Are Top UK Civil Servants Breaking The (Procurement) Law? Yes, According to PACAC Committee Evidence

Yes, following the UK parliament’s Public Administration and Constitutional Affairs Committee hearing on public sector outsourcing post the Carillion collapse, we’re going for the “clickbait” headlines to try and entice you to read what can sound like fairly dry reports of MPs grilling senior civil servants.

And actually, buried amongst the two hours of material, (you can watch it here), there were some rather striking nuggets. We’ll have several reports on the hearing, but let’s start today with perhaps the most interesting.

The victims for the Committee were David Lidington, the new “Minister for Procurement”, clearly a bright guy but has no background in anything commercial, little clue what he’s talking about, having to read from his notes when asked a tricky question such as “what are the benefits of outsourcing”? (I wondered once or twice whether his brief was based on the submission I sent the Committee, as some of his comments seemed very similar to my words!)

John Manzoni, the Civil Service CEO, has learnt how to speak convincingly when needed without really saying anything, a la Sir Humphrey, although he was interesting at times. He also gets away with saying “we’re just working on that now” quite regularly despite the fact he’s been around for over four years now.  Gareth Rhys Williams, the government’s Chief Commercial Officer, looked and sounded uncomfortable at first but warmed up pretty quickly.

Anyway, to the matter of the day. EU and UK procurement regulations are pretty prescriptive when it comes to changing major contracts post-award. There is an obvious reason for that. The initial competition can be compromised if terms are changed once the contract is in place. I give my brother-in-law the contract because his firm bids low, then I just increase the agreed prices by 20%. That sort of practice raises issue around fairness, transparency and even corruption – issues the EU is pretty keen to address through proper public procurement.

So it was a little surprising to hear this Committee discussion. Asked about contracts that are in difficulties, “we have re-priced in some case” says Manzoni. He then backs off somewhat and says “we have to be careful with regulations”. Really? Tell us more, do explain where you have broken the law!  “Several I can think of where a re-pricing has taken place, where we have got it wrong”.

Rhys Williams then said that we get more detail from open book contracts, we can see how they are doing, and try to price in a fair way – “where vendors are losing money on individual contracts we need to work with them to re-price it or change the spec”.

But the EU and UK Regulations are clear on this.  You can modify a contract if the “need for modification has been brought about by circumstances which a diligent contracting authority could not foresee”, AND the modification does not alter the overall nature of the contract, AND any increase in price is not higher than 50% of the value of the original contract or framework agreement. Even then, you must publish a notice in the OJEU to say you have modified the contract.

Another part of the directive says this. A modification is considered “substantial” if it “changes the economic balance of the contract or the framework agreement in favour of the contractor in a manner which was not provided for in the initial contract or framework agreement”.

So where does “re-negotiating the contract because the supplier isn’t making any money from it” stand in terms of the directives? It would appear to be breaking the rules – it certainly changes the economic balance, and the overall nature of the contract. And of course the key point is that the supplier won the competition on false pretences; I beat you to it by bidding a 5% lower price, but now the government has decided to pay me 10% more than my bid, or has relaxed the specification. So it may well be you deserved to win the contract in the first place.

We do understand where Rhys Williams and Manzoni are coming from on this. There are real dilemmas when suppliers get into “bad contracts” and it is often not in the buyer’s interest either to demand continuation on those terms. It has become a bigger problem in the last couple of years in the UK, as we have seen issues with Carillion, Capita, Interserve and more major suppliers struggling.

But re-negotiation takes us into a very tricky legal area. It might be hard for a disgruntled supplier to challenge such events – how would they even know? But it just needs one executive who has had such negotiations with Manzoni or Rhys Williams to jump from that firm to another, and then challenge, and this could get very messy.

Voices (6)

  1. Dan2:

    Personally I think currently with the (alleged) ‘oligopoly’ of suppliers who all hold a large portfolio of public sector contracts, they look at this in the round “if we challenge this, we risk getting challenged back” and the entire house of cards comes crashing down so they ignore it. I can think of only one challenge received in my career to a contract change – and it was withdrawn as the Supplier had misread it and thought it was a PIN to respond to.

    I’m sure it’s not appropriate for all categories of spend/markets (and possibly not for the larger gov organisations) – but I’d suggest trying to simplify requirements and design out commercial/technical lock-in, in order to reduce the need for renegotiation mid contract (hence the big push for disaggregation in ICT). Ideal world would then to have a realistic option of walking away rather than ‘repricing’.

  2. Dan:

    Sometimes its easier to deal with the legal consequences of a contract change (because they very rarely get challenged as far as I know, as no-one finds out about it) than it is to deal with a strategically important supplier going bust. It really can be the lesser of two evils.

    Of course you should have robust risk management and due diligence measures in place to prevent that from happening, but when a bankruptcy comes as a surprise even to the auditors, there’s only so much procurers can do.

  3. Charlie Middleton:

    There are a few cases in the Public Contracts Regulations where you can change the contract in mid flow. In addition to the one you have quoted, there may be scope in contracts to make changes, eg it could say every 12 months there can be a review of pricing. Also there is a catch all regulation (72(5)) that says the public sector body can make a change of 10% of the initial contract value for services or 15% for works without needing to retender. If the initial contract value is, say, £10m, this gives scope to “give” an extra £1m to a customer through a contract change with no scope for challenge.

    1. Little Acorn:

      I don’t think you’re right here, it’s not substantial if the increase based on the initial value is less than 10% AND less than the threshold. The counter logic to this is therefore it is substantial (i.e. a new procurement if needed) if the increase on the initial contract value is more than 10% OR more than the threshold. So the most a £10m contract can overspend before having to be retendered is the value of the applicable EU threshold (~£118k for central and ~£181k for sub-central contracting authorities.

      1. Peter Smith:

        I think if you are fundamentally changing the balance of the contract in the suppliers favour then that overrides any questions about the 10% (which is more aimed at simple volume increases). the issue is fairness – if another supplier lost out originally because they were 5% more expensive, which is quite feasible, then you give the winning supplier a 5%+ price increase, it is clearly unfair (and not transparent either).

  4. Mr Grumpy:

    In fairness Peter I think many have broken or at worse bent the rules to their advantage.

    However isn’t this a case of where the Regulations are not your friend and become more of a hindrance and the buyer is damned if they do and damned if they don’t essentially. Contracts can and often vary over time. Now in the event they are not covered under the Safe Harbours, It is often or not either a VEAT notice or the madness of another procurement process.

    The Public Sector doesn’t help itself with open book costing approach as they tee off on the Supplier’s margins and extract all of the financial benefit from year 1. So there is absolutely nowhere to go for more value and the Suppliers cost base takes a hammering from then onwards. The huge savings targets most Public Sector bodies are tasked with more than not drives a “Let’s beat up the Supplier” approach in mad dash to the bottom. Eventually the government will clue in to the fact you need to spend to save in most instances.

    The government want top public services, however they don’t want the cost of having to run them.

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