UK Defence Procurement: Navigating the impact of the Procurement Act

Introduction

As the new go-live date of 24 February 2025 approaches for the Procurement Act 2023 (the Act), it will be necessary to understand the impact of the Act on the entire procurement lifecycle.

This blog explores the new procedure surrounding contract modifications under the Act, shedding light on what this means for stakeholders in the defence industry.

 

Background

In a similar way to the current regime, the Act acknowledges that instances arise during the lifecycle of a public contract that require modifications to be made to the public contract.

Sections 74 – 77 (inclusive) and Schedule 8 of the Act, set out the process which must be followed when a contracting authority seeks to modify a public contract, once the new regime comes into force. Notably a contracting authority may only modify a public contract if the modification:

• is a permitted modification under Schedule 8;
• is not a substantial modification; or
• is a below-threshold modification.

The Act explicitly deals with the concept of a “convertible contract” at section 74(1). This states that where a contract is below-threshold but will become a public contract as a result of a modification, it is to be treated as if it were a public contract prior to the relevant modification - such that a modification can only be implemented if it is permitted under section 74(1) on the basis of the three grounds (a) – (c) above.

 

Permitted Modifications

Schedule 8 of the Act sets out the grounds upon which a contract change may be a “permitted modification”, such that a new procurement process does not need to be carried out in respect of such permitted modification. Such grounds, for example, include:

Grounds for modification common to the existing regime:

• Modifications that are explicitly provided for in the contract awarded and in the tender or transparency notice for such contract. Additionally, it is essential that the modification does not change the nature of the overall contract.
• Modifications that arise because the circumstances giving rise to such modification could not have reasonably been foreseen by the contracting authority prior to contract award. Such modification must not change the overall nature of the contract and must not increase the estimated value of the contract by more than 50% (with the exception of utilities contracts as defined in section 6 of the Act).

New grounds for modification under the Act:

• Modifications that could be achieved via a direct award of a contract under section 41 of the Act (e.g. if justified on the basis of (i) extreme and unavoidable urgency; or (ii) protection of life - please see our previous blog on direct awards for further details on this).
• Modifications occurring as a result of the materialisation of a known risk and therefore the contract cannot be performed to the satisfaction of the contracting authority. It is essential that the materialisation of risk has not arisen due to any act or omission of either the contracting authority or the supplier and that the modification is necessary in order to remedy the situation. A contract modification can only take place in lieu of the award of a new contract, where awarding a new contract would not be in the public interest, and as above the modification cannot increase the estimated value of the contract by more than 50% (with the exception of utilities contracts).
• A “known risk” in this context is a risk that was considered by the contracting authority as having the potential to jeopardise satisfactory performance of the contract, but due to its nature could not be addressed in the contract as awarded. The risk must have been identified in the tender or transparency notice with a reference to possibility of modification.
• The contracting authority should consider whether awarding a new contract would be “in the public interest”, the Act suggests considering whether a new contract would provide “more value for money” and operational and technical matters also.
• Modifications for the provision of additional goods, services or works where using a different supplier would lead to incompatibility with the goods, services or works supplied under the existing contract resulting in: (i) disproportionate technical difficulties or other significant inconvenience; and (ii) the substantial duplication of costs for the contracting authority. As above the modification cannot increase the estimated value of the contract by more than 50% (with the exception of utilities contracts).

Additionally, there are new, additional specific permitted grounds for contract modification in relation defence authority contracts:

• Where a modification of a defence authority contract is necessary to: (i) take advantage of developments in technology; or (ii) prevent or mitigate adverse effects of such developments; and
• Where a modification of a defence authority contract is necessary where: (i) the supply of goods, service or works are necessary to ensure the armed forces maintain their “operational capabilities, effectiveness, readiness for action, safety, security, or logistical capabilities”; and (ii) the modification is necessary for the continuous supply of goods, services or works.

The grounds for contract modification under the Act represent a widening of the existing regime due to the inclusion of new grounds for modification. Cabinet Office guidance explains that this is due to a desire to promote flexibility in order to allow contracting authorities to deal with the challenges of managing a contract. However, the Cabinet Office have sought to maintain a balance by increasing transparency requirements alongside the grounds for contract modification – this is explored further below.

