UK Defence Procurement: Navigating the impact of the Procurement Act

Notwithstanding the recent announcement from the Cabinet Office, that the go-live date of the Procurement Act (the Act) has been delayed until 24 February 2025, anticipation within the defence sector and the wider market continues to build.

Some of the key changes that will be implemented by the Act relate to direct awards. These will see some existing principles continue while increasing flexibility in relation to the direct award of defence and security contracts.

This blog sets out the position on direct awards under the Act, and what this means for stakeholders in the defence sector.

 

Background

Under the Act, competitive procurement will continue to be the default process. In certain circumstances, however, a contracting authority may be able to directly award a public contract to a contractor, if a specific justification applies. The instances in which this might occur are:

• Section 41: Special Case – a contracting authority may award a contract directly where one of the direct award justifications apply. The justifications are similar to those under the Public Contract Regulations 2015 (PCRs); however, the intention of the Act is to simplify and streamline direct awards, and provide additional justifications;
• Section 42: To Protect Life – this extends to human, animal or plant life (or health), and is to be used where a direct award of a contract is necessary for the protection of life of any of these species; or
• Section 43: Switching to Direct Award – this is used where an attempt at a competitive tender has already been considered or taken place but no suitable responses have been received.

 

Section 41: Special Cases

Section 41 specifies the various circumstances or "special cases" in which a contracting authority can invoke a justification in order to issue a contract via direct award to:

• a supplier which is not an excluded supplier; or
• a supplier where that supplier is an excluded supplier, but the contracting authority considers that there is an overriding public interest in awarding the contract to that supplier.

There are a wide range of justifications available under the Act to allow a direct award in special cases. These include:

1. Prototypes and development: where the contract relates to the production of a prototype or other novel goods, for the purposes of testing suitability, researching viability or other research / development. Cabinet Office guidance suggests that any contract awarded under this ground must be restricted to the early stages of design and development and must not include quantity production / supply beyond what is necessary.
2. Single suppliers: where there is a lack of competition owing to either intellectual property rights / exclusive rights or technical reasons meaning that only one supplier can supply the goods or services and there being no reasonable alternative. This is likely to be particularly relevant to some defence contracts due to the complex nature of such contracts and their deliverables. This is also the ground upon which the contracting authority may take account of compatibility issues in respect of new technologies.
3. Urgency: where a direct award is "strictly necessary for reasons of extreme and unavoidable urgency". The Act states that urgency may be deemed as unavoidable where it is: (i) not attributable to an act or omission of the contracting authority; and (ii) could not have been foreseen by the contracting authority. Cabinet Office guidance clarifies that a failure to allow sufficient time to carry out a competitive process will not give rise to a finding of unavoidable urgency. This ground may be important to defence and security contracts which are required to respond to an urgent operational requirement.
4. Defence and Security: there are three specific justifications which are specifically relevant to the category of defence and security contracts:
   • where (in relation to the supply of air or maritime transfer services) the nature of the services is such that a reasonable supplier would not be able to guarantee all of the terms contained in a tender would remain in effect for 10 days following the day of submission;
   • where there is an existing contract between the contracting authority and the supplier and the circumstances are such that it is more appropriate to directly award a new contract rather than amend the existing contract and where the new contract would be a "qualifying defence contract" under section 14(2) of the Defence Reform Act 2014; or
   • where (in relation to a defence authority contract) a direct award is necessary "in order to enhance or maintain the operational capability, effectiveness, readiness for action, safety or security of the armed forces."
The available justifications in respect of defence and security contracts are broad, which allows contracting authorities sufficient flexibility to be able to respond to changes in the geopolitical terrain and national security considerations.

Broadly, these special case justifications for the direct award of contracts largely reflect the position under the PCRs, however the Act does contain some additional justifications, and provides a greater level of detail regarding when these special case justifications will be applicable.

