Regulation 46 – Division of contracts intolots

Commentary

Regulation 46 of the Public Contracts Regulations 2015 (PCR2015) transposes Article 46 of Directive 2014/24/EU and upgrades the rules on division of contracts into lots.

One of the biggest changes introduced by Directive 2014/24/EU is the new preference for division into lots, which aims to promote participation by small and medium-sized enterprises (SMEs) and to make procurement easier, more accessible for smaller suppliers by dividing contracts into smaller chunks. However, this logic can be seen as flawed in two accounts: one, it can destroy the value of aggregation by increasing the transaction costs for the contracting authority (and to a certain extent) to suppliers who want to bid for multiple lots as they now need to submit multiple bids. Two, it is a competition law nightmare by facilitating collusion immensely, particularly if similarly sized lots are used. Issue two will be more pressing on sectors where there are either limited suppliers or where collusion is already prevalent. Issue one will be largely an empirical difficulty and will require careful calculations on the net benefits that can be derived from the division of contracts into lots and the ensuing increase in administration costs.

Rules on division into lots

The rules on division of contract into lots attracted significant attention during the reform process that led to the adoption of these new rules after the European Commission proposed a rule on division of contracts of a value above 0.5mn Euro whereby contracting authorities would have to provide reasons for decisions not to split those contracts into lots–hence setting a presumption or expectation for contracts to be generally divided into lots (see Article 44 of the 2011 Proposal and A Sanchez-Graells, “Are the Procurement Rules a Barrier for Cross-Border Trade within the European Market? — A View on Proposals to Lower that Barrier and Spur Growth” in C Tvarnø, GS Ølykke & C Risvig Hansen, EU Public Procurement: Modernisation, Growth and Innovation (Copenhagen, DJØF, 2012) 107-133). 

The final version of the rule, now in Article 46 Directive 2014/24/EU is softer, less prescriptive regarding the need to subdivide contracts into lots, merely indicating that contracting authorities may decide to award a contract in the form of separate lots and may determine the size and subject-matter of such lots (Regulation 46(1)). However, the principle of “divide or explain” has remained as a general rule. Indeed, Regulation 46(2) PCR2015 requires that contracting authorities provide an indication of the main reasons for their decision not to subdivide contracts into lots. Thus, Article 46 of the Directive 2014/24/EU and Regulation 46 stop short of mandating the use of lots or prescribing any particular strategy to undertake them. The key point is that although lots should be used, they do not have to and all the contracting authority needs to provide is a justification for it.

Consequently, in our view, the rule (or at least the expectation) is that contracting authorities need to make an effort to determine whether they can divide the contract into lots and, only if there is a plausible reason not to do so, tender a single contract for the entirety of the object of the procurement. Moreover, the explanations provided for their decisions not to divide the contract into lots should be open to challenge, among other reasons, on the basis of the general principles of procurement (Regulation 18 PCR2015) and, notably, the principle of competition.

In terms of rules, if lots are to be used the ifs, buts and hows need to be spelled out from the start in the tender documents or contract notice. After setting up this general framework, Regulation 46 PCR2015 goes on to establish rules whereby contracting authorities can establish restrictions on the possibilities to tender for one, for several or for all of the lots (Regulation 46(3)) and, even where tenders may be submitted for several or all lots, limit the number of lots that may be awarded to one tenderer, provided that all this information, including the maximum number of lots per tenderer, is stated in the contract notice or in the invitation to confirm interest (Regulation 46(4)).

In case any of these restrictions are employed, contracting authorities shall indicate in the procurement documents the objective and non-discriminatory criteria or rules they intend to apply for determining which lots will be awarded where the application of the award criteria would result in one tenderer being awarded more lots than the maximum number (Regulation 46(5)). And where more than one lot may be awarded to the same tenderer, contracting authorities may award contracts combining several or all lots where they have specified in the contract notice or in the invitation to confirm interest that they reserve the possibility of doing so and indicate the lots or groups of lots that may be combined (Regulation 46(6)). In the abstract, it is difficult to see how this can be done transparently as different combinations of lots may lead to different winners, therefore creating the risk of steering contracts to a preferred supplier. Having said that, it also creates uncertainty into the system and the extra variable may create issues for cartels and candidate collusion.

From a broader perspective, it is worth stressing that these rules consolidate possibilities that already existed under the previous rules (as none of them were explicitly prohibited) and allow for contracting authorities to take a more sophisticated approach to lot division. The legislator has decided not to make use of the possibility foreseen in Article 46(4) of Directive 2014/24/EU, whereby Member States may render it obligatory to award contracts in the form of separate lots under conditions specified in accordance with their national law and having regard for Union law.

Impact on SMEs

Division of contracts into lots is an issue of particular relevance in terms of SME access to procurement and with an immediate effect on competition for the public contract, and in the market concerned. Hence, applying these rules in an adequate manner is of utmost importance. For additional discussion of these issues, please see A Sanchez-Graells,  Public Procurement and the EU Competition Rules, 2nd edn (Oxford Hart, 2015) 347-352; and I Herrera Anchustegui, “Division into lots and demand aggregation – extremes looking for the correct balance?”, in GS Ølykke & A Sanchez-Graells (eds), Reformation or Deformation of the EU Public Procurement Rules (Cheltenham, Edward Elgar Publishing, 2016) 125-145.

Proposed citation: Albert Sanchez-Graells & Pedro Telles, (2016) Commentary to the Public Contracts Regulations 2015, available at: www.pcr2015.uk.

Last modified: September 5, 2016 by Pedro Telles

46.—(1) Contracting authorities may decide to award a contract in the form of separate lots and may determine the size and subject-matter of such lots.

(2) Contracting authorities shall provide an indication of the main reasons for their decision not to subdivide into lots, which shall be included in the procurement documents or the report referred to in regulation 84(1).

(3) Contracting authorities shall indicate, in the contract notice or in the invitation to confirm interest, whether tenders may be submitted for one, for several or for all of the lots.

(4) Contracting authorities may, even where tenders may be submitted for several or all lots, limit the number of lots that may be awarded to one tenderer, provided that the maximum number of lots per tenderer is stated in the contract notice or in the invitation to confirm interest.

(5) Contracting authorities shall indicate in the procurement documents the objective and non-discriminatory criteria or rules they intend to apply for determining which lots will be awarded where the application of the award criteria would result in one tenderer being awarded more lots than the maximum number.

(6) Where more than one lot may be awarded to the same tenderer, contracting authorities may award contracts combining several or all lots where they have specified in the contract notice or in the invitation to confirm interest that they reserve the possibility of doing so and indicate the lots or groups of lots that may be combined.