The Procurement Bill: modification of contracts
What you need to know if contracting with the UK Government
In June 2022, Freshfields and Monckton Chambers co-hosted an event on how the Procurement Bill proposes to reform public procurement law in the UK. We are now publishing a series of briefings to provide a summary of the key topics discussed and track the development of the Bill as it passes through the legislative process.
In this briefing, Azeem Suterwalla (Monckton) and Alexia Millett (Freshfields) address the provisions in the Bill on contract modifications and their likely effect.
Status of the Bill
The long-awaited Bill was introduced to the House of Lords on 11 May 2022, setting out the UK Government’s proposed reforms to public procurement rules in a post-Brexit world. While the Bill has dropped a number of the more drastic suggestions from the Government’s Green Paper on Transforming Public Procurement, it still proposes a number of significant changes that aim to simplify and improve the UK’s public procurement regime.
The Bill has had its first and second readings in the House of Lords. It is currently at “committee stage”, during which it undergoes a line-by-line examination. This is expected to run through to September, following which the Bill will be referred to report stage and a third reading before it starts its journey in the House of Commons.
What is the current position?
For parties contracting with the Government, modifying a publicly awarded contract carries risk. A new procurement process may be required if substantial amendments are made to an existing contract, for example an amendment that materially alters the scope of the original contract or would have allowed other potential suppliers to be selected. There is also a risk of a declaration of ineffectiveness if the contract is modified outside of the procurement rules.
The current rules on modification of public contracts during the contract execution phase are set out in Regulation 72 of the Public Contracts Regulations 2015 (PCR 2015) and its equivalents in the Utilities Contracts Regulations 2016 (Reg. 88) and the Concession Contracts Regulations 2016 (Reg. 43). The rules state that, following the award of a public contract, if modifications are made which amount to what is in effect a new contract, a new procurement process is required. The objective of the rules is to foster transparency and competition for the letting of public contracts across the EU, even if actually implementing that intention has sometimes been difficult.
The key changes proposed by the Bill
The Bill proposes extensive changes to the rules around modification of public contracts. We consider these in more detail later on, however, in summary, the key changes in the Bill regarding modification without the need for the contract to be retendered are as follows:
- The introduction of a new concept of “convertible contracts” – i.e. those which were not considered public contracts pre-modification, as they were below the financial threshold, but which go on to be considered a public contract post-modification;
- A potentially less stringent approach to review clauses – i.e. contractual clauses pursuant to which a contract may be modified without having to be retendered;
- Where a new supplier is to replace the one initially awarded the contract, it is no longer a requirement that the new supplier must have fulfilled the original qualitative selection criteria in order for the modification to be permitted;
- The introduction of three new permitted contract modifications:
- For urgency and the protection of life;
- For materialisation of a “known risk”; and
- To a Defence Authority Contract in certain circumstances.
- Non-substantial modifications continue to be permitted, but with the following changes:
- If the term of the contract is increased or decreased by more than 10 percent, it will now be considered to be a substantial modification;
- It is no longer relevant whether the modification may have had an impact on the outcome of the initial procurement process (or attracted additional participants);
- The appointment of a new/replacement counterparty will not necessarily be substantial, although it is not clear whether this is intentional or an oversight in the drafting of the Bill.
- Light touch contracts (e.g. health and social care contracts) can be modified without any conditions; and
- Contracting authorities will be required to publish a Contract Change notice prior to modification.
Looking now at the provisions of the Bill in detail, the key provisions concerning contract modification are found in clauses 69, 70 and Schedule 8 to the Bill. Clause 69 provides four categories of modifications which may be lawful:
- a permitted modification under Schedule 8. These are broadly similar to the current “gateways” (i.e. permitted modifications) in the existing Reg. 72, but with some important differences which are considered below;
- a modification which is not a substantial modification, again a concept familiar from Reg. 72,
- a below-threshold modification, which again has its origins in Reg. 72(5) of the current regime; and
- a modification to a contract which is a “light touch” contract.
Importantly, clause 69 of the Bill expressly introduces the concept of a “convertible contract”. This is defined as a contract which before being modified was not a public contract, i.e. because it was below threshold, but when modified, becomes a public contract governed by the Bill. This is arguably quite a radical change, as it means that contracts can be modified to become public contracts, but without having to have first been tendered or procured in accordance with the procurement regime. This may open the door to complaints, and therefore potentially challenges, by parties who feel that they may have been unfairly shut out from obtaining the contract.
We address each of the four categories of modification set out above in turn:
(1) Permitted modifications
The Bill preserves a number of the permitted modifications currently in the existing Reg. 72 (albeit with revised wording and effects). These are:
- Where there is a clear, precise and unequivocal review clause. This concept has been retained in the Bill, although the Bill now (in Schedule 8) refers to the possibility of the modification being “unambiguously” provided for in the contract. This is a wider and more permissive right for parties than the current provisions on modification, and unlike the current regime, which specifies the sorts of provisions that can be modified (e.g. price review clauses), the Bill does not limit the types of clauses that can be modified. The only limitation, which mirrors the current rules, is that the modification does not change the overall nature of the contract.
- A permitted modification for additional works, services or supplies by the original supplier that have become necessary, which were not included in the initial procurement and cannot be made for economic or technical reasons.
