Procurement Bill – Modification of contracts

Contract change notices everywhere you look – but can you see the wood for the trees?

Even fans (and yes, in the anorak-ish world of public procurement, such people do exist) of the current regulation 72 of the Public Contracts Regulations 2015 (PCR 2015), regarding modifications to existing contracts, will admit that it is convoluted and difficult to navigate. When I tell you that its replacement in the Procurement Bill – draft sections 69 to 71 – runs to nearly three times the length, you might be alarmed at the complexity of it all. There may be some sense in this proposed ‘simplification’, though you may need a quiet space and a damp flannel on the forehead to see it.  

When can modifications be made?
Draft clause 69 introduces a replacement regime which sets out what modifications are permitted without triggering a new procurement exercise. The clause introduces a three-pronged approach, allowing contracting authorities to modify a public contract by way of:

• ‘permitted modifications’ listed in schedule 8;
• modifications that are not ‘substantial modifications’; or
• ‘below-threshold modifications’. 

The draft clause covers existing (i.e. previously procured) public contracts and ‘convertible contracts’ – contracts that as a result of being modified will become public contracts. The concept of a ‘convertible contract’ is new – currently, contracts that are below threshold (as evaluated before the procurement) remain below threshold unless there is a substantial change to them.

Permitted modifications
The modifications that are listed in schedule 8 include a number that will be familiar. Paragraph 1 permits modifications where:

(a) the possibility of the modification is unambiguously provided for in:

(i) the contract as awarded; and

(ii) the tender or transparency notice for the award of that contract, and

(b) the modification would not change the overall nature of the contract.

The sparse drafting here is rather striking compared to section 72(1)(a) in the PCR 2015 which currently permits modifications only where the procurement documents provide for them in ‘clear, precise and unequivocal review clauses’ and provided certain additional requirements are met. We will have to see if any guidance issued will require a similar level of specificity as that required under the current regime and whether the principles set out by the Supreme Court in the Edenred* case will still be relevant.

Paragraph 9 relates to transfers on ‘a corporate restructuring or similar circumstances’ (although it doesn’t specifically mention insolvency). There are a number of other categories which will prove helpful in appropriate circumstances – including extreme and unavoidable urgency, unforeseeable circumstances (which closely mirrors the current regulation 72(1)(c)), and the materialisation of a known risk (which is a completely new concept). 

Substantial modifications
Substantial modifications are those that would:

• increase or decrease the term of the contract by more than 10% of the maximum term provided for on award;
• change the overall nature of the contract, or materially change its scope; or
• materially change the economic balance of the contract in favour of the supplier. 

Note that this means that any curtailing of the term of the contract (for example, on an agreed ‘walk away’ basis following a dispute with the contractor), as well as an extension to it by more than 10%, would be considered substantial. However, if this is provided for in the contract (e.g., through a break clause) this would be a permitted modification, even though it is a substantial modification, as long as it doesn’t change the overall nature of the contract. (Are you reaching for that damp flannel yet?)

Below-threshold modifications
Below-threshold modifications are those that would not in themselves increase or decrease the estimated value of the contract by more than:

• 10% in the case of goods or services; or
• 15% in the case of works.

There are then some additional rules to adhere to when relying on a modification as being ‘below threshold’:

• the aggregated value of consecutive below-threshold modifications must be less than the overall financial threshold for that type of contract;
• the modification should not change the scope of the contract; and
• the modification should not be “substantial” or fall within the permitted modifications schedule. 

Notification regime
Draft clause 70 sets out a requirement (subject to exceptions) to publish a ‘contract change notice’ before (no specific timescale is stated, only ‘before’) modifying a public contract or convertible contract. The exceptions are:

• if the modification increases or decreases the estimated value of the contract by 10% (for goods and services) or 15% (for works) or less (although the explanatory note seems to suggest that the test is whether the contract is ‘below threshold’ which is not the same as the test in this section);
• if the modification increases or decreases the term of the contract by 10% or less of the maximum term provided for on award; or
• the modification is to a light touch contract. 

These, therefore, will be the only circumstances in which a contracting authority can modify a contract without notifying the marketplace. These circumstances would not, therefore, include a one-year extension to an existing four-year contract, even where it is provided for in the contract itself. Neither would they include the exercise of a break clause to terminate a ten-year contract at the end of year seven. This, of course, assumes that these are both treated as ‘modifications’ of a contract, which seems to be implied by the wording, although that is not totally clear.  

This means that the exercise of options within contracts will become much more visible than under the current rules. This could lead to a regime where the sheer number of notices detailing the exercise of options (e.g., to extend contracts) will entirely obscure the important information about contracts that are being amended in ways not provided for and that suppliers might want to see. Added to this is the requirement in clause 70(6) to publish a copy of any modified contracts with a value over £2 million (either before, or as a result of, the modification) within ninety days. This could lead to a regime which is bureaucratic, labour intensive, and which will only serve to create an abundance of (albeit electronic) paperwork – the very definition of creating so many trees that you cannot see the wood.

For more information

If you would like to find out more about the Procurement Bill and the modification of contracts, please contact Gayle Monk.

*Edenred (UK Group) Ltd and another v HM Treasury [2015] UKSC 45

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