The Public Contracts Regulations 1996: Establishing the most economically advantageous offer

Under the Regulations, the contracting authority must state whether it will select its tender on the basis of the “lowest tender” or the “most economically advantageous tender”. If the latter, it has to set out the criteria it will use to evaluate the tenders received (as the Letting and McLaughlin cases above demonstrate).

In the following case, the issue was whether the contracting authority had acquired sufficient material in relation to pricing to permit a proper determination as to which was the “most economically advantageous” offer before it selected the successful tenderer.

Henry Bros (Magherafelt) Ltd, & Ors v Department of Education for Northern Ireland [2007] NIQB 116, Henry Bros (Magherafelt) Ltd, & Ors v Department of Education for Northern Ireland [2008] NIQB 105 and Henry Bros (Magherafelt) Ltd, & Ors v Department of Education for Northern Ireland [2008] NIQB 153

The Department of Education, acting through the Central Procurement Directorate (CPD), launched a procurement process for the award of a framework agreement for Northern Ireland’s programme for schools modernisation.

The framework agreement was to last for four years and the estimated total value of projects to be awarded under it was to be £550 - £650 million. There would be eight participants. The specific projects to be awarded were to be based on the NEC 3 Standard Form of Contract. Tenders would be evaluated in accordance with the weighting set out in the invitation to tender documents, namely 80% qualitative and 20% commercial.

The CPD awarded a framework agreement on the basis of the most economically advantageous tenders to eight successful contractors. The claimant contractor was unsuccessful and sought further information as to the basis on which the CPD reached its decision.

When provided with information regarding the assessment of price criteria, the claimant contractor instituted a legal challenge to the CPD’s decision, contending that CPD had not acquired sufficient material at the tendering stage in relation to pricing to permit a proper determination as to which was the most economically advantageous offer.

CPD’s pricing process

The CPD adopted the following pricing process:

  • During the tendering period - i.e. at the primary competition stage - tenderers were required to specify their fee percentages and indicative fee percentages for design services in relation to a number of bands of hypothetical values. This was the only information directly relating to price tenderers were required to provide before the CPD made its decision as to the eight members who would be chosen to join the framework agreement. Tenderers were not required, at the primary stage, to submit a price for or cost a representative sample or historic contract.
  • During the term of the framework agreement, a secondary competition was required when the CPD identified a specific contract to be awarded. At this stage, each of the eight members of the framework agreement would be given a project brief, including a budget, and would be required to comment on the budget and identify savings and potential risks. CPD’s assessment team then would chose which contractor was, in its view, able to deliver the best value for money.
  • The chosen contractor would (as successful tenderer) enter into further discussions on an “open book basis” with the CPD’s costs manager for the purpose of developing the design and establishing specific prices for materials, plant and staff etc.. If prices were agreed, CPD would issue a construction notice. If no such agreement was reached, the CPD would commence discussions with a different member of the framework agreement.

In short, the ultimate contract price for each contract awarded by CPD would be developed from a “pricing process” rather than as part of a competition between the members of the framework agreement at the secondary competition stage.

Rationale for CPD’s pricing process

CPD’s rationale for adopting the above pricing process was:

  • Fee percentages were a good criteria at the primary competition stage: they were the key financial differentiator between contractors under NEC 3 forms of contracts.
  • Competitive tendering at the primary competition stage based solely on price encouraged a “low bid/high claim” culture and was a flawed process. Instead, CPD needed to identify the most economically advantageous offer over the whole life of the framework agreement, to develop optimal solutions and improvement in rates/prices.
  • The Regulations did not require either:
    • pricing to be done against sample projects at the primary competition stage which left too much opportunity to contractors to amend their rates and prices after the award; or
    • outturn cost to be required at the primary competition stage (although the CPD did concede that further information would be required from the selected contractors at the beginning of the secondary stage to determine the outturn cost).

Objections to CPD’s pricing process

The claimant contractor argued that CPD’s pricing process was flawed because:

  • Although price was not expressed as a mandatory element of the “most economically advantageous” offer criterion, the natural meaning of the word “economically” meant that a component of the assessment must involve analysis of the comparative price or cost of each bid. This would involve a comparison of what was to be provided for the price or the cost to be paid.
  • The measurement against fee percentages was defective because they were not capable of providing an accurate assessment of outturn cost - a factor which was essential in measuring the most economically advantageous offer.
  • The pricing process permitted specific contract prices to be established through one to one dialogue. This was contrary to the general principles of competition law.

