Under most construction contracts, the contractor takes on the ground conditions risk. However, a recent case has demonstrated that the risk can fall on the employer.
At a time of continuing reductions in central funding and radical reassessments of how services are financed and delivered, planning for and acting on contract management and contract review has never been more important.
From our experience of advising on procurements as diverse as waste disposal and social care, we have set out below several key areas and questions for consideration by local government lawyers and your instructing officers when planning your future contracts and reviewing existing contracts.
The law - for the time being (and potentially for some time after Brexit), Regulation 72, Public Contracts Regulations 2015 is still with us. It applies to changes made to a contract even if that contract was procured or entered into before the Regulations were in force. Where you propose to make any change to a contract, it must fall within one of the permitted changes. If it does not then it is unlawful and there is a risk of procurement challenge. As a result planning for a change at the procurement stage, especially for long-term contracts, is vital. If you know something might happen, then make express provision to vary the contract in the future to take account of it (use a clear, precise and unequivocal review clause – “the parties may agree to vary this contract by agreement at any time” is unlikely to protect you).
Day to day operation – this is important both at procurement stage and during the operation of the contract.
- Is what is happening or will happen on the ground reflected in the contractual wording?
- If you are mid-contract, have there been undocumented variations that explain the difference between the contract and the operation? If there are then you should undertake a retrospective assessment of compliance with Regulation 72.
Poor performance - contracts often have performance monitoring and management provisions.
- Are your tools tailored to the sector/service the contract is aimed at?
- Are your performance deductions fair or a penalty?
- If there is an issue with performance during the contract term, are you using all the tools at your disposal?
- If existing measures are not working, then it might be time to think about new tools, but keep in mind that unless you have the power to unilaterally impose the changes the contractor will need to agree.
Money – without express provision, changes to a contract mid-term in relation to money are difficult to justify from a procurement perspective unless they are of very low value. If there is the possibility that the market is liable to change during the contract period, then make provision to alter the price in the contract. In particular:
- Should/can the contract price be benchmarked over time to ensure that the authority does not lose out if the market changes?
- Is there an industry standard that the price can be periodically assessed against?
- If you are benchmarking is there a cap; is it downwards only? Whilst it is tempting to have financial terms highly favourable financial to the authority, tenderers will price in risk, so it is important to think about what is reasonable in the long term.
How are you dealing with inflation – no inflationary increases or inflation in line with particular indices?
Improvements and new ways of working – it is highly likely that both the authority and the contractor will over time think of new ways to work. An effective change management procedure in the original contract drafting can enable the authority to take advantage of this, and if it is sufficiently precise on what can change within the procedure, then it may alleviate concerns under Regulation 72.
Re-procure – it is very tempting to stick with what you know and especially not to voluntarily undertake a new procurement process (given the time and up-front cost we can well understand that). However, authorities should consider whether they can only get the best from their contract if they go back to the market – this will likely be the case if there is no scope to make variations or if your contractor is unwilling to engage. With this in mind, authorities should consider whether periodic break clauses are appropriate.
We can do it better – can the contract be in-housed either direct to the authority or to a Teckal compliant (see Regulation 12, Public Contracts Regulations 2015) vehicle? This can give the authority greater control and flexibility (Regulation 72 will not apply) and may allow for costs savings if the profit element of the private sector is removed.
For more information, please contact Alex Lawrence.
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