Regulation 72 – Modification of contracts during their term

Commentary

Regulation 72 PCR2015 transposes the rules on contract modification from Article 72 of Directive 2014/24/EU. 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 the 2014 Nobel in Economics Jean Tirole work is precisely about contract modifications. 

It is interesting to note that the transposition alters the structure of the provision and groups some limitations (Regulation 72(2) PCR2015) in a way that eliminates repetition and slightly simplifies it. Regulation 72 does not transpose the possibility under Art 72(1)(d)(iii) of Directive 2014/24/EU for contracting authorities to assume themselves the main contractor’s obligations towards its subcontractors, since this was not included in Regulation 71 PCR2015. This does not represent any infringement of the transposition obligations.

Regulation 72 brings a roster of new rules to the fore, which mainly aim to consolidate pre-existing case law of the CJEU. In general, modifications are possible but within very strict boundaries and only in the specified situations. In the Regulation we can find 6 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. 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. Trying to consider that an alteration is “substantial” because the revised contract is “material different in character” appears 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 doing so lest they have to re-tender the contract (something no one really wants to do and economic operators know), so the incentives for compliance are limited to the instances where the contracting authority knows for sure it is complying with the legal requirements.

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 contract performance. There are good arguments to support 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, something it does not make sense in this day and age.

It should be stressed that there can be a need for limited renegotiation as the implementation of the contract progresses, particularly in longer running contracts, as contractors and contracting authorities might be faced with unexpected situations that require an adjustment of the contract. What we cannot find a justification for is if renegotiation occurs right before or shortly after the award of the contract.

In any event, renegotiations should cover secondary issues related to the subject-matter of the contract such as liability, risk, insurance or guarantees but without changing the basic or fundamental elements of the contract (Regulation 72(4) PCR2015). In addition, it is conceivable that negotiations may cover scope, delay and price as long as the changes introduced do not alter the essence of the contract.

In consequence, changes in the basic, substantial or fundamental elements of the contract should lead to the termination of the existing contract and its re-tendering, as established by Recital 107 of Directive 2014/24/EU.

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Last modified: December 5, 2016 by Pedro Telles

72.—(1) Contracts and framework agreements may be modified without a new procurement procedure in accordance with this Part in any of the following cases:—

(a)where the modifications, irrespective of their monetary value, have been provided for in the initial procurement documents in clear, precise and unequivocal review clauses, which may include price revision clauses or options, provided that such clauses—

(i)state the scope and nature of possible modifications or options as well as the conditions under which they may be used, and

(ii)do not provide for modifications or options that would alter the overall nature of the contract or the framework agreement;

(b)for additional works, services or supplies by the original contractor that have become necessary and were not included in the initial procurement, where a change of contractor—

(i)cannot be made for economic or technical reasons such as requirements of interchangeability or interoperability with existing equipment, services or installations procured under the initial procurement, and

(ii)would cause significant inconvenience or substantial duplication of costs for the contracting authority,

provided that any increase in price does not exceed 50% of the value of the original contract;

(c)where all of the following conditions are fulfilled:—

(i)the need for modification has been brought about by circumstances which a diligent contracting authority could not have foreseen;

(ii)the modification does not alter the overall nature of the contract;

(iii)any increase in price does not exceed 50% of the value of the original contract or framework agreement.

(d)where a new contractor replaces the one to which the contracting authority had initially awarded the contract as a consequence of—

(i)an unequivocal review clause or option in conformity with sub-paragraph (a), or

(ii)universal or partial succession into the position of the initial contractor, following corporate restructuring, including takeover, merger, acquisition or insolvency, of another economic operator that fulfils the criteria for qualitative selection initially established, provided that this does not entail other substantial modifications to the contract and is not aimed at circumventing the application of this Part;

(e)where the modifications, irrespective of their value, are not substantial within the meaning of paragraph (8); or

(f)where paragraph (5) applies.

(2) Where several successive modifications are made:—

(a)the limitations imposed by the proviso at the end of paragraph (1)(b) and by paragraph (c)(iii) shall apply to the value of each modification; and

(b)such successive modifications shall not be aimed at circumventing this Part.

(3) Contracting authorities which have modified a contract in either of the cases described in paragraph (1)(b) and (c) shall send a notice to that effect, in accordance with regulation 51, for publication.

(4) Such a notice shall contain the information set out in part G of Annex 5 to the Public Contracts Directive.

(5) This paragraph applies where the value of the modification is below both of the following values:—

(a)the relevant threshold mentioned in regulation 5, and

(b)10% of the initial contract value for service and supply contracts and 15% of the initial contract value for works contracts,

provided that the modification does not alter the overall nature of the contract or framework agreement.

(6) For the purposes of paragraph (5), where several successive modifications are made, the value shall be the net cumulative value of the successive modifications.

(7) For the purpose of the calculation of—

(a)the price mentioned in paragraph (1)(b) and (c), and

(b)the values mentioned in paragraph (5)(b),

the updated figure shall be the reference figure when the contract includes an indexation clause.

(8) A modification of a contract or a framework agreement during its term shall be considered substantial for the purposes of paragraph (1)(e) where one or more of the following conditions is met:—

(a)the modification renders the contract or the framework agreement materially different in character from the one initially concluded;

(b)the modification introduces conditions which, had they been part of the initial procurement procedure, would have—

(i)allowed for the admission of other candidates than those initially selected,

(ii)allowed for the acceptance of a tender other than that originally accepted, or

(iii)attracted additional participants in the procurement procedure;

(c)the modification changes the economic balance of the contract or the framework agreement in favour of the contractor in a manner which was not provided for in the initial contract or framework agreement;

(d)the modification extends the scope of the contract or framework agreement considerably;

(e)a new contractor replaces the one to which the contracting authority had initially awarded the contract in cases other than those provided for in paragraph (1)(d).

(9) A new procurement procedure in accordance with this Part shall be required for modifications of the provisions of a public contract or a framework agreement during its term other than those provided for in this regulation.