The Public Contracts Regulations 2015 implementing the Public Sector Directive of 26 February 2014 come into force today repealing The Public Contracts Regulations 2006 and introducing a new regime for public sector contracting.

The stated objective behind the reforms is to modernise and improve flexibility in public procurement so as to maximise opportunities to achieve smart, sustainable and inclusive growth and the efficient use of public funds. To that end, the rules provide greater flexibility and choice of use of procedures including greater access to the negotiated procedure and the introduction of a new procedure of innovation partnerships. Thresholds for the application of the detailed procedural rules under the Directive are raised and procurement is liberalised where there is limited cross border interest - this includes in the social care and health care sectors and provision of prison services.

The UK Government has forged ahead with implementation of the 2014 Directive a year ahead of the deadline to take advantage of the perceived improvements at the earliest opportunity. The 2015 Regulations are effective from 26 February 2015, i.e. the new rules apply to procurements that begin on or after that date by publication of a contract notice in the Official Journal or other advertisement or contact with a potential bidder in relation to a proposed contract.

The 2015 Regulations can be found at:

http://www.legislation.gov.uk/uksi/2015/102/contents/made

Consultation on the equivalent implementing regulations for the new Utilities and Concessions Directives will take place later this year.

Points of particular interest include:

1. The competitive procedure with negotiation and innovation partnerships: there is now greater flexibility in the choice of procurement procedures, with access to the competitive procedure with negotiation where. e.g. the requirements of the contracting authority include an element of design, innovative solutions or where prior negotiations are necessary due to the complexity of the subject matter. Any negotiations, however, must be conducted strictly in accordance with the principles of equality and transparency.

In addition, there is also the new procedure of innovation partnership, where a contracting authority requires a product, service or work that is not available on the market. The aim of the partnership is to span both the development phase, and, critically, the subsequent production and purchase of the solution provided that it corresponds to the agreed performance levels and any ceiling set on costs. However, contracting authorities may elect after any phase to terminate the partnership or to reduce the number of partners by terminating individual contracts provided that this break option is included in the procurement documents. This means that the private sector is still vulnerable to the risk of termination of the partnership prior to the production of the product or delivery of the service, which is typically when the investment in research & development is re-couped.

2. Modification of contracts during their term: in line with the underlying 2014 Directive, the 2015 Regulations include the codification of various findings of the Court of Justice of the EU over recent years, a notable example being the modification of contracts during their term. The 2015 Regulations now provide the framework (reasonably familiar from the Pressetext case) within which a contracting authority can decide whether a proposed modification can proceed with or without a new procurement. The parameters within which change is permitted without a new procurement procedure include that:

  • the original procurement documents provided a clear mechanism for modifications, subject to certain constraints – e.g. that the mechanism does not enable the overall nature of the contract to be changed;
  • a change of contractor cannot be made for economic or technical reasons;
  • the increase in contract price does not exceed 50% of the original contract value;
  • the need for modification is a result of circumstances which “a diligent contracting authority” could not have foreseen.

3. Mandatory and discretionary exclusion: grounds for exclusion have been extended to include the following

  • terrorist and corruption offences (mandatory);
  • plausible indications” that the economic operator has entered into agreements with other economic operators aimed at distorting competition (discretionary);
  • a conflict of interest or a distortion of competition from the economic operator’s prior involvement in the procurement procedure, which cannot be resolved by other less intrusive means (discretionary);
  • significant poor performance under a prior public contract which led to early termination of the contract, damages or other comparable sanctions (discretionary);
  • withholding of or misrepresenting information relevant to a contracting authority’s verification of the grounds for exclusion (discretionary);
  • attempts to exercise undue influence over the decision making process or obtain confidential information that brings with it an unfair advantage in the procedure (discretionary).

Evasion of tax/social security contributions can result in either mandatory exclusion (where there has been a conviction) or discretionary exclusion (contracting authority knowledge of breach short of a conviction). In either case, the prohibitions cease to apply on payment (or binding arrangements to pay) the outstanding amounts or if the amounts in issue are minor or payment was impossible prior to the deadline for submission of the tender. Maximum periods for exclusion have now been set by the Regulations: three and five years for discretionary and mandatory exclusion respectively. On remediation (or “self-cleaning”), the 2015 Regulations give contracting authorities discretion to assess whether there is sufficient evidence (on specific remedial measures to be taken by the economic operator) to justify the readmission of the economic operator to the tender process.

