Our firm's series of Procurement on Demand insights will assist contracting authorities, bidders and practitioners alike in getting to grips with the key changes and issues that may arise as a result of the Procurement Act 2023 (the 2023 Act).
The 2023 Act reforms are set to "shake up our outdated system and improve the way procurement is done" (as per the 2023 Act short guide for suppliers published on 13 November 2023). It will introduce an enhanced focus on supplier performance, which represents a radical change to on-going contract performance management and will potentially have a significant impact on bidder's rights to compete for future opportunities.
This Procurement on Demand provides an overview of some of the new contract management requirements set out at Part 4 of the 2023 Act. Public contracts will have new implied terms, there will be requirements for contracting authorities to publish information about supplier performance and payments, and sub-contractors may be insisted to enter into legally binding arrangements by contracting authorities.
At present, the messaging is that these transparency obligations will only apply to contracts under the 2023 Act (i.e. would not have retrospective effect), however our firm's procurement team will be keeping a close eye on developments and further guidance published.
Implied terms
The use of terms to be implied into contracts by law or by statute typically serve to reflect reasonable expectations, balance unequal bargaining power between the parties and/or for reasons of justice and policy.
There are a series of terms that will be implied into every public contract by the 2023 Act which have the following effects:
- Section 67 of the 2023 Act – contracting authorities must accept and process electronic payments that meet certain minimum standards, which have been set by reference to standards adopted by the British Standards Institution such as being in the 'required electronic form'; and
- Section 68 of the 2023 Act – sets out that contracting authorities must make payment within 30 days of receiving an invoice from a supplier unless that invoice is disputed, it is a concession contract or utilities contract awarded by a private utility, or to contracts awarded by a maintained school, academy or sixth form college.
The implied terms do not prevent a contracting authority from requiring the use of a particular system in respect of electronic invoices (section 67(6)) and the parties will remain able to agree shorter payment periods (section 68(7)). However, any terms included in contracts which seek to restrict or override these implied terms will not have legal effect in accordance with the 2023 Act.
It is therefore key that contracting authorities, and suppliers, are aware of these terms that will form part of the contract to ensure that invoices are compliant and paid on time, with any potential dispute in relation to an invoice being raised promptly. The parties may wish to go further and specifically include these terms in contracts to ensure certainty.
Supplier performance
Publication requirements
There also a number of changes that focus on publication of certain information by contracting authorities regarding supplier performance:
- Section 69 of the 2023 Act – with the exception of private utilities, contracting authorities will be required to publish a 'payments compliance notice' every six months (with a reporting period ending 1 March or 30 September, as appropriate). The payments compliance notice will need to set out information detailing that authority's compliance with its obligation to make payments within 30 days of invoices.
- Section 70 of the 2023 Act – contracting authorities will need to publish information on a quarterly basis about any single large payment of over £30,000 made (note that this may be subject to change by secondary legislation). The information must be published within 30 days of the end of the quarter in which the payment was made. This will not apply to utilities, concession contracts or contracts awarded by a maintained school, academy or sixth form college.
- Section 71 of the 2023 Act – sets a further publication requirement for contracting authorities who have set and published key performance indicators (KPIs) in accordance with section 52 (requiring a minimum of three KPI's be set for contracts worth over £5 million). At least once a year a contracting authority must assess the supplier's performance against those KPI's and publish information on that performance. This will not apply to private utilities.
Poor performance
The poor performance notice is an extension of the existing discretionary exclusion ground for past poor performance under the Public Contracts Regulations 2015, which was narrowly drafted and not widely used. In comparison to the 2023 Act of which the provisions are much more prescriptive and detailed. In fact, section 71(5) of the 2023 Act has a considerably low threshold as it seems that no actual breach of contract is required to give rise to the publication of a poor performance notice.
Poor performance notices will need to be published where a supplier has:
- Breached a public contract, with that breach resulting in termination, partial termination, an award of damages or an agreed settlement; and / or
- If a contracting authority thinks that a supplier
- is not performing the contract to its satisfaction; and
- having been given a proper opportunity to improve performance, they have failed to do so.
Perhaps most significantly, if a poor performance notice is published, the 2023 Act allows all contracting authorities to potentially exclude the supplier from future procurements and terminate existing contracts if a poor performance notice has been published. However this is only possible if the supplier cannot show that the unsatisfactory performance/breach is not likely to re-occur.
This will mean that suppliers will be held to account for their contractual promises and there are significant impacts that flow from this, including exclusion. The 2023 Act also provides for a central debarment list, which will be publicly available and contracting authorities will be required to consider it as part of their procurement processes. This is likely to cause bidders some concern until it is seen how this list will work in light of the potential impact that being listed may bring.
Further, suppliers will need to be alive to KPIs and respond promptly to improve performance should any poor performance allegations be raised. This also could be a tool for rival suppliers to challenge authorities who have not exercised their discretion to exclude suppliers who have had a poor performance notice.
For authorities, this provision purports to be an additional safeguard against contracting with suppliers that do not deliver on their contractual obligations. However, a clear trail of correspondence will be important to ensure decision-making is tracked and is readily defensible should suppliers push-back in light of the potential serious consequences of a poor performance notice.
Sub-contracting
There is also a new power for contracting authorities under section 72 of the 2023 Act to insist that suppliers enter into legally binding arrangements with subcontractors who are fulfilling parts of the contract. Whilst this is a discretionary right, this would inevitably serve to assist both parties in understanding their respective obligations and reduce the risk of a dispute later down the line.
If a supplier fails or refuses to enter into a legally binding contract with a subcontractor, this could result in the contracting authority either refusing to award the public contract, directing that the supplier must enter into a contract with another appropriate subcontractor or, if the contract has already been entered into, terminating it.
Further, pursuant to section 73 there will be a newly implied payment term into sub-contracts that are equivalent to section 68 (which requires payment to be made within 30 days of receipt of an invoice unless they dispute it or consider it invalid). This is regardless of what the sub-contract actually says. In practice, it will be interesting to see the extent to which subcontractors would feel able to enforce this term against lead suppliers.
What do contracting authorities and suppliers need to know?
It will be important for contracting authorities and suppliers to familiarise themselves with what the new contract management requirements are and adapt their processes, particularly to have sufficient resource in place throughout the procurement process to monitor performance and subcontracting arrangements.
As ever, any challenges for breach of procurement legislation need to be made promptly, so be sure to consider what training your teams might need on how the new legislation impacts your obligations and the applicable timescales.
