purposes, a contracting authority is required to consider the maximum estimated value of ‘all the contracts’ envisaged over the term of the framework. Every call-off award is therefore regulated rather than just those individual call-offs that have a value above the relevant financial threshold for triggering the PCR 2015. Otherwise, a contracting authority could easily divide the call-offs into above and below-threshold contracts to avoid the application of the rules.
It appears that the Bill envisages a fundamental change to this position. The explanatory notes to the Bill clarify that whilst the definition of a ‘framework’ provides for the future award of ‘contracts’, the remainder of clause 44 on frameworks only applies to the award of ‘public contracts under frameworks’. This means that frameworks will be able to be used to procure below-threshold contracts without having to apply the rules in the Bill. Whilst this may seem like a welcome relaxation of the rules, the aggregation rules in the Bill still require the value of a framework to be based on the estimated values ‘of all the contracts’ that have or may be awarded in accordance with the framework. This seems somewhat illogical and may lead to some poor practices.
Could it lead to the deliberate disaggregation of contracts under frameworks to fall beneath the radar of the rules? We are not convinced that the anti-avoidance provisions in the Bill will be strong enough to prevent this. We certainly envisage this resulting in the increased use of frameworks for below-threshold purchases thereby increasing the revenue generated through them.
What is the maximum term for frameworks?
The maximum four-year term for closed frameworks remains except for defence and security and utilities closed frameworks which can be put in place for eight years. It is still permissible to set longer framework terms if the contracting authority considers the nature of the goods, services or works means that a longer term is required. This is a relaxation of the current rules which only allow longer terms ‘in exceptional cases’.
What information needs to be published at the outset?
In the Government’s response to the Green Paper consultation, it stated:
‘To discourage contracting authorities from putting in place extremely broad and poorly defined frameworks, it will be a requirement to identify in the tender notice or in the procurement documents the nature, scope and overall maximum estimated value of the contracts that may be awarded under the framework’.
The Bill sets out a list of information that needs to be included in the framework. This includes:
- description of goods, services or works
- the price payable, or mechanism for determining the price payable
- the estimated value of the framework
- any selection process to be applied on the award of contracts
- the term of the framework
- the contracting authorities entitled to award public contracts in accordance with the framework
- whether the framework is awarded under an open framework
We expect secondary legislation to be issued under clause 86 of the Bill to clarify what information needs to be inserted in tender notices. The absence of the word ‘maximum’ when referring to the ‘estimated value of the framework’ is rather conspicuous. The above information is generally framed in rather loose terms and indicates that more flexibility may be allowed under the new regime.
To note, the reference to a ‘mechanism for determining the price payable’ appears to acknowledge that determining ‘price’ at the appointment stage of a framework is a difficult task in practice. Does this impliedly permit the establishment of closed frameworks without any substantive competition on price at the outset, however? Some guidance on what elements must be present in such pricing mechanisms would be most welcome.
Can fees be charged for using a framework?
The Bill clarifies that a framework may provide for the charging of fixed percentage fees to framework suppliers based on the estimated value of a call-off contract. The Government’s response to the Green Paper consultation indicated that any charges recovered should be ‘proportionate and used solely in the public interest’. This condition has not made its way into the Bill and so it remains to be seen if secondary legislation will address this or if it will be provided for in guidance only. The framework market in the UK has grown rapidly in the last few years which had led to the commercialisation of frameworks and dramatic variances in the percentage rebates charged by central purchasing bodies (CPBs). The rebate model can result in behaviours that are not in keeping with ethical public sector purchasing as CPBs are motivated to generate as much spend as possible through their frameworks to support their business models.
Will direct awards still be possible?
Direct awards under frameworks will remain possible for:
- single supplier frameworks; and
- multi-supplier frameworks which set out (a) the core terms of the public contract, and (b) an objective mechanism for supplier selection.
Unlike the PCR 2015, there are no specific rules about how to make call-offs under single supplier frameworks.
It is implied in the Bill that multi-supplier frameworks that facilitate both direct awards and mini-competitions will continue to be allowed but it appears that a contracting authority no longer needs to apply objective criteria to determine which call-off award procedure to use.
As for the conditions for making direct awards, it is no longer required to set out ‘all the terms’ in the framework, just the ‘core terms’. The explanatory notes provide that ‘core terms’ means key terms such as deliverables, standards, charges, pricing mechanisms, warranties, termination rights, etc. As for choosing which supplier to make a direct award to, the framework must set out an ‘objective mechanism’ for choosing the supplier. Under the PCR 2015, contracting authorities need to apply ‘objective conditions’ to select a supplier. Whilst this may just reflect a change in language, it does seem to speak to commercial practice in the UK whereby a wide range of direct call-off ‘mechanisms’ such as online filtering tools have emerged and are being used widely (and often somewhat subjectively) to make direct call-offs. It is also not clear whether the use of such objective mechanisms will need to comply with the rules on ‘award criteria’ in the Bill.
In our opinion, these new flexibilities will most certainly lead to the increased use of direct awards under frameworks moving forward and lots more revenue being generated for CPBs as a result.
What are the rules for running mini-competitions?
Unless a framework provides for direct awards in accordance with the conditions described above, a call-off contract must be awarded following a ‘competitive selection process’. No more detail is provided on how to run this process. The framework can set out ‘any selection process to be applied on the award of contracts’. This aligns with the lack of detail more generally in the Bill about following a competitive procedure to award a public contract and we expect guidance will be issued to assist contracting authorities here.
