Carillion and the policy of re-pricing contracts

Somehow I missed this excellent blogpost by Peter Smith last week about the Public Administration and Constitutional Affairs Committee hearing on public sector outsourcing. The whole thing is worth reading, but here's an interesting bit:

"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”."

I do not fully agree with Peter's immediate conclusion of illegality. It may be that what is meant in this context is that the service delivery changed and as such the prices changed as well. This would be legal (within the limits provided for in the Regulations). Even a pure price change might be legal if it met the three criteria mentioned by Peter in his post and present in Article 72 of Directive 2014/24/EU:

(i) the need for modification has been brought about by circumstances which a diligent contracting authority could not foresee;
(ii) the modification does not alter the overall nature of the contract;
(iii) any increase in price is not higher than 50 % of the value of the original contract or framework agreement. Where several successive modifications are made, that limitation shall apply to the value of each modification. Such consecutive modifications shall not be aimed at circumventing this Directive;
 

The burden of proof for the conditions to be met remains with the contracting authority, so in this case evidence would have to be provided that a diligent contracting authority could not foresee the need to increase the price. An of course, the more times the repricing happens to any given contracting authority the less likely it is the test will be met. But who would put forward a complaint even it that was the case? 

In the bigger picture, this is yet another example of what I have been harping for years: the price of regulatory focus in the procedure has moved the pressure points (corruption/illegalities/violation of competition etc) to other areas of the system, namely contract performance and pre-tender launch. 

It is also evidence of the winner's curse at play, but we have known that for ages.

Public Contracts Regulations 2015 - Regulation 72

Regulation 72 - Modification of contracts during their term

Modifying contracts during their performance and how to deal with prospective modifications is a big, big deal and has been problematic for many years. For example, change a contract too much and perhaps the winner would not have won it. More importantly, during contract performance there is zero competition leverage and economic operators are known to take contracting authorities for a ride. After all, a good chunk of Jean Tirole is precisely about contract modifications. I suspect that contract modifications will remain a thorny issue for years to come and a moneymaker for lawyers. Man, why did I ever leave practice?!

Frankly, a decent commentary of this Regulation is probably beyond the scope of a single blogpost. Albert's monster entry is here and I particularly recommend the bit about the "and/or" distinction between Regulation 72 paragraph 1(b) and Article 72 1(b) of Directive 2014/24/EU.

Regulation 72 brings a roster of new(ish) rules to the fore. In general, modifications are possible but within very strict boundaries and only in the specified situations. In the Regulation we can find 5 main avenues to change a contract:

i) if it had been forecast all along in clear and precise terms;

ii) for additional necessary works, supplies or services under certain circumstances (including a maximum expenditure increase of 50%);

iii) due to unforeseen circumstances (without changing contract nature or going over the 50% value threshold);

iv) supplier succession;

v) alterations are not substantial, irrespective of value (!);

vi) alterations have a value under the thresholds, stay within 10% (services and supplies) or 15% (works) and do not change "overall nature" of contract.

The usual interpretative problems remain in this Regulation as the (legal) devil is really in the details as illustrated by Albert's comment mentioned above. What constitutes "clear and precise terms", "substantial alteration" or "overall nature"? To be fair, paragraph 8 considers an alteration to be substantial if any of the conditions mentioned in it is met. However, the examples provided are clear as mud in my view. Trying to consider that an alteration is "substantial" because the revised contract is "material different in character" appears to me to be an exercise in circular thinking.

There are other contractual modification issues that remain unsolved or at least untouched by the Regulation. For example, successive alterations "add up" to the total amounts that may trigger the retendering obligation. So far so good. But who will keep track of this information? Contracting authorities have no interest in do so lest they have to re-tender the contract (something no one really wants to do and economic operators know), so there are no incentives for compliance. And contract management is not exactly a forte in many organisations in the first place. Further, if even during the award stage the use of review systems is uncommon in England and Wales, surely one cannot expect its use to lead to enforce compliance during ontract performance. I am more and more convinced that this kind of information needs to be tracked automatically in one way or another and a procurement ombudsman would not be a bad idea either. Comparing procurement with finance is as if procurement was still in the 1950s with all operations conducted and logged by hand. It does not make sense in 2015.

I suspect the myriad options for increasing the size of the contract will lead to a lot of tactical bidding by economic operators. That is certainly the experience in Portugal where for many years contracts could overrun for 25% before a re-tendering obligation occurred, led to economic operators constantly bidding at least 25% below the price they really wanted to get from the contract, hoping to make the difference during the performance. Many alleged cost overruns were nothing other than the real price being disclosed during contract performance, although I know of many cases where the contract modification leniency was used for rent seeking.