In search of value for money

Local authorities and other public sector organisations are increasingly looking at how they can achieve value for money by varying contracts. Elizabeth Cooper considers the procurement implications.

The government's drive for efficiencies, together with the new push for benefits realisation, is leading to a number of local authorities revisiting their existing contracts. This is to see whether changes can be made to reduce costs or achieve better value for money (vfm). Some are considering extending contracts to save on procurement costs. All of this is being done with laudable aims of meeting efficiency targets year on year and saving council taxpayers' money.

To what extent do public procurement considerations directly conflict with local authorities' ability to deliver vfm from existing contracts? How far can you go in changing your contracts without risk of a procurement challenge?

A great number of local authorities have existing long-term contracts (including PFI and PPP) with many years to run. Could your ability to look at potentially changing or combining services or contracts be fettered by procurement law?

The EU procurement case of Pressetext Nachrichtenagentur v Austria, which sets out factors to be considered where changes to an existing contract may mean that the variation is essentially a new contract award, cannot be ignored. The ECJ held that amendments to the provisions of a public contract during the currency of the contract constitute a new award of a contract when they are materially different in character from the original contract, such as to demonstrate the intention of the parties to renegotiate the essential terms of that contract.

Questions to consider are: would other tenderers have been interested in the contract if it had included such conditions? Have services been included that were not initially covered? Has the economic balance of the contract changed in favour of the contractor in a manner which was not provided for in the terms of the initial contract?

Whereas previously it would be sufficient to look to the variation provisions of the contract to determine the extent to which you could vary it, this case requires you to also consider the extent to which any changes require a new procurement. This will not apply in all cases but as a general rule the more substantial the changes and move away form the original scope, the more likely you are looking at a new contract.

Of course you will need to consider whether procurement is required or not in accordance with the procurement regulations and your own contract procedure rules. Get this wrong and you risk the consequence of an unlawful direct award and the possibility for the contract to be set aside under the new remedies regulations recently implemented into UK law.

For major contracts, including PFI, there are standard form change protocols which recognise that for high value changes the public procurement rules must be considered whether it is the local authority or your contractor which is required to market test and put such changes to works or services out to tender. For example, the variation procedure from the NHS SF3 contract includes in its change procedure consideration of procurement law and whether high value changes require a public procurement.

At least one central government department has taken the bull by the horns and effectively brought together its main IT suppliers to deliver substantial savings in IT costs. No one would question the motive but post Pressetext and implementation of the new remedies regulations is this type of venture entirely risk free?

You may want to extend the contract or add other services. Can you do this? Do the existing terms permit such changes? If yes, then does this mean that you are safe and dry? What did the original OJEU contract notice say regarding scope and value? Here we go full circle to considering Pressetexte and whether this is in fact a new contract award.

The Public Contracts Regulations, as amended, do include two – albeit caveated – provisions for you to negotiate variations to existing contracts (without publication of a contract notice in the OJEU). These are worth considering. The first is where you may want your contractor to carry out additional work or works or provide additional services which were not included in the original contract but which through unforeseen circumstances have become necessary.  However the caveats do limit the potential scope of such changes, including the requirement that the additional contract consideration must not be greater than 50% of the value of the consideration payable under the original contract.

The second way is in the case of a public works contract or a public services contract where you want a contractor to carry out new work or works or provide new services which are a repetition of the work or works carried out or the services provided under the original contract and which are in accordance with the project for the purpose of which the first contract was entered into. Again, check out the caveats carefully as this provision includes a requirement to have included the possibility of such repetition in your original OJEU contract notice.

So what is the solution? Before signing up to a contract variation decide on the scope of what you are aiming to achieve, review the existing contract terms thoroughly, and see what the terms permit. You also need to consider whether you are looking at a new contract and potentially a procurement exercise. Carry out a risk analysis and avoid getting into detailed negotiations with your contractors until you have thought through the issues and risks.

Elizabeth Cooper is a partner in the projects group at Nabarro. She can be contacted on 0114 279 4029 or via This email address is being protected from spambots. You need JavaScript enabled to view it..