Public procurement can be a complex and challenging field. With governments around the world spending an estimated 9.5 trillion dollars a year1 of taxpayers' money on goods and services, effective contracts are the backbone of public good and services, setting out the terms, conditions and expectations for the parties involved.
In recent uncertain times due to COVID-19, the war in Ukraine, conflict in the Middle East, high energy costs and ongoing supply chain issues, variations to public contracts have undoubtedly increased, leading to a growth in procurement litigation and many other challenges. The stakes are high, as poorly managed contract variations can result in penalties for both contracting authorities and contractors.
In the public sector, transparency, fairness, and competition are essential when awarding contracts. These principles ensure that taxpayers' money is spent wisely and opportunities are open to a broad spectrum of bidders so everyone has a chance to bid in equal competition for a contract.
Put simply, contract variations are changes or modifications made to an existing contract after it has been awarded. These changes can be initiated for various reasons in order to address evolving project needs, such as labour shortages, technological advancements, statutory changes, geological anomalies and non-availability of specified materials. Such variations should not fundamentally alter the contract and must be approved by all parties.
Contract variations are not a means to bypass procurement rules. Variations should not alter the overall nature of the contract or unfairly impact on competition. It is crucial to consider whether other potential bidders would have participated in the original procurement process had they been aware of the potential variations. This is particularly important in maintaining a fair and transparent market.
A classic example of a common variation is a contract extension. It's often much more straightforward for the contracting authority in terms of project timescales and cost for an incumbent contractor to continue working on the contract past the original scheduled completion date. This is a situation where both sides are likely to agree that an extension to the contract is commercially sensible and allows the existing relationship to continue.
Safe Harbours – Permitted Modifications
Regulation 72 of the Public Contracts Regulations 2015 (PCR 2015) sets out various safe harbours that allow for an existing contract to be modified during its term without the need for a new procurement process. This regulation is intended to provide flexibility to contracting authorities while encouraging transparency and fair competition. Important questions to ask when determining whether the modification is materially different in character from the original contract are:
- Is it a major change in accordance with contractual procurement documentation?
- Have additional requirements become necessary?
- Were there unforeseen circumstances?
- Is the changing/succession of a contractor necessary?
Adjustments to the contract price may fall under the first of these considerations. Where clear and precise review clauses have been provided in the original contract, stating the scope or nature of possible modifications, there can be little question over whether the variation constitutes a significant material change. Price increases as a result of changing market conditions, supply chain issues or technical reasons which may cause inconvenience or delay to the progress of the works can all be anticipated to a certain extent at the initial contract drafting stage.
The UK Parliament's Procurement Bill2 is currently in its final consideration of amendments and aims to reform the present system, making it quicker, simpler and better able to meet the UK's needs. This includes:
- Opening up public procurement to small businesses and social enterprises;
- Strengthening the approach to excluding suppliers where there is clear evidence of involvement in Modern Slavery practices;
- Consolidating existing procurement regulations into a single regime, removing duplication and overlap;
- Creating a digital platform for suppliers to register their details once for use in any bids, whilst also allowing suppliers to see all opportunities in one place.
Contract variations in public procurement present a tricky balancing act between flexibility and compliance. Clear and transparent documentation at the outset, along with legal expertise in the field, play a pivotal role in maintaining the principles of fairness and competition at all stages of the contract.
This topic was discussed in our webinar 'Insight from an Arbitrator and Procurement Law in Construction with Russell Thirgood and Deok Joo Rhee QC in July 2022. Click here to view the webinar and presentation.
1. World Bank Estimate, 2021
2. Click here for the most recent updates on the UK Parliament's Procurement Bill – HL Bill 171
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.