EU procurement – “Come out from below” – Subcontractors move centre stage

The 2015 Regulations have more to say about subcontracting, in particular by:

• requiring purchasers to obtain and record more about the subcontractors used by a successful contractor to whom they award a contract; and
• a requirement on contracting authorities to pay any undisputed amounts to contractors within 30 days and to ensure this applies down through the supply chain.

Information about subcontractors

The detail of the requirements regarding subcontractors is set out in Regulation 71, which:

• continues the option for purchasers to ask tenderers in the procurement documents to indicate in their tenders what share (if any) of the contract they intend to subcontract and any proposed subcontractors. It adds that this is not to detract from the tenderers' own liability for what is done under the contract.  For more about what needs to be disclosed in the procurement documents, see "EU procurement - Get set and ready before you go – completely set and ready
• where the contract being tendered is for works or in respect of services which are to be provided “at a facility under the direct oversight” of the purchaser, requires the purchaser to ensure that the successful tenderer (referred to in Regulation 71 as the “main contractor”):

   

• provides the name, contact details and legal representatives of its subcontractors who will be involved in such works or services as far as known at the time;
• updates this information with any changes or additions to it to during the contract.

Suppliers and facilities not under the direct oversight of the contracting authority

The requirements in Regulation 71 regarding contracts for works or in respect of services “at a facility under the direct oversight” do not apply to supply contracts, services contracts (other than for services at facilities under direct oversight) or to suppliers under works or services contracts. However, purchasers may extend these requirements to supplies contracts and other services contracts, and to subcontractors of the main contractor’s subcontractors and to contractors further down the subcontracting chain.

Excluding subcontractors

Regulation 71 gives purchasers the right to exclude proposed subcontractors to a tenderer in the same way they can exclude the tenderer itself under Regulation 57 (for more on exclusion criteria, click here). In doing so they must comply with the requirements of Regulations 59, 60 and 61 relating to the use of ESPDs, the means of proof which they can rely on and the use of certificates and other documentary evidence covered by “e-Certis” wherever possible.

Regulation 71 adds that where the verification process has shown that there are grounds for excluding a subcontractor, the purchaser:

• must require a contractor to replace the subcontractor if the ground for exclusion is mandatory; and
• may require contractor to replace the subcontractor if the ground for exclusion is discretionary.

Direct payment of subcontractors

The 2014 Directive gave the option to Member States to provide for direct payment to subcontractors, even to make it mandatory.

In its Consultation Document UK Transposition of new EU Procurement Directives Public Contracts Regulations 2015 Government seemed to suggest that it would include some reference to direct payment to subcontractors. However in their final form the 2015 Regulations make no reference to direct payment. Whilst the reason for this has not (so far as we are aware) been stated by Government, this may be for a combination of the following.

First it is always open to purchasers to include in their contracts provisions for direct payment to subcontractors. Indeed, there are a number of standard forms of construction contract which include “project bank account” options which facilitate direct payment to the supply chain.

Secondly, the 30 day payment requirement in Regulation 113 included in the 2015 Regulations as part of the “Lord Young Reforms” arguably makes direct payment less important.

30 day payment requirement

Regulation 113 applies to all purchasers (except NHS care services providers and maintained schools or academies) as well as contractors and subcontractors.

In summary Regulation 113 requires that purchasers must now ensure that every “public contract” as defined in the 2015 Regulations that they enter into contains suitable provisions to require:

• that they make payment to the contractor no later than the end of a period of 30 days from the date on which the relevant invoice is regarded as valid and undisputed; and
• that any subcontract awarded by the contractor contains suitable provisions to impose, as between the parties to the subcontract, the same 30 day payment terms from the contractor to the subcontractor.

This requirement applies to every contract in the supply chain no matter how far removed from the purchaser.  In other words purchasers must include in the contracts they enter into with main contractors provisions which require the “main contractor” to include the 30 day requirement in the subcontracts they enter into and that the subcontractors do likewise with any contracts they in turn enter into and so on down the supply chain.

Regulation 113 goes on to say that if these provisions are not included in the contracting arrangements then they will be deemed to be included as an implied term.

Purchasers should ensure that they include provisions in the contracts they enter into to properly deal with the 30 day payment requirement to avoid later uncertainty and embarrassment. To that end Crown Commercial Services (CCS) has published "Statutory guidance for contracting authorities and suppliers on paying undisputed invoices in 30 days down the supply chain" (available here).  This includes some general guidance on how to comply with the 30 day payment requirement procedurally and model wording for terms to include in contracts. However, this wording will need to be adapted to suit each particular form of contract.  There will also need to be consistency with other statutory payment obligations e.g. the payment requirements of the Housing Grants, Construction and Regeneration Act 1996 in the case of construction contracts.

The CCS guidance goes on to say that purchasers will be required to publish performance data on the internet starting their performance over financial year 2015/16 and then at the end of each following financial year on their performance (in percentage terms and amount of interest paid) on paying in 30 days to first tier suppliers and contractors over the previous 12 months.  They will also be required to publish annually the total amount of interest they were liable to pay due to a breach of the 2015 Regulations (i.e. whether or not they actually paid it). This figure will need to be published at the end of March 2017 for the 12-month period up to that date and annually thereafter – i.e. the Government has allowed a 12-month grace period to allow purchasers time to change their internal accounting systems to be able to do this.

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