4. Light touch regime: to provide greater flexibility, the 2015 Regulations permit contracting authorities to determine the procedures applicable to procurements for social and other specific services provided the principles of transparency and equal treatment are met. The government intends to provide “practical advice and support “ to contracting authorities to assist with compliance with the new rules on procurements covered by the light touch regime. There is a carve out for the procurement of healthcare services until April 2016 which will, in the interim, continue to be subject to the National Health Service (Procurement, Patient Choice and Competition) (No 2) Regulations 2013.

5. Termination: contracting authorities must include in their contracts a right to terminate in certain circumstances (i.e. substantial modification requiring a new competition; grounds for mandatory exclusion at the time of contract award; a declaration from the Court of Justice of the EU of a serious infringement by the contracting authority of its obligations such that the contract should not have been awarded). Where such a provision is not expressly incorporated, a term will be implied into the contract permitting the contracting authority to terminate on reasonable notice to the contractor. Contracting authorities have the right to terminate but are not obliged to do so. The government will provide model contract clauses and guidance.

6. Division of contracts into lots: the 2015 Regulations do not mandate the division of contracts into lots. The rationale for this is that because contracting authorities are required to explain if they decide not to divide into lots, this necessarily means that the possibility of lot division must be considered in the planning of the procurement. Again, it is intended that further guidance will be provided on whether and how to divide into lots and circumstances in which combined lots may be acceptable.

7. Additional advertising/payment requirements and low value procurements: the Crown Commercial Service has published Procurement Policy Note 03/15 drawing attention to new measures to make public procurement more accessible, in particular to Small and Medium-Sized Enterprises. Although the recitals to the 2014 Directive do refer to the importance of encouraging the participation of SMEs in public procurement, these new measures go beyond the 2014 Directive itself and are partly based on Lord Young’s 2013 report “Grow Your Business”. This is consistent with the message in the 2014 Directive that the potential presented by SMEs should be at least partially driven by initiatives at national level. These measures appear in Part 4 of the 2015 Regulations and require:

  • the placing of advertisements for procurements above certain thresholds and the publication of contract notices on Contracts Finder. The thresholds are £10,000 (central contracting authorities) and £25,000 (sub-central contracting authorities). The differential between these thresholds and those set by the EU is quite marked. The specific requirements for these Contract Finder advertisements include a minimum level of information for both contract opportunities (e.g. the time by which an interested economic operator must respond if it wants to be considered) and contract awards ( e.g. the name of the contractor and value of the contract);
  • the insertion of prompt payment provisions in all public contracts. Although this is not covered in the 2014 Directive, this is related to Directive 2011/7/EU on Late Payments (already implemented in the UK);
  • the abolition of a pre-qualification stage for below EU threshold procurements and a requirement to have regard to guidance on qualitative selection on above EU threshold procurements issued by the Cabinet Office.

However, it is also provided that a material failure to comply with any of the Part 4 requirements “does not, of itself, affect the validity of a public contract that has been entered into”. In our view, this creates an area of uncertainty: i.e. what precisely is the remedy if a contracting authority fails to adhere to these Part 4 provisions? Does the reference to not affecting a contract that “has been entered into” leave the door open for a pre-contract challenge? There is no obvious route for this - the remedies set out in Part 3 of the 2015 Regulations apply to circumstances in which a contracting authority has breached the duty to an economic operator. That duty is defined in Regulations 89 (the obligation on the contracting authority to comply with Part 2 of the 2015 Regulations ie the substantive requirements governing a procurement procedure) and 90 (being the duties owed to economic operators from certain other states). Unfortunately, the 2015 Regulations are silent on the repercussions of failure to adhere to Part 4.

The rationale for the government’s approach to the framing of the 2015 Regulations can be found in its response to the consultation:

Government response to the consultation on UK transposition of new EU procurement directives public contracts regulations 2015

As an overall observation, bringing together developments in procurement case law since the Public Contracts Regulations 2006 into one set of regulations is to be welcomed. Uncertainty in a number of areas remains, however, given the approach taken by the government to leave several areas to the discretion of contracting authorities, not least those highlighted above that await further government guidance for clarification. In our view, flexibility is preferable to a regime that does not permit contracting authorities to tailor procurements to specific requirements. With an increasing culture of challenge to procurement decisions, there is significant scope to exploit areas of uncertainty and we may see more litigation in particular around decisions to exclude operators from competitions on the broader grounds set out in these 2015 Regulations.