Utilities contracts: Be prepared

Monday 18 April will see the extension to utilities and concession contracts of the principles that have applied to public bodies since April 2015 under the Public Contracts Regulations 2015. The Utilities Contracts Regulations 2006 will be replaced by the Utilities Contracts Regulations 2016, transposing the Utilities Directive 2014/25/EU into law in England, Wales and Scotland. These changes have been introduced to codify case law, simplify procedures, provide additional flexibility and facilitate the market participation of SMEs and start-ups.

So what will this mean for utilities? The key message is that pre-procurement preparation will become obligatory and no longer just best practice. Rushing into a procurement exercise without thorough preparatory work on key issues could be commercially disadvantageous and will also now put a utility at risk of challenge. Some important points to consider:

• Procurement documents must be available online from the date of publication of the relevant contract notice. This is the date of publication of the OJEU notice or, where a qualification system is used instead of an OJEU notice as the call for competition, the date of the invitation to tender or negotiate. The definition of “procurement documents” is broad, covering commercial, legal and technical requirements. This suggests a need for utilities to undergo a productive period of market consultation before issuing of a contract notice. There is debate as to whether this requirement to make documentation available only applies where the relevant document already exists (rather than operating as an obligation to produce it) or whether it constitutes an obligation actually to produce all of the documents with the contract notice. On the latter interpretation, how complete do the documents need to be? There has been conflicting advice, but the assumption should be that all procurement documents do need to be provided
  – not necessarily in final form
  – particularly where the competitive dialogue or competitive procedure with negotiation is used.
• Framework agreements have long been a way for utilities to avoid numerous procurements on the same subject matter but the new regulations place an eight-year term limit on the use of framework agreements by utilities. Moreover, the evaluation criteria both for awarding entry onto a framework and also for the placing of orders under it must now be set out in the procurement documents and the framework agreement itself. While direct awards are allowed as well as mini-competitions, the applicable criteria to determine how a direct award is to be made must also be provided from the outset. This is a huge departure for many utilities which are used to setting the criteria for mini-competitions at the time of call-off and reserving complete discretion when choosing to make direct awards.
• Utilities now have explicit discretion to apply a “lotting strategy” (for example, limiting suppliers to one lot or maintaining the flexibility to award multiple lots to the same supplier). This strategy will need to be set out clearly in the procurement documents and so must be considered at the outset.
• Variations to existing contracts will require a new procurement where that variation is “substantial”. In line with existing case law, a modification will be considered to be substantial where it renders the contract materially different in character from the one initially concluded. A modification with a value below the procurement threshold or which is contemplated in some way in the contract will not require a new procurement. Where a variation is valued at less than 15% of contract value for works contracts or less than 10% of contract value for services or supply contracts, it is similarly exempt from the requirement to carry out a new competition. Utilities will therefore need to consider at the start of a procurement exercise whether the intended contract is flexible enough to accommodate potential future requirements.

The same issues require early engagement from a supplier perspective. Bidders responding to contract notices should be aware of the additional obligations on their prospective employers to provide procurement documents at an earlier stage and need to be ready to respond within the shorter timescales which the new regime allows utilities to set. Bidders should benefit from increased early transparency when preparing tender responses. The controls introduced to limit the term of framework agreements should also provide opportunities to new contractors rather than allowing utilities to extend previously procured contracts.

The changes imposed on utilities by way of the new regulations will result in a significant front-ending of the workload for procuring entities. How many utilities will be prepared for the change?

Stella Mitchell is a partner, Katherine Calder is a consultant and Katy Wall is a senior associate at Berwin Leighton Paisner LLP