Whether or not to divide a procurement into separate lots when offering it to bidders has always been an important strategic procurement decision, often touted as an effective mechanism for enhancing SME participation because of its ability to create more specialist/ discreet/ smaller service lines within a requirement.

However, it is a mechanism that needs to be carefully considered before application. Do you want a spread of suppliers to avoid a single point of failure? How will the market react to smaller contracts? Will there be interoperability challenges for suppliers if you split the wider requirement? Following the implementation of a new procurement regime under the Procurement Act 2023 (PA23): what are the requirements of its noticing regime and do the practicalities of that regime need to be considered from the outset?

In this article we touch on some of the age-old challenges with lotting that featured in procurements run under the Public Contracts Regulations 2015 (PCR) and will continue to test procurement professionals under PA23. However, we also touch on some of the nuances and practical challenges of the new noticing regime when running a lotted procurement. If these issues are something your organisation is tackling or would like a discussion on, please get in touch.

What is lotting?

Lotting is a way of structuring procurements to split the requirements sought into smaller opportunities and contracts. It is often used where a requirement has multiple streams or consists of multiple connected operational needs. The procurement is governed by the overall value of all lots but each lot is usually awarded as a separate contract and should be procured as such. The statutory recognition for lotting in PA23 comes from section 18 of PA23 which obliges authorities to consider the use of lotting and, where it is suitable, either use lotting or explain in a tender notice why it wasn’t used.

Is lotting suitable?

As noted above, whilst there is an obligation to consider lotting, there is no obligation to split a large procurement into a series of smaller ones it if it isn’t suitable. Lotting should only be used if there is a good reason connected to the requirement and/ or market conditions. To force a requirement into a lotted structure, for example where the technical specification clearly shows an interdependency between elements or where the financial modelling shows significant cost increases in multiple contracts (perhaps due to multiple overheads), is not required and conflicts with the overall objectives set out in section 12 of PA23 to achieve value for money and the maximisation of public benefit. The commercial structure must follow the operational need.

So when will lotting be suitable? Reasons can include:

• Where there is a wide geographical reach to the requirement (for example national repairs and maintenance needs) but there are concerns the market cannot deliver across the geographic spread in one contract;
• having regard to removing barriers to SMEs (section 12(4) of PA23) where the authority believes that lotting would increase SME participation as the requirement can be split into smaller volume or single expertise contracts which a leaner operation or start up would be best placed to deliver; 
• the requirement is fundamental to the services delivered by the authority and there is concern around a single point of failure, so the requirement is split, with a view to more than one supplier delivering; or
• the requirement is a combination of existing and new operational needs (for example, repairs and maintenance but with a new requirement for retrofitting) and the authority believes the new need/ developing area would be best delivered by a specialist.

The list above is not exhaustive but it does hopefully show when lotting has been used to good effect, and where it is likely to be used going forward.

When considering suitability, authorities should, however, consider the feedback received from all bidders in the relevant market-place and also be guided by their reflections on the procurement principles in section 12 of PA23 and the wider desire for proportionality in procedures (which comes across especially clear in the provisions on the competitive flexible procedure). Any decision around lotting needs to fit into the wider procurement strategy which will be focused on these principles, and importantly, any such decisions need to be recorded in line with section 98 of PA23.

How do we ensure supply and avoid a single point of failure?

We noted above that one example of when lotting is suitable is where there is a large and fundamental requirement and the authority cannot risk delivery collapsing. In such scenarios the requirement will be lotted so that there are at least two suppliers delivering the requirement and the authority may have rights in the contract to transfer work/ services across the suppliers if issues arise. But how can authorities ensure they get more than one supplier? What’s to stop the same supplier winning both lots?

The answer is section 20(7) of PA23 which specifically allows in a competitive flexible procedure for the authority to restrict what lots a supplier can bid for and/ or win. To avoid all lots being won by the same supplier, the authority can prevent bids to more than a specific number of lots or allow bids for all, but limit the number of lots a supplier can win. PA23 is vague on how an authority can use section 20(7) of PA23 meaning that an authority can tailor restrictions around bidding/ winning lots to its specific needs and commercial model, so long as it can be articulated clearly in tender documents. Tactically for instance, if an authority wants to maximise competition for all lots as the market is small or overridden with work, it might choose to allow bids for all lots. This avoids suppliers only bidding for the higher value/ more desirable lots and leaving scarce competition for the remainder. However, it is generally sensible to keep the final decision on lot allocation at award in the control of the contracting authority as it will have views on how delivery should be spread/ which lots require the strongest tenders.

