UK: Procurement Update: Flexibility For Public Sector Development Agreements?

Case Update: Edenred: Material Change

The recent case of Edenred (UK Group) Ltd v Her Majesty's Treasury & Ors [2015] UKSC provides useful guidance on the issue of "material change" and highlights the importance of preparing a full and clear specification prior to launching a public procurement exercise.  

The Supreme Court concluded that Authorities may alter contracts to extend the scope of the goods, works, services to be provided in certain circumstances. In the Edenred case, changes to the original contract were lawful as they were envisaged by the original procurement exercise and clearly covered by the language used in the procurement documentation.

Although the case involved an outsourcing contract, the issues discussed are equally relevant to the purchase of goods and works by contracting authorities.

Background

After a lawful public procurement exercise NS&I awarded an outsourcing contract to Atos in 2013.  Under the contract, NS&I outsourced its operational services including customer and back office functions such as IT services, accounting, printing, customer services etc. At that time NS&I also provided services to other public bodies (known as business to business or B2B services). The outsourcing contract was intended to include all back–office services which NS&I would need to deliver the B2B services.

The contract notice for the original contract explained that the service provider would be required to provide operational services to other public bodies. The notice stated that the service provider would be required to provide all the services that NS&I need to enable it to deliver B2B services. It also stated that NS&I intended to increase the value and range of B2B services during the lifetime of the outsourcing contract and the initial estimated contract value included the potential increase in value of B2B services. 

In 2014 Her Majesty's Treasury (HMT) asked NS&I to operate the tax-free childcare system (TFC) on its behalf. Under this arrangement NS&I would provide all of the services that would be needed to implement TFC. The provision of the operational services for TFC were classified as B2B services. On this basis NS&I altered the original contract with Atos to include the specific detail regarding delivery of the additional B2B services which were required to operate TFC.

Edenred challenged the contract variation and argued that the inclusion of these additional services was a material change to the original contract. They argued that the changes were substantial modifications which extended the scope of the original contract considerably (within Regulation 72(8)(d) of the Public Contracts Regulation 2015). On this basis, they argued, the changes were unlawful and HMT and/or NS&I were required to conduct a new public procurement exercise to appoint a supplier to provide the TFC services.

Judgment

The Supreme Court applied the Public Contracts Regulation 2015 to the issue despite the fact that these Regulations were not in force at the time the change was proposed or the claim being launched.

The Court observed that a public body cannot agree to modifications which extend the scope of the contract or framework agreement considerably (Regulation 72(8)(d)) and a change to a contract "extends the scope of the contract or framework agreement" if it changes the contract to encompass services not initially covered. However, in this case the Supreme Court ruled that no material change had been made as the services were clearly covered by the original procurement exercise.

When are services initially covered by the original contract?

The nature, scale and scope of the contract is determined by reference to the original contract notice, procurement documents and contract. In Edenred's case the contract notice and procurement documentation covered services required to support NS&I and enable NS&I to provide B2B services to other departments. The explanation of the B2B services in the contract notice and procurement documentation was deemed sufficient to encompass the additional services.

The decision turned on the specific facts and language used in the original procurement documentation including the contract notice. The Court concluded that, in this instance, all tenderers had been aware that they would be required to deliver B2B services. The tenderers capability and capacity to deliver the B2B services was evaluated during the evaluation stage. The fact the services were not included in the original contract did not preclude NS&I from requiring the provider to deliver these properly procured services at some later date during the term. 

It was also key that the original contract was for £600million but the estimated contract value provided for a potential increase in value up to £2bn. The additional services relating to TFC increased the contract value no higher than this original estimated contract value stated in the contract notice. In addition, the inclusion of the additional services did not change the economic balance of the contract as the providers profit margins remained the same in respect of the additional services.

Development Agreements

Long term contracts including development agreements often require modification to deal with changing circumstances. Despite this the scope of contract variations is restricted when the agreement has been publicly procured. However, the Edenred case provides useful guidance to those designing projects where change is anticipated and greater flexibility is required. 

The Court, in Edenred, makes it clear that Authorities may, in certain circumstances, alter contracts to extend the scope of the goods, works and services to be provided. The scope of a public contract can be modified to include additional goods, works or services of the same nature and type as those originally procured if such changes were included in the procurement documentation and tenderers were aware that they may be required to deliver the services during the term. 

When preparing project documentation Authorities must think carefully about future requirements or potential change to requirements and policies and should not assume that the specification is a living document that can be changed at will and will evolve during the contract term. Where flexibility is required, the Authority should build this into the original specification and other procurement documentation. A procurement exercise can cover 'optional' services, the Authority is not required to actually purchase such services from the provider. The Authority can choose whether to take up the optional services at a later date during the contract term without risk that the change will be deemed material.

The Edenred case also confirms that Authorities should consider the total value of goods, works and services that may be required under the contract during the term and include this in the estimated contract value at the outset of any procurement. If an Authority sets an estimated contract value range, with an upper limit covering both core and additional services, this will provide useful evidence that the additional works, goods and services were envisaged by the original contract.

However, the contract value alone is unlikely to be enough to demonstrate that the additional works, goods or services of a different type or nature were encompassed by the original contract. The exact wording of the published procurement documentation, including the specification, is key to defending a procurement challenges to contract variations and it is vital that the requirements published during the procurement are complete and are drafted so as to cover all potential works, goods and services which the provider may be called upon to provide during term.

In practice this will mean that the more the tender documentation  can do to anticipate changes which may be made to a scheme, the less risk there will be where those anticipated changes are made.  Even so the scope must be clear and have limits. Edenred is not authority for an open ended tender exercise and open ended future changes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.