The Government’s response to the Green Paper stated that contracting authorities will need to evaluate the mini-competition on the same basis as was applied for the award of the framework, including the evaluation criteria, but that more detailed terms such as detailed sub-criteria within an existing criterion can be used if desired. If such restrictions are to apply, then we consider these need to be explicitly incorporated into the legislation.
Can framework suppliers be excluded from being awarded a call-off contract?
The drafting of the provisions in the Bill on exclusions is rather tortuous due to the introduction of such concepts as ‘excluded’ and ‘excludable’ suppliers and the discretionary steps a contracting authority must take to determine whether a supplier falls within any of these categories.
There is a provision for an implied term of every framework that a contracting authority may exclude a supplier from participating in any selection process run for the award of a call-off contract that is an ‘excluded supplier’ or has become an ‘excludable supplier’ since the framework was awarded. We think this is aimed at clarifying that the application of exclusion criteria should be an ongoing assessment throughout the life of a framework. However, given that the decision as to whether a supplier meets the definition of an ‘excluded’ or ‘excludable’ supplier requires each contracting authority to assess the risk of recidivism, we envisage problems with applying these concepts in the framework context, particularly for a framework with lots of different user contracting authorities who may reach different views on each supplier.
What are open frameworks?
We have already issued an ebriefing on the open framework provisions in the Bill which we summarise here for the sake of completeness.
An ‘open framework’ must involve the appointment of at least two suppliers and is defined as ‘a scheme of frameworks that provides for the award of successive frameworks on substantially the same terms’. There must be an award of a framework at least once during the initial three years of the open framework term, beginning when the first framework is let. Assuming this is talking about two different frameworks (the one that is let at the start of this three-year period and from which the three years are calculated, and the one that must be let during that three-year period), this is actually a reduction to the maximum four-year term that applies at the moment. A third framework must then be awarded at least once in the five-year period following the award of the second framework.
The explanatory notes confirm that a new framework could conceivably be awarded every year during the maximum eight-year open framework term, although we cannot see why a contracting authority would want to do this, other than in the special circumstances applying to frameworks with no limit on the number of suppliers.
Can a supplier keep its place at each iteration of an open framework?
Where no limit is set on the number of suppliers that can be admitted to an open framework, the contracting authority may re-appoint an existing supplier to the open framework at each opening based on either:
(a) the fact that the supplier has already been awarded a framework under the scheme;
(b) a tender relating to an earlier award under the scheme; or
(c) a tender relating to the current award.
So, if a supplier has been successful in winning a place on such an open framework, a contracting authority can allow the supplier to keep its place for the duration of the open framework term without having to re-evaluate its tender. However, (b) and (c) imply that an existing supplier is still to be given the opportunity to update its previous tender at each new framework award, presumably so that they are not disadvantaged vis-à-vis the offerings of new bidders joining the framework.
Where a framework does limit the number of suppliers, an existing supplier can only be reappointed based on its existing tender or new tender. This means that whichever tender is relied upon, it would need to be evaluated against others (both existing and new) to determine which suppliers will stay on/join the framework for the next iteration.
As we said in our response to the Green Paper, this does not provide much practical benefit over the existing regime. It is already possible to set up a series of frameworks on substantially similar terms. The only practical benefit under the Bill is that for frameworks with an unlimited number of suppliers, a supplier could conceivably sit on a framework for up to eight years without having to retender.
It would theoretically be possible for this to apply also to a framework with a limited number of suppliers (with the supplier’s original tender being evaluated against new tenders when the framework is opened up to competition at the end of the three or five-year period). However, the prospect of an existing supplier not taking the opportunity to update its tender at each framework award under an open framework seems very low. They will likely want to update their tender at each iteration to improve their offering both to ensure it stands the best chance of being reappointed and to improve their chances of being awarded a call-off contract.
The new open framework regime actually provides less flexibility, due to the requirement that each framework iteration under an open framework has to be on ‘substantially the same terms’. A series of frameworks under the current law would not be so restricted as the terms of each framework could be updated each time a new framework is let.
Concluding remarks
Whilst the Green Paper consultation did not provide an opportunity for a detailed review of how the current rules on framework agreements are working, the framework provisions in the Bill represent a significant relaxation of the already skeletal set of rules in the PCR 2015. We are concerned that this could lead to even poorer procurement practice in terms of, for example, the extent to which direct awards are used, the closing out of the market without holding a substantive competition on key elements (e.g. price) when setting up at the framework and the endorsement of the rebate model that has proliferated across England, Wales and Northern Ireland in particular.
There is a provision in the PCR 2015 (Reg 37) which apportions liability between CPBs and user contracting authorities using frameworks depending on the stage of the procedure they conduct themselves. The Bill does not seem to include a similar provision to this. Does this mean that the ‘buyer beware’ culture that has pervaded frameworks in recent years is set to remain or even worsen and user contracting authorities will bear all the risk of legal compliance when using frameworks? There is a case to be made for introducing more regulation on the activities of CPBs to help from a monitoring and enforcement perspective and to provide more transparency and support for user contracting authorities.
With regard to open frameworks, if the rules remain as currently drafted, we are not convinced that they will offer sufficient practical benefits over alternative options of a series of closed frameworks or a dynamic market. A better option might have been to retain closed frameworks only but permit a mechanism which allows new suppliers to be added in certain circumstances.
We expect that the Bill will be subject to many amendments before it emerges at the other end of the legislative process. However, in light of the scope of the consultation and the objective to create a set of rules that can be applied, as much as possible, uniformly across the public, utilities and defence and security sectors, we are not expecting many substantial changes from what is currently on the table in the House of Lords.
For more information
If you would like to find out more about the Procurement Bill, please contact Steven Brunning.
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