Nevertheless, caution should be had when restricting bidding or award of lots under section 20(7) of PA23. Any restrictions need to be clearly articulated in the tender notice and associated tender documents to avoid challenges at a later date and to ensure compliance with section 21(5) of PA23 (requirement to provide sufficient information to suppliers in order that they can prepare their tenders). Authorities also need to think quite carefully about how limits on winning lots will play out in practice, certainly where conditions of participation have been set and a supplier's ability to achieve the financial conditions of participation may vary depending on the lots it is awarded.

How early do I communicate my structure to the market?

Lotting, as noted above, will need market support and buy-in. Therefore, even before articulating the structure in your tender notice, it is recommended that the market is engaged through preliminary market engagement. Under section 16 of PA23 (preliminary market engagement) there is strong encouragement for preliminary market engagement to take place and we are strong advocates of its use since it allows authorities to check the market will bid and respond to the procurement in a way that achieves optimal outcomes for the authority.

One particular issue to explore with the market when conducting preliminary market engagement will be restrictions on bidding and how it could change supplier tactics/ appetite for different lots. However another more fundamental question will be whether the lotting approach will achieve the authority's goals. If the primary reason for lotting is to ensure adequate geographic spread, do the regions chosen for each lot align with how the market is structured? If the aim is enhanced involvement of SMEs, do the lots enable this or simply make it easier for large organisations to meet financial conditions of participation and offer more competitive rates? Your commercial and legal advisers can give a view, but ultimately the market will give the most accurate opinion.

When conducting preliminary market engagement, do remember to issue a preliminary market engagement notice per section 17 of PA23 and regulation 17 of the Procurement Regulations 2024.

What happens if I choose not to award a lot?

Most of the points above have been issues that authorities have been wrestling with for years under the PCR. The next two issues, in contrast, are more problematic because of new obligations under PA23.

Historically, if a lot was not awarded under PCR, some form of communication of abandonment was needed to those involved, but there was little public communication of the decision. In contrast under PA23, where an authority chooses to abandon a lot it will need to be explained in one of two new PA23 notices. Which notice depends on the timing for the abandonment decision.

Where a lot is abandoned prior to an award decision, Regulation 27 of the Procurement Regulations 2024 requires the following to be communicated in the contract award notice issued under section 50 of PA23 (in addition to notifying the bidders):

• the title of the lot;
• distinct number given to the lot by the contracting authority;
• relevant CPV codes;
• description of the kinds of goods, services or works which were to have been supplied under the lot; and 
• date when the contracting authority decided to cease the procurement under the lot.

In contrast, where a lot is abandoned after an award decision is announced in a contract award notice, PA23 will require a procurement termination noticed to be issued under section 55 of PA23 in respect of that lot. 

Interestingly there is no need in either the contract award notice or procurement termination notice to explain why the lot was abandoned. However, generally we would expect to see some form of explanation on a voluntary basis. Under PCR case law it was clear reasons had to be given to bidders for abandoning procurements, and there seems no reason why under PA23 this would be different. Section 12(1)(3) of PA23 which requires authorities to have regard to sharing information to explain procurement decisions also supports this view. Therefore, if a rationale must be communicated to the bidders, there would seem few instances where that same rationale could not be shared with the market.

Therefore in addition to authorities determining if it is appropriate to abandon the lot and the risk of challenge from bidders in doing so, they now need to ensure they complete the right administrative steps under the PA23 noticing regime.

What happens if my lotting structure means the individual contracts are below threshold?

The requirement for a contract award notice under section 50 of PA23, a contract details notice under section 53 of PA23 and for contract management notices like the contract performance notice in section 71 of PA23 relate to above threshold contracts. However, in a lotted procurement it is possible to have a situation where some or all lots are below threshold, but the overall requirements taken together are above threshold.

Whilst the procurement would be run as an above threshold procurement, guidance from Cabinet Office on contract award notices suggests that the notice requirements will vary for each lot depending on their value and a lot resulting in an award which is below threshold would not be a public contract. In theory therefore that lot does not require a contract award notice, but given the spirit of transparency under PA23, the guidance still recommends information on those lots is voluntarily published in a contract award notice. Voluntary publication of such information also makes sense because most below threshold contracts still require publication of a contract details notice once the contract is in place (section 87 of PA23).

When handling obligations for contract details notices, as hinted at above, if a lotted procurement results in some below and some above threshold contracts, it is still likely (unless below the threshold in section 7 of PA23) that a contract details notice will be needed for each. The main challenge will be determining the notice content as this differs under the Procurement Regulations 2024 for above and below threshold contracts (see Regulations 32 and 36).

Conclusion

In conclusion, whilst we see strong reasons for lotting procurements, certainly if it will deliver better outcomes for the authority and their end users, we do suggest caution when doing so. Whilst the basic concept is intuitive, working through both its commercial application and the practical administration associated with it takes careful thought and analysis. Our Procurement team are on hand to support if you have questions or need support.