Material variations – when will changes to public contracts require a fresh tender process?

How much can an awarded public contract be changed without rendering that contract so different in nature that procurement law requires a fresh tender process to be conducted? This is a question that has often caused difficulty.

Thankfully, regulation 72 of the Public Contracts Regulations 2015 (“Regulations”) introduces some helpful clarity on the position. A recent amendment to the Regulations has also confirmed that regulation 72 will apply to changes to all awarded contracts, regardless of whether they were procured under the Regulations or their predecessor, the Public Contracts Regulations 2006.

This article examines the tests provided within regulation 72, which are used to determine whether a change is material (and hence potentially requires a fresh procurement process), and what contracting authorities will be required to do if they wish to rely on certain elements of regulation 72.

The grounds

Regulation 72 describes a number of changes that can be made to awarded public contracts without triggering a requirement to conduct a fresh tender process. Importantly, a change proposed by a contracting authority will only need to satisfy one of the below regulation 72 tests in order to not be deemed material. We have set the tests out below in the order that we consider is most likely to be useful in practice, rather than the order in which they are listed within regulation 72. If a change does not fall within any of these grounds, the Regulations will usually require a fresh procurement process to be conducted, unless an exemption applies (addressed at the conclusion of this article).

1. The value of the modification is below both of the following values:
a. the relevant threshold governing the application of the Regulations; and
b. 10% of the initial contract value for service and supply contracts or 15% of that value for works contracts, provided that the modification does not alter the overall nature of the relevant agreement.

This ground is useful because the key consideration is the value of the modification. However, the ground may have limited use in practice. For supply contracts commissioned by NHS Foundation Trusts for example, the maximum value of the change would need to be both below £164,176 and 10% of the initial contract value, giving limited room for manoeuvre. A further restriction in using this ground is that, unlike grounds 4 and 5 below, the Regulations consider the cumulative value of the modifications made pursuant to it, meaning that a full 10% of freedom will not be given each time that a further change is proposed.

2. Where the modifications, irrespective of their monetary value, have been provided for in the initial procurement documents in clear, precise, unequivocal review clauses, provided that those clauses:
a. state the scope and nature of the possible modifications as well as the conditions under which they may be used; and
b. do not provide for modifications or options that would alter the overall nature of the contract or framework agreement.

This is a very specific test. It would not, for example, usually be appropriate for the purposes of this test to rely on a general variation clause often found in commercial contracts when making a particular variation. A change falling within the ambit of this test must be clearly and precisely envisaged by the contract, together with the scope and nature of that change and the conditions that must be satisfied for the change to take effect.

However, if at the time of conducting a procurement process it is possible to predict with sufficient certainty and clarity that particular changes are likely to take place during the life of the contract and hence to “future proof” the agreement, this is potentially a very useful ground. Importantly, if a change falls within the scope of this ground, the value of it is immaterial.

3. The modification does not do any of the following:
a. render the contract materially different in character;
b. introduce conditions which, if part of the original procurement procedure, would have:
i. allowed for the admission of bidders other than those selected; or
ii. allowed for the acceptance of a tender other than that originally accepted; or
iii. attracted additional participants in the procurement procedure;
c. change the economic balance of the agreement in favour of the contractor in a manner not provided for in the initial agreement;
d. extend the scope of the agreement considerably; or
e. result in a contractor replacing the contractor that was originally awarded the contract otherwise than provided for under ground 6 (below).

This ground effectively codifies the position from the leading case on material variations (Pressetext) into the Regulations. If the modification falls foul of any of the limbs listed above, a contracting authority will not be able to rely on this ground. Care should be taken when applying these tests as an incorrect application could lead to legal challenge.

4. For additional works, services or supplies by the original contractor that have become necessary and were not included in the original procurement where a change of contractor:
a. cannot be made for economic or technical reasons; and
b. would cause significant inconvenience or substantial duplication of costs for the contracting authority, provided that any increase in price does not exceed 50% of the value of the original contract.

This ground could prove useful in the case of necessary and unpredictable work, especially as it allows a substantial increase in the overall contract price. However, care should be taken when relying on it, particularly in determining and substantiating that change cannot be made for economic or technical reasons and that a change in contractor would cause significant inconvenience or substantial duplication of costs.

If a contracting authority wishes to rely on this ground it will need to publish a notice that it has done so in the Official Journal of the European Union, which will bring (potentially unwelcome) scrutiny to its decision to vary the contract without tendering. On a more positive note, this ground can be used repeatedly, and the 50% value test would be considered afresh each time the ground is validly applied.

5. Where:
a. the need for the modification has been brought about by circumstances which a diligent contracting authority could not have foreseen; and
b. the modification does not alter the overall nature of the contract; and
c. any increase in price does not exceed 50% of the value of the original contract.

Again, caution should be exercised before relying on this ground. The obvious allegation from any potential supplier wishing to challenge reliance on this element of regulation 72 would be that a diligent contracting authority could/should have foreseen the need for the relevant modification. As per ground 4, if a contracting authority wishes to rely on this ground it will need to publish a notice that it has done so in the Official Journal of the European Union, and this exemption can be used repeatedly, with the 50% value test being considered afresh each time the ground is validly applied.

6. A new contractor replaces the body originally awarded the contract, either as a consequence of a review clause or due to corporate restructuring, provided that the replacement contractor fulfils the criteria for qualitative selection originally applied, that the change does not result in substantial changes to the contract, and that the change is not implemented to circumvent the requirements of the Regulations generally.

This element of regulation 72 introduces helpful clarity in the event that there are changes in the identity of the contractor during the life of the contract. If such a change is anticipated during the procurement process and hence provided for in the contract, this ground for change is likely to be satisfied easily. Even if the change is not predictable, this ground allows some latitude for a change in the identity of the contractor where arising from a permitted corporate restructuring or takeover and if it can be established that the replacement body would have satisfied the selection criteria (often applied at PQQ stage) had it participated in the original procurement process leading to the award of the contract.

What if a change is material?

If a material change is to be made, the most common consequence is that a fresh tender process will be required. However, in such circumstances commissioners should consider whether another exemption from the requirement to conduct a process under the Regulations might apply (such as the ability to conduct a negotiated procedure without notice under regulation 32, or to call-off from an appropriate framework agreement). Such options are outside of the scope of this article but are mentioned for completeness, and we recommend that before relying on an exemption specialist legal advice is sought.

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