- For unforeseeable circumstances, namely where: (a) the circumstances giving rise to the modification could not reasonably have been foreseen by the contracting authority before the award of the contract; (b) the modification would not change the overall nature of the contract; and (c) the modification would not increase the estimated value of the contract by more than 50 per cent.
- Where a new supplier replaces the one initially awarded the contract. This is significantly more permissive than the current regime, under which a change to a new supplier is permissible where that new supplier is an economic operator who would have fulfilled the selection criteria required for the original procurement. This requirement, however, has been dispensed with in the new regime. In practice, this means that the contract can be transferred to another supplier who may never have been able to participate in obtaining the contract in the first place. This gives contracting parties and authorities significantly more flexibility.
The Bill also adds three new permitted modifications:
- Modification for urgency and the protection of life. This modification allows modification of the contract where the modification could be achieved by way of direct award, and the direct award can be made due to extreme and unavoidable urgency, or to protect life. In respect of this modification, there are no provisions stating that the value of the modification has to be below a certain level (e.g. 50% of the value of the contract), or that the overall nature of the contract must not be amended.
- Modification for materialisation of a “known risk”. This modification is intended to cover situations where a risk has materialised (otherwise than as a result of an act or omission of the contracting authority or the supplier) and as a result the contract cannot be performed to the satisfaction of the contracting authority. However, it is worth noting that the modification must:
- go “no further than necessary” to remedy the situation,
- that it would not be in “the public interest” for a further contract to be awarded, and
- that the modification would not increase the estimated value of the contract by more than 50 per cent.
- Again, this modification appears to signal that the Government intends for contracting authorities to be able to modify public contracts more easily. However, the fact that this modification turns on risks outside of the parties’ control introduces some uncertainty that may not give much comfort to suppliers, and suppliers may seek to challenge improper use of this modification. However, in reality, the number of conditions which have to be satisfied in order for this modification to be made may mean that it is not in fact used regularly.
- Modifications to Defence Authority Contracts which are not excluded contracts under the Bill, where this is to enable the taking advantage of developments in technology or to prevent adverse effects on those developments, and a modification is necessary to ensure there is a continuous supply of goods, services and works to ensure the abilities of the Armed Forces.
2) Non-substantial modifications
The Bill also sets out a number of non-substantial modifications. There are three key important distinctions between the current test of what constitutes a substantial modification under existing Reg. 72, and that as proposed in new clause 69 of the Bill.
1. Under clause 69(3)(a), a modification will be substantial where the term of contract has been increased or decreased by more than 10 per cent of the maximum term provided for on award. This is new. This will require careful monitoring for those parties in particular that have shorter term contracts seeking to amend the term.
2. It is no longer relevant whether the modification may have had an impact on the outcome of the initial procurement process, or whether it would have attracted additional participants or candidates in the procedure itself. This will give some comfort to modifying parties as to how the initial procurement was run and lower the risk of challenge on this basis.
3. It now seems to be possible for a modification not to be substantial even where another economic operator has taken over the contract, and even if they have not done so under the permitted regime for this to take place. It is unclear whether this is intentional, or constitutes an oversight by the drafters of the Bill.
(3) Below-threshold modifications
This broadly follows the earlier scheme, i.e. Reg. 72(5).
(4) Light Touch category
Clause 69(2) allows a contracting authority to modify a public contract or a convertible contract if it is a light touch contract (certain contracts in health and social care and other community related contracts). The Bill makes a significant change in that such contracts, including those which are convertible contracts, can be modified without, apparently, any conditions.
New notification requirements
A major development is clause 70 of the Bill which requires contracting authorities to publish Contract Change notices in addition to publication of modifications. The current regime in Reg. 72 PCR requires a contracting authority to give notice that a contract has been modified (and therefore the notification is after the event) where the modification is necessary because of economic and technical reasons, and where the need for modification was unforeseen.
However, the Bill provides that before modifying a public contract, or a convertible contract, a contracting authority must publish a contract change notice. Significantly, the Bill provides that a contracting authority may not modify a public contract or a convertible contract before the end of any standstill period provided in the relevant contract change notice, which introduces a greater risk of challenge of the modification while it is still live. However, it is noted that this notice requirement is voluntary, so it is not at all clear how this will work in practice.
The notice requirements in the Bill will not apply in all circumstances, but it will apply in respect of modifications where: (i) the equivalent of a clear, precise and unequivocal review clause is used; (ii) modification for additional works, services or supplies by the original supplier that have become necessary, were not included in the initial procurement and cannot be made for economic or technical reasons; (iii) unforeseeable circumstances; (iv) known risks; and (v) where a new supplier replaces the one initially awarded the contract.
The Bill also requires that where a modification has an estimated value of £2m or more, the authority must publish a copy of the contract as modified within 90 days from the modification (clauses 70(6) and (7)).
Overall, the Bill appears to be an attempt to provide greater flexibility to contracting authorities to make modifications to public contracts, whilst at the same time affording greater transparency for these modifications than under the existing regime. Whilst on the one hand the more permissive regime may encourage parties to make more modifications, there may also be a “chilling effect”, as contracting authorities will be aware that modifications will be subject to greater scrutiny through the Contract Change Notice procedure. This introduces the risk that modifications to public contracts are challenged more regularly, particularly given the new notice requirements, while the proposed contract modifications are live. These provisions will no doubt be tested in the courts in due course.
This briefing is part of a series. See also: