Small can be beautiful

Jack Hayward looks at a route by which public procurement awards to mutuals and the SME sector could be exempt.

The government’s initiatives on localism and mutuals inevitably raise questions as to how far contracting authorities can give preference in the award of contracts to such organisations. The EU Teaty or the Treaty for the Functioning of the EU (TFEU) as it is now known expressly prohibits discrimination on the grounds of local preference. This view has been reinforced by cases such as Du Pont de Nemours and Commission v Ireland (the Dundalk Case), where attempts to give priority to local suppliers failed.

In addition, the European Court of Justice now appears to be using the equal treatment principle to impose for contracts outside the directives obligations on specific issues that are very similar to the explicit obligations applying under the directives (SECAP v Comune di Torino).

Elected members and officers frequently find these restrictive rules frustrating. However, there is a little used opportunity to soften the effect of TFEU and the cases by using the exception set out in Article 9(5) of the Directive and PCR reg.8(12). This is designed to encourage contracting authorities to divide contracts into lots in order to provide opportunities for small and medium sized enterprises as part of the attempt by the Commission to assist that sector.

This is motivated by the realisation that the aggregation rules tend to lead to the award of contracts to larger entities. This is often a by-product of the award of framework agreements, particularly over a long period.

PCR reg 8 (12) provides that where the value of a contract for works is less than one million Euros (£679,090), or for supplies or services worth 80,000 Euros (£54,327), that contract may be excluded, even though the directive/regulations would otherwise apply because the total value of relevant contracts under the aggregation rules exceeds the threshold.

The authority may take advantage of this exemption for contracts worth up to 20% of the total value of the lots. These provisions appear to affect only the exempt lots themselves: the value of the exempt lots may not be disregarded in determining the value of the non-exempt part of the contract. In other words exemption for lots may be used only where:

• each is worth less than the maximum value for exempt the relevant type of lots, and
• together the exempt lots account for less than 20% of the total value of the work.

No doubt the contracting authority’s own financial regulations would normally set out a structure for awards below threshold. However since small lots for works can be as high as £679,000, they may not be suitable particularly if they are purely on an RFQ basis.

Points to note regarding small lots:

• The fact that 20% of the contract value is being reserved should be mentioned in the OJEU advertisement
• The contract award must still comply with the underlying TFEU values of transparency and non-discrimination
• Best value provisions will still apply
• The additional work involved in awarding the exempt lots will add to the overall management cost of the process
• On large capital projects consideration will have to be given to the interface with the main contractor which may also have a detrimental effect on project costs
• They can be used with frameworks. However, there may be difficulties around thresholds where mini-competitions are the selection tool.

Jack Hayward is a consultant procurement solicitor. He can be contacted on This email address is being protected from spambots. You need JavaScript enabled to view it..