Procurement on Demand – Contract Modifications

Whilst the heart of the Procurement Act 2023 (the Act) addresses how a contracting authority undertakes a procurement process to enter into a compliant contractual arrangement – the Act also deals with what happens when changes need to be made to a contract that is already in place.

The starting point for a contracting authority's thinking around modifications is that, unless there is a permitted ground for modification, any change to an existing contract should be treated as a new contract and undergo a formal procurement procedure accordingly.

Part 4 of the Act, specifically sections 74 to 77 and Schedule 8, sets out the new regime that will apply when a contracting authority seeks to modify a public contract. While most of it will be familiar to procurement practitioners, it is worth noting some key differences that reflect the government's overall approach to the new procurement regime. In particular:

• Additional flexibility – the wording of the Act broadens the existing "safe harbours" in some respects, allow greater scope for modification.
• Increased transparency – sections 75 to 77 contain new requirements:
  • First, to publish a Contract Change Notice before modifying a contract; and
  • Second, to publish the modified contract once it has been varied;
• Broadened application – the Act creates the concept of a "convertible contract" which is a below-threshold contract that will become a public contract as a result of the modification.

  What does the Act say about modifications?

  Section 74(1) allows for a contracting authority to modify a public contract or a convertible contract where:

  Sections 75-78 set out new modification procedures in respect of:

  Light Touch Contracts

  Light Touch Contracts are contracts for light touch services under section 9 of the Act. The list of light touch services – covering health, social,  cultural and other community-based services – is set out in Schedule 1 of the Procurement Act 2023 (Miscellaneous Provisions) Regulations which came out in draft form in June 2023.

  A clear authorisation to modify Light Touch Contracts is a helpful increase in flexibility for contracting authorities that buy light touch services.

  Substantial modifications

  Any modifications that are not substantial are permitted under the Bill.  Section 74(3) defines a substantial modification as a modification that:

• increases/decreases the term of the contract by more than 10% of the term at award;
• materially changes the contract's scope; or
• materially changes the economic balance in favour of the supplier.

  The approach to "substantial" modifications will be familiar to current procurement practitioners. However, something that has been left out of the Act (previously in regulation 72(8) of the Public Contracts Regulations 2015) is the prohibition on the introduction of new conditions that would have allowed for the admission of new candidates. This has always been very difficult to assess and apply in practice and so its removal adds some helpful clarity to what makes a modification "substantial".

  More importantly, materiality now features in the Act's definition of substantial. This still requires a degree of value judgement – but materiality is a concept that courts and practitioners are far more familiar with than how certain conditions may or may not have impacted on procurement outcomes.

  This materiality appears to provide further flexibility for contracting authorities, although we expect that forthcoming Cabinet Office guidance will set some boundaries on this. We also expect this "materiality test" to produce a rich seam of case law in the coming years.

  Below threshold modifications

  Below threshold modifications are described in section 74(4) as being where:

• the modification would not itself increase or decrease the estimated value of the contract by more than 10% in the case of goods or services or 15% in the case of works;
• the aggregate value of the below-threshold modifications is less than the relevant threshold amount for that contract type; and
• the modification does not materially change the scope of the contract.

  This is broad reflection of the existing Regulation 72(5) and so will not be new to procurement practitioners.

  Schedule 8

  Schedule 8 completes the picture on permitted modifications, and it provides some further flexibility because it enhances current modification parameters under Regulation 72.

  A modification is a "permitted modification" under Schedule 8, as follows:

• Paragraph 1: where it is unambiguously provided for:
  1. in the contract as awarded;
  2. in the tender or transparency notice; and
  3. does not change the overall nature of the contract.
• Paragraphs 2-3: where the Act's direct award scenarios apply:
  1. where a direct award is permissible under section 41 (extreme or unavoidable urgency); or
• Paragraph 4: in response to circumstances that were not reasonably foreseeable:
  1. Foreseeability is considered looking back at the time that the contract was awarded; and
  2. The modification must not:
     • ichange the overall nature of the contract: or
     • iiincrease the contract value by more than 50%.
• Paragraphs 5-7: in response to a "known risk"

  A "known risk" is one that:

  1. could jeopardise contract performance; and
  2. has been identified in the tender or transparency notice,

   but, due to its nature, could not be addressed in the contract as awarded.

• Para 8 – necessary additional goods, services or works
  1. Additional goods/services/works must be of the kind supplied in the original contract;
  2. Justification must exist such that using a different supplier would result in different or incompatible goods, services or works that would cause disproportionate technical difficulties or a substantial inconvenience and substantial duplication of costs; and
  3. Such a modification cannot increase the value of the contract by more than 50%.
• Para 9 – novation following a contract following a corporate restructuring
• Para 10 - modification to a defence authority contract to respond to developments in technology

  Transparency

  Section 75 sets out the requirement for Contract Change Notices where a modification occurs:

• The contract change notice must be published before the permitted modification;
• No contract change notices are required for:
  • below threshold changes; or
  • modifications on corporate restructuring.
• The notice itself needs to provide details of the modification (as set out in regulations) stating clearly that the contracting authority intends to modify the contract.

  This requirement chimes with the wider theme of increased transparency that the Act promotes under the new regime. Contracting authorities are required to do more to notify the wider market of their contract modification activities.

  Voluntary Standstill

  Section 76 enables a contracting authority to include a voluntary standstill period in its Section 75 Contract Change Notice. If a voluntary standstill period is stated, it must be not less than eight working days and the contracting authority must not enter into the modification before the end of that period.

  This provides helpful certainty since modifications must be publicised prior to signing, they will benefit from the protections from declarations of ineffectiveness that come from observing a standstill period.

  Publication of modifications

  Section 77 contains provisions requiring the publication of qualifying modifications after they have been implemented. A qualifying modification is:

• a modification that requires a Contract Change Notice under section 75; and
• modifies (or results in) a public contract with an estimated value of over £5m.

1. it is a Light Touch Contract;
2. it is not a substantial modification;
3. it is deemed to be a below-threshold modification; or
4. where it is permitted under Schedule 8.

1. Transparency;
2. Voluntary standstill;
3. Publication of modifications; and
4. Implied termination rights for improperly modified contracts.

1. under section 42 where a direct award is considered "necessary", to protect life or public order.

The modified contract or details of the modification must be published within 90 days from the point a contracting authority makes a qualifying modification.

Implied Termination Rights

Section 78(2)(a) includes an implied right to terminate the contract where the contract is modified in breach of the Act or regulations. 

This enshrines the general principle that procurement practitioners are very familiar with; a modification is to be treated as a new contract unless permitted under Section 74 or Schedule 8 and contracts can be terminated if this principle is breached.

Concluding thoughts

There is a lot to digest with the new Procurement Act, and the detail of the modifications regime is no exception. The new provisions provide some additional flexibility for contracting authorities but the greater transparency requirements will increase administration costs and are likely to result in more challenges since the wider market will have greater awareness of the modifications that are taking place. It is important that contracting authorities start gearing up for compliance now.