Supply Chain Difficulties in Public Sector Contracting
One of the main symptoms of the current economic crisis is rising prices, for individuals and businesses. Brexit and the Russian invasion of Ukraine are just two contributory factors in fuelling increases in prices across the supply chain in the UK, particularly the cost of raw materials, labour and transport.
We have already looked at how force majeure may be used in private sector contracting to address supply chain disruption in the following podcasts:
Public-private sector contracts often have to be publicly procured and if you are involved in public procurement, whether as a procuring authority or a bidder, high inflation and rising prices only bring uncertainty. The question on the minds of suppliers and authorities alike is what this means for the successful delivery of projects, and whether the new Procurement Bill is likely to provide additional assistance?
During the procurement process
Until the new Procurement Bill is brought into effect next year, we have four main procurement procedures, plus competitive procurements for frameworks. The open and restricted procedures are usually very short and so it is unlikely that supply chain price rises would materially impact a supplier’s price between tender and award. However, the competitive dialogue procedure and the competitive procedure with negotiation usually take longer and so, with the direction of travel of inflation, there is potential for costs to rise between a supplier submitting its pricing and contract award.
The same applies between the award of a framework and the ultimate entry into call-off contracts, perhaps even more so as frameworks typically last 4 years (and then the call-off contracts can last beyond that). The prices submitted to gain a place on the framework are therefore likely to be affected by supply chain price rises if a call-off contract is entered into a few years down the line.
Unfortunately, there is no express provision in the existing procurement rules that sets out how procuring authorities or suppliers are to deal with supply chain price rises and this will not change when the new Procurement Bill enters into force next year with its reduced number of procedures. Historically, procuring authorities tend to include a tender validity period under which suppliers have to maintain their prices, meaning that the supplier bears the hit of a fluctuation in prices. In framework procurements, suppliers typically are not allowed to increase prices from those originally bid to get on to the framework when being awarded a call-off contract and so arguably suppliers on frameworks bear an increased risk when compared to one of the other procurement procedures. Inevitably, suppliers will therefore have to factor potential price rises into their tenders, although this creates risk for suppliers as they will want to remain competitive in order to win the competition and it is not ideal for procuring authorities either as they will not necessarily be achieving best value and may end up paying a premium for the contract in order to absorb suppliers’ potential costs.
Aside from the universal pressure on supply chains, meaning that procuring authorities may be forced to allow suppliers to revise pricing later on in the procurement process in order to have a viable project, both suppliers and procuring authorities may find some assistance in the forthcoming change in award criteria contained in the Procurement Bill. Instead of the focus being mainly on price through the “most economically advantageous tender” procuring authorities will be able to award contracts on the basis of the “most advantageous tender”. This is likely to allow the public sector to have a greater ability to assess the tenders received on the basis of criteria other than price, leaving suppliers more room to manoeuvre.
After the procurement process
Once the procurement process has been carried out and the contract has been awarded and is fully operational, there are two main mechanisms that can be used to adjust pricing.
The first is to use the contractual mechanisms available in the contract, whether that is a price review mechanism whereby prices are reviewed periodically and adjusted accordingly, or the ability to use a variation mechanism to discuss changes with the contracting authority. Clearly these mechanisms have to be present in the contract in the first place, so suppliers should think carefully about what might be needed in the future when reviewing the contract during the procurement process and try to secure the ability to price adjust or at least raise variations with the contracting authority during dialogue/negotiation.
The other option is to seek to rely on the grounds for modification set out in the new Procurement Bill. These are not fail safe but may assist suppliers struggling with supply chain difficulties. Changes to the scope and/or the pricing as a result of supply chain difficulties can be made:
- where such changes are lower than the value of a specific threshold. For goods or services this is 10% of the value of the contract and for works this would be 15% of the value of the contract; and
- where such changes would not increase or decrease the term of the contract by more than 10% of the maximum term on award, change the overall nature or materially change the scope of the contract, or materially change the economic balance of the contract in favour of the supplier.
As the Procurement Bill is still making process through Parliament, it remains to be seen how exactly material changes to the economic balance of the contract will be interpreted but it could prove useful for suppliers in these circumstances.
Another few potentially useful grounds listed in the Procurement Bill:
- the possibility of a change is unambiguously provided for in the contract as awarded and the tender or transparency notice for the award of the contract, and the change would not alter the overall nature of the contract.
- circumstances giving rise to the change could not reasonably have been foreseen by the contracting authority before the award of the contract, the overall nature of the contract is not changed, and the value of the contract is not increased by more than 50%. The reference to unforeseeable is likely to be quite a high bar to meet but there may well be certain supply chain difficulties that are genuinely unforeseeable at the time of contracting, events like Russia’s invasion of Ukraine for example;
- a known risk has materialised that is not the result of the actions of either the contracting authority or the supplier, and the contract cannot be performed to the satisfaction of the contracting authority. For this ground to be used the contract value cannot be increased by more than 50%, the change must go no further than necessary to remedy the issue and it is not in the public interest to carry out a new procurement. In addition, the known risk must have been identified in the tender or the transparency notice awarding the contract, underlining the importance of suppliers giving early consideration to potential supply chain issues and raising these during the procurement process.
There are ways in which suppliers can mitigate the risk of being stuck in either a lengthy procurement process or an operational contract with years left to run whilst watching supply chain prices rise and not being able to do anything about it. The new Procurement Bill builds on the existing rules and contains grounds that will potentially be helpful to suppliers. However, the main message for suppliers is that early consideration of the possibility of supply chain disruption is key – the sooner this is raised with the contracting authority, the more options will be available.
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