What does the Procurement Bill say about modifying public contracts?

As part of a series of articles on modifying public contracts under the Procurement Bill, Nathalia Perera takes a look at “substantial” modifications under the new regime.

It is likely that over the life of any contract, the parties may wish to amend its terms. Change is a commercial reality - in the current economic climate for example, suppliers are seeking to re-negotiate price to reflect the pressures of the high inflationary environment. In the world of public contracts however, change is regulated.

Under the existing rules, a “substantial” modification or a modification not otherwise permitted under regulation 72 of the Public Contracts Regulations 2015 (PCR) effectively results in a new contract requiring a new procurement. This approach derives from the principles of fairness, transparency, and the requirement not to discriminate against suppliers. In the Bill, the key provisions on modifying public contracts are found in sections 74 to 77 and Schedule 8. So how do the new rules differ?

The new rules will apply to “public contracts” and “convertible contracts”. A convertible contract -  a new concept - is a contract that, as a result of the modification, will become a public contract. An authority may modify a public contract or a convertible contract if the modification:

• is permitted under Schedule 8 of the Bill;
• is not substantial; or
• is a below threshold modification.

In this article, we reflect on the proposed approach to the meaning of “substantial”. The current meaning is set out in regulation 72(8) of the PCR, which largely reflects codified EU case law, notably the Pressetext[1] case. Section 74(3) of the Bill provides that a “substantial modification” would:

1. increase or decrease the term of the contract by more than 10 per cent of the maximum term provided for on award;
2. materially change the scope of the contract; or
3. materially change the economic balance of the contract in favour of the supplier.

These sorts of modifications would not be permitted. Overall, these three sub-provisions provide a simpler approach when compared to the provisions of regulation 72(8). We consider section 74(3) of the Bill below.

Increasing or decreasing contract term

This provides welcome clarification on the effect of changing the term of a contract; there is no directly equivalent provision under the PCR. Helpfully, the quantification in the context of the original contract explicitly applies to an increase or a decrease in term.

In practice, we expect contracting authorities will benefit the most from applying this in the context of an extension e.g. when a re-procurement exercise has been delayed. Where an authority requires a longer extension therefore, it may need to look at Schedule 8 (Permitted Modifications) to navigate its path compliantly.

Where the modification increases or decreases the term of the contract by 10% or less, the contracting authority would not be required to publish a Contract Change Notice (section 75).

Materially changing the scope

Earlier wording in the Bill in connection with this provision made reference to changing the “overall nature” of the contract; this has now been removed which we consider provides more certainty here.

Section 74(5) confirms that “a reference to a modification changing the scope of a contract is a reference to a modification providing for the supply of goods, services or works of a kind not already provided for in the contract” (our emphasis).

Whilst it is a common sense approach that new goods, works or services will change the scope of the contract, we anticipate that the question of materiality will be the focus when assessing compliance with the new provisions. This could pose similar difficulties currently faced in assessing whether modifications extend the scope of a contract “considerably” under regulation 72(8)(d).

Materially change the economic balance of the contract in favour of the supplier

This provision simplifies its equivalent under regulation 72(8)(c), which refers to changing the economic balance in favour of the contractor “in a manner which was not provided for in the initial contract or framework agreement”. There is also a materiality condition, which is new.

Presently, there is no definition of “economic balance”, so as with the current rules, authorities will need to continue to consider each modification on its facts, taking into account the balance of risk in the contract (including payment terms, profit margins, service levels etc). Again, the question of materiality will be a focus here, and arguably provides more flexibility for authorities than under 72(8)(c).

Whilst it remains to be seen if further amendments to this part of the Bill will be made, the proposed changes to the meaning of “substantial” appear to give authorities an increased degree of certainty in assessing changes.

Nathalia Perera is a Legal Director at TLT.

[1] Pressetext v Republik Österreich (Bund) and others [2008] EUECJ C-454/06