Changes to EU law will soon mean that employers may be prevented from instructing sizeable variations and will instead have to tender such works via a new contract award.
Since the early 1990’s any public body or utility company tendering a substantial construction contract has had to do so in accordance with certain statutory procedures which seek to ensure that all contractors have advance notice of projects they may want to bid for. These procedures stipulate an open and transparent tender process which is conducted by reference to a clear set of criteria. A contractor can challenge the award of a contract if the public body does not follow the rules.
In recent years, the EU has been concerned with a possible loophole in the regulations relating to variations to construction contracts. Suppose a government contract is let for the construction of a 200 km stretch of railway and tendered in accordance with the usual procurement rules. Then, part way through the project, the public rail authority decided it wanted to extend the track by a further 75 km. If the project was let as a new contract it would need to be tendered in accordance with the public procurement procedures. But, could the additional track package instead be instructed as a variation to the original scope thereby avoiding the delay involved in running a new tender process? Other contractors might object that they couldn’t pitch for the work which was instead given to the incumbent contractor – perhaps at an above market price.
A legal challenge by an Austrian company to an agreed variation of a contract in the ECJ in 2008 has spurred the EU into passing a new directive, which came into force on 17 April 2014. The UK government is required to introduce legislation to implement EU directive rules within the next two years, which will extend the reach of procurement law with significant implications for the operation of construction contracts.
The new rules are complex, but in short they will prevent public bodies from instructing major variations and ensure they instead run a new tender process in which all interested contractors can compete. Small variations with a cumulative value of up to 15% of the contract value will not be caught by the rules. The directive separately provides that variations which are not “substantial” will be allowed. In order for a variation to be challenged it must be substantial and the 15% ceiling must have been exceeded.
There are further exceptions designed to ensure that employers do not become unreasonably constrained by these new regulations, and can still instruct major changes even if they infringe these two rules. For example, one exception is where additional works are necessary, but a change of contractor is not possible for economic or technical reasons. This could apply in a technically complex project where the integration of varied equipment means that bringing in a new contractor is not feasible. A further exception arises in the case of an unforeseeable modification which does not alter the nature of the contract and amounts to less than 50% of the contract value.
Many of these exemptions to the new rules are quite vague – for example, it will be subjective as to what constitutes a “substantial” variation. An employer’s decision to instruct a variation or a contractor’s legal challenge of that decision may turn on what this entails. This is unfortunate because a failure to correctly follow public procurement rules can have severe consequences. Disgruntled contractors, unable to bid for the work, may have the right to challenge the variation through the courts. They may be able to force the employer to follow an open tender process or demand compensation.
Therefore, whilst the legislation is necessary in order to close a loophole in the public procurement rules, this legislative change will open up further uncertainty in an area that is already a potential minefield.