The issues

Was it legitimate to use fee percentages for the purpose of determining the most economically advantageous tender?

Was it legitimate to establish costs/price after completion of the secondary competition stage?

The court’s approach

The court found that the Department’s evaluation model, which relied on percentages fees, was flawed because it was based on the incorrect factual assumption that underlying costs would be the same for all tenderers. In this case, the percentage fee alone was not sufficient for determining the actual cost of any individual project. Additional information was required, namely specific rates and costs. However, these were only going to be established following discussions between the Department and the successful contractor, which would have taken place after the completion of the competitive stages of the procurement process.  

In the judge’s view such a procedure did not comply with the Regulations and was not consistent with transparency, equal treatment of tenderers and the development of effective competition.

It is worth noting that the court did not rule out the possibility of fee percentages being used as a legitimate pricing mechanism provided that, as a minimum, this involved the competitive establishment of specific prices/costs (to which such percentages should be applied) at the call-off stage of the competition, possibly followed by a further check by the costs manager to safeguard against abnormally low bids.

Editor’s comments: Must price always be determined under competitive conditions?

The court did not determine the issue of whether price must always be a criterion in determining the most economically advantageous tender, although the court did appear sympathetic to such view. What the court essentially said in its judgment was that to the extent that price was an evaluation criterion this must be determined under competitive conditions.

Accordingly, as already discussed, the court did not rule out the possibility of fee percentages being used as a pricing mechanism provided that this also involved the competitive establishment of specific prices/costs (to which such percentages should be applied) at least at the call-off stage of the competition and with the possibility of following this by a further check by the costs manager to safeguard against abnormally low bids.

Remedies for breach of the Regulations

The claimant contractor contended that the court should set aside the framework agreement and award it damages in relation to any contracts which the contracting authority had concluded pursuant to the framework agreement. It relied upon McLaughlin and Harvey Limited v Department of Finance and Personnel (No.3) [2008] NIQB 122 (reported in this Updater above).

Would the court set aside the framework agreement?

The court approved the McLaughlin approach (analysed in this Updater above), holding that the framework agreement was not a species of contract within the scope of the Regulations and the court therefore had the power to set aside a framework agreement under Regulation 47(8).

In reaching this decision, the court took into account the fact that under the framework agreement in question (like the framework agreement in the McLaughlin case), CPD did not guarantee the award of any specific contracts to any of the successful tenderers.

Was the new Remedies Directive relevant?

In the McLaughlin case, the court did not consider the effect of the new remedies directive which expressly defined “contract” as including a framework agreement. However, in the Henry Brothers case the Department argued that since the new remedies directive now explicitly provided that the definition of contracts included framework agreements the provision in the Regulations that “contracts” could not be set aside once concluded, should be interpreted as also covering framework agreements.

However, the court rejected this argument essentially for the following reasons:

  • national courts had an obligation to construe domestic legislative provisions in the light of the objective and overall purpose of a directive rather than focus on any specific terminology. In the court’s view (and in line with the court’s view in McLaughlin), there were qualitative differences between a contract and a framework agreement; and
  • while in the case of specific contracts there was a balance to be struck between limiting the right of aggrieved parties to one of damages and the interests of the third party contractors and the public for whose benefit the contracts were to be performed, in the case of framework agreements an inability to set them aside had the potential “to be much more damaging particularly to the public in whose interest the Community principles of transparency, equality, non-discrimination and open competition (were) to be observed”.

It is worth noting that the court accepted that with regard to call-off contracts that had already been awarded under the framework agreement the only remedy available was that of damages.

Editors’ comments: setting aside framework agreements

It is arguable that the court’s approach in seeking to interpret the new remedies directive as not including “framework agreements” within the meaning of a “contract”, despite the specific reference in that directive to the contrary, was based on at least some misunderstanding of the nature of framework agreements and a generally strained purposive interpretation of that legislation. It remains to be seen whether the High Court in England will follow the same approach. It is also worth noting that the Department has now decided to appeal.

View: Henry Bros (Magherafelt) Ltd, & Ors v Department of Education for Northern Ireland [2007] NIQB 116, Henry Bros (Magherafelt) Ltd, & Ors v Department of Education for Northern Ireland [2008] NIQB 105 and Henry Bros (Magherafelt) Ltd, & Ors v Department of Education for Northern Ireland [2008] NIQB 153