 

Non-Substantial Modifications

The Act provides that a contract modification will not be a substantial modification, provided that it does not fall within the grounds of what is a “substantial” modification under section 74(3) of the Act. If a contract modification is non-substantial, then a new procurement process will not need to be carried out in respect of such modification.

A substantial modification is one that would:

• increase or decrease the term of a contract by over 10% of the maximum term on award;
• materially change the scope of the contract (that is, as detailed in section 74(5), a change to the type of goods, service or works to be supplied under the contract that was not already provided for in the contract); or
• materially change the economic balance of the contract in the supplier's favour.

 

Below-threshold Modifications

Under the Act, another ground for being a permissible modification is where a modification is below-threshold this is where:

• the modification itself will not increase or decrease the estimated contract value by:
• more than 10% for goods or services contracts;
• more than 15% for works contracts;
• the aggregated value of below-threshold modifications is less than the threshold amount for that type of contract;
• the modification will not materially change the scope of the contract; and
• the modification is not otherwise a Permitted Modification or not a substantial modification.

As under the existing regime, the Act includes a concept of aggregated below-threshold modifications. As per section 77, it will not be acceptable to enact a series out below-threshold modifications, thereby ensuring the modifications are permissible, where collectively the modifications would aggregate as above threshold.

 

Modifications During Procurement Process

Section 31 of the Act, provides as to how and when the terms of a contract can be modified during the procurement process.

• In an open procedure, changes can be made before the deadline for submitting tenders.
• In a competitive flexible procedure, changes are allowed before the deadline for submitting a request to participate, or if there has been no invitation for requests to participate, the deadline for submitting a first or only tender.

Additionally, in a competitive flexible procedure, there are some circumstances where a modification (or modifications) can be made prior to the deadline for submitting the tender for assessment, without the need to initiate a new procurement process, where it is: (i) a light touch contract according to section 9 of the Act; or (ii) where the modification is not substantial. A substantial change in this context is where: (a) it would permit suppliers not participating to submit a tender; or (b) if the modification was reflected in the tender notice or tender documents, one or more participating suppliers would not be a participating supplier, or one or more non-participating suppliers would be participating. Modifications made which are not permitted by (i) or (ii) will be a breach of the Act.

 

Transparency Requirements

In an effort to improve transparency under the Act, there are various transparency obligations associated with contract modifications.

• A contract change notice compliant with section 75 of the Act, must be published on the central digital platform prior to modification of a public contract (this does not apply to defence and security contracts). Such contract change notice may provide for a voluntary standstill period of not less than eight working days, before a modification may be implemented;
• If the contract is valued at over GBP5 million, the contract as modified must be published within 90 days of the modification.

However, it should be noted that these requirements do not apply to defence and security contracts. Other exceptions also apply in various circumstances, including a general de minimis exception where the modification increases or decreases: (i) the value of a goods or services contract by 10% or less; a works contract by 15% or less; or (ii) the term of a contract by 10% or less of the maximum term provided on award.

Please see our previous blog on "Transparency and Confidentiality" for more information on this.

 

Conclusion: What Does This Mean For You?

Contracting authorities – the Act aims to enable greater flexibility when modifying public contracts throughout the procurement lifecycle. However, it will be important for contracting authorities to be able to accurately identify under which ground any permitted modification may fall, and, where possible, plan for any potential changes that may need to be made or can reasonably be foreseen ahead of time before initiating the relevant procurement process. Contracting authorities will need to ensure that they are alive to the increased transparency obligations associated with the increased flexibility and they can meet the additional administrative requirements.

Suppliers – the greater flexibility afforded by the Act, means that suppliers should be open to the potentially increased possibilities for contract modifications. Suppliers may wish to consider the likelihood of future modifications in the early stages of the procurement process. Confidentiality concerns may arise due to the transparency requirements associated with contract change – please see our previous blog "Transparency and Confidentiality" for further insights on this topic.

 

Further information

Please refer to our previous blogs where we consider the provisions of the Act relating to exclusions, debarment, termination and national security – "Exclusions, Debarment, Termination and National Security", transparency requirements – "Transparency and Confidentiality", and Direct Awards – "Direct Awards".

Please contact the authors if you have any questions, or if it would be useful to discuss anything further.

This publication is intended to be a general overview and does not create a lawyer-client relationship. It is not intended to be, and should not be used as, a substitute for taking legal advice in any specific situation. DLA Piper will accept not responsibility for any actions taken or not taken on the basis of this publication.