Costs can increase in public sector
Framework Agreements and Contracts for several reasons. Suppliers may increase
their prices, or a public sector organisation may need to increase the amount
spent within a Framework Agreement or Contract, which may or may not alter its
value and/or scope.
The maximum worth of a Framework
Agreement or Contract will be determined by the value advertised within the
Tender that led to the public sector Framework Agreement or Contract award.
Regulation 33 of the Public Sector Contracts Regulations 2015 (PCR 2015)
specifies that the maximum length of a public sector Framework Agreement or
Contract can be four years or longer for limited reasons.
Regulation 5 of the PCR 2015 determines
the values at which a public sector Framework Agreement or Contract must be
advertised. The values, including VAT, are determined every two years and are
advised by the UK Government in January of every evenly numbered year.
Regulation 6 of the PCR 2015 governs the
methods for determining the value of a public sector Framework Agreement or
Contract. Public sector organisations must accurately calculate the maximum
value of a Framework Agreement or Contract, generally over four years. The
value must not be calculated to avoid the need for a public sector commercial
pricing exercise.
Where the value of a public sector
Framework Agreement or Contract increases beyond the advertised value of the
Framework Agreement or Contract, or the reason for the cost increase changes
the scope of the Framework Agreement or Contract, the actions required of the
public sector organisation are governed by Regulation 72 of the PCR 2015, which
applies to public sector Framework Agreements or Contracts where:
- The Framework Agreement or Contract value increase
falls above the threshold values stipulated in Regulation 5 of the PCR
2015.
- The advertised value of the Framework Agreement or
Contract has risen by more than 10% for service and supply Framework
Agreements or Contracts, or 15% of the capital value for Works Contracts.
The commercial terms of a Framework
Agreement or Contract will govern how much a Supplier can increase their
prices. If a Supplier increases their costs by more than the amount stipulated
within the Framework Agreement or Contract, the Supplier will breach the
Framework Agreement or Contract if the Terms of the Framework Agreement or
Contract cannot substantiate the reasons for the price increase.
The test of whether a cost increase in a
public sector Framework Agreement or Contract requires a public sector
commercial pricing exercise depends on whether the cost increase is a
“material” increase in costs. Regulation 72 describes several cost increases
that would not trigger a public sector commercial pricing exercise. The
relevant tests are:
- The cost increase does not require modifications to a
Framework Agreement or Contract that renders the Framework Agreement or
Contract materially different, introduce new Terms and Conditions, allow
the acceptance of a Framework Agreement or Contract other than as
specified, change the economic balance of a Framework Agreement or
Contract in favour of a Supplier, extend the scope of a Framework
Agreement or Contract in a way not provided for, or allow the replacement
of a Supplier that was initially awarded a Framework Agreement or Contract
otherwise than provided for within the PCR 2015.
- The value of the cost increase is below the threshold
governing the relevant application of the PCR 2015 and 10% of the
Framework Agreement or Contract value for service and supply procurements
or 15% of the value for Works Contracts, provided that the Cost increase
does not alter the overall scope of the relevant Framework Agreement or
Contract.
- Where additional costs have been incurred that were
not included within the public sector commercial pricing exercise and the
Supplier cannot be replaced due to economic or technical reasons without
causing a significant and major inconvenience as well as an increase or
duplication of costs for a public sector organisation, providing that the
increase in costs does not exceed 50% of the value of the original
Framework Agreement or Contract value.
- Where a cost increase modified a Framework Agreement
or Contract that a diligent public sector organisation could not have
reasonably foreseen, providing the modification does not alter the overall
scope of a Framework Agreement or Contract and the cost increase does not
exceed 50% of the value of the original Framework Agreement or Contract.
- Where the cost increase requires modifications to the
Framework Agreement or Contract, irrespective of their financial value, if
detailed within the Tender, Framework Agreement or Contract documents. The
documents must state in clear and unequivocal terms the scope and nature
of the modifications that can be made and the conditions under which they
may be used, providing that such modifications do not alter the overall
context and nature of the Framework Agreement or Contract or extend beyond
the advertised value of the Framework Agreement or Contract as specified
within Regulation 6 and 72 of the PCR 2015.
- A new Supplier is to replace the Supplier initially
awarded the Framework Agreement or Contract, either due to corporate
restructuring or as the result of a review clause within the Framework
Agreement or Contract, providing that the replacement Supplier meets or
exceeds the qualitative criterion that was initially applied to the
selection of the Supplier to whom the Framework Agreement or Contract was
awarded. The change must not substantially alter the scope or value of the
Framework Agreement or Contract to circumvent the requirements of the PCR
2015.
Satisfying just one of the Regulation 72
tests would not make the cost increase a “material” increase in costs and would
obviate the need for a public sector commercial pricing exercise. However, if
the cost increase falls outside these grounds, it becomes a “material” cost
increase. Therefore, the PCR 2015 will require a public sector commercial
pricing exercise to be conducted unless an exemption applies.
Substantial Supplier price increases
within a Framework Agreement or Contract, without a substantiating reason, will
mean that the Supplier is in breach of the Framework Agreement or Contract, and
the cost increase becomes a material increase in costs under Regulation 72 of
the PCR 2015.
Public sector organisations will breach
Regulation 72 of the PCR 2015 if they fail to undertake a public sector
commercial pricing exercise to mitigate the material increase in costs under
Regulation 72 or if they fail to consider the implications of modifications to
Framework Agreements or Contracts, especially where the modification has cost
or scoping implications.
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