As outlined above, a contract may be awarded to an excluded supplier where a justification applies, and where there is an overriding public interest in awarding such public contract to an excluded supplier. Whether there is an overriding public interest will be determined with reference to the list of overriding public interests set out in section 41(5), which includes a number of defence-specific interests, including where a contract is necessary: (i) to ensure the proper functioning of a sector on which the defence, security or economic stability of the United Kingdom relies; and (ii) if a failure to award the contract would prejudice the conduct of military or security operations, or the effective operation of the armed forces or intelligence services.

 

Section 42: To Protect Life

This new provision allows a Minister of the Crown to present a direct award when they consider it is necessary to protect life. Protection of life extends to humans, animals, and plants, covering both life itself and health.

This section also provides that it may extend to the protection of public order and safety. The drafting has been developed with reference to lessons learnt from the Covid-19 pandemic. The new provisions seek to provide reputable avenues for direct awards against the backdrop of additional requirements to ensure fairness and a stringent process where possible.

The same transparency notice requirements and standstill period requirements will apply, as are discussed below. Additionally, the Minister must create regulations that specify which contracts (or classes of contract) may be directly awarded and keep those regulations under review so that they may be revoked when no longer necessary.

 

Section 43: Switching to Direct Awards

This provision aims to provide an alternative solution for contracting authorities when a competitive tender process has been unsuccessful. This is not a new ground for awarding a direct award under the Act, however it should be noted that this ground is separate from the direct award justifications within Schedule 5 of the Act, as this ground can only be involved where a contracting authority has run a competitive tendering process but is unable to award a contract.

A contracting authority will be unable to award a contract under a competitive procedure where it has not received any suitable tenders as the tenders received fall within the following categories, rendering them unsuitable:

• they have been disregarded under section 19(3)(a) – (c) of the Act, including where tenders are abnormally low;
• they do not meet the contracting authority's requirements or the award criteria under the assessment methodology of the procurement;
• they display evidence of corruption or collusion; or
• they materially breach a procedural requirement in the tender notice / tender documents.

The ability of a contracting authority to switch from a competitive process to a direct award in instances of unsuitability is an important power of the contracting authority, which will help to facilitate efficiency in the aftermath of an unsuccessful competitive procurement process.

 

Direct Awards - Additional Requirements under the Act

There are specific transparency requirements linked to direct awards. Section 44 of the Act provides that a transparency notice must be published by the contracting authority prior to the direct award of a contract. The publication of this notice will kickstart the procurement process for a direct award and will include supplier information and the grounds for the direct award. This is mandatory unlike the voluntary ex ante transparency notice under the PCRs. The requirements for subsequent notices are the same as for contracts awarded following a competitive process (as summarised in Transparency and Confidentiality).

It should also be noted that a mandatory 8 working day standstill period from the date of publication of the contract award notice will apply to most direct award contracts, unless they are awarded under sections 42 or 43 or in the special case of extreme and unavoidable urgency. The contract cannot be entered into during this period.

 

Direct Awards – Single Source Contract Regulations

Alongside the new Act, the Single Source Contract Regulations 2014 (SSCR) are applicable to certain direct awards in the defence sector and were recently updated via the Single Source Contract (Amendment) Regulations 2024. They will be further updated in order to ensure that these dovetail with the Act. Key amendments include a number of updated definitions to more closely reflect the defined terms in the Act, enhanced transparency requirements, a simplified process to speed up direct awards whilst still maintaining the same focus of fairness and accountability.

 

Conclusion: What Does This Mean For You?

Contracting authorities – the justifications for direct awards largely reflect those under the current regime with some additions and broadening in places. Whilst contracting authorities can approach the new regime under the Act with a sense of familiarity surrounding direct awards, they will likely benefit from the additional justifications and widening but need to be aware of requirements to publish a transparency notice and a mandatory standstill period before directly awarding a contract.

Suppliers – the Act embodies a considerable increase in flexibility surrounding direct awards particularly in relation to defence and security contracts. Suppliers may wish to consider this in the development of their goods, services and expertise as suppliers seek to secure valuable contracts via direct award where a relevant justification applies.

 

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 | DLA Piper", and transparency requirements – "Transparency and Confidentiality".

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.