On 10 April the Crown Commercial Service issued a procurement policy note entitled “Supply Chain Visibility”. It applies to central government bodies, their executive agencies and non-departmental government bodies (“in-scope organisations”). It does not apply to utilities, local authorities, NHS Trusts or clinical commissioning groups. It is also relevant to contractors that supply in-scope organisations.
What are the key obligations for in-scope organisations?
From 1 May 2018 in-scope organisations must update terms and conditions for subcontracts worth upwards of £25,000 where the relevant prime contract is (a) worth more than £5 million per year; and (b) within the scope of the Public Contracts Regulations 2015.
The updated terms and conditions must include clauses requiring prime contractors to:
- advertise subcontract opportunities on the government’s Contracts Finder portal
- separately report on how much they spend on (a) subcontracting and (b) direct spending with SMEs and Voluntary, Community and Social Enterprise (VCSE) organisations in the delivery of the prime contract
- send a notice to Contracts Finder within 90 days of the subcontract being awarded, specifying to whom the subcontract has been awarded.
Are there any exemptions?
The new obligations do not apply to subcontracts worth less than £25,000, nor to those that were “arranged or existed prior to the award of a contract”.
Also, there appears to be a level of discretion for in-scope organisations to increase the threshold above £25,000 when compliance with the provisions would be “overly burdensome” for suppliers. However, the CCS expects that the conditions will be "relevant and proportionate" for the majority of prime contracts worth more than £5 million per year.
The new clauses will not apply where:
- issues of national security mean that subcontracts cannot be openly advertised
- a contract is to be delivered overseas and resulting subcontracts can only be delivered by in-country partners or where local law or custom means subcontracts cannot be advertised
- the supplier has confirmed that there will be no subcontract spend.
Why is CCS doing this?
These measures are another example of CCS using public procurement to drive broad policy agendas. In this case, the aim is to improve market access to public contracts for SMEs.
Analysis – How will this work in practice?
The note poses a number of interesting questions and issues for in-scope organisations and for contractors alike. While we do not anticipate a hard-line approach to be taken by CCS, stakeholders would no doubt appreciate more clarity. For example, this raises the following questions:
- If all that is needed to increase a threshold is for a supplier to show that compliance would be "burdensome", will the threshold be increased above £25,000 for most contacts? How "burdensome" does compliance need to be? How much can the threshold be increased by?
- What needs to be done to fall within the exemption for "subcontracts that were arranged or existed prior to the award of the contract"? How formal do those arrangements need to be and must they relate specifically to a particular contract?
- It remains to be seen what action CCS will take (if any) if an in-scope organisation fails to comply with the requirements of the note, or implements the provisions in a more relaxed manner than is intended. If there are no specific consequences, it is reasonable for in-scope organisations to ask what the incentive is for them to comply. If prime contractors' obligations to advertise and conduct tenders for subcontracts and report on spend increase, so will their costs. If tender costs cannot be accurately anticipated at the point of tender, contractors may price these conservatively into bids and pass those costs onto in-scope organisations. This net effect may be that in-scope organisations effectively pay a higher contract price so that SMEs are provided with market access. These additional costs may, of course, be offset (or removed entirely) if those tender exercises drive competition and price reductions.
- Would the provisions apply if there is a fault-based termination of a subcontract during the term of the prime contract? It appears that they would. If so, prime contractors may wish to seek indemnification from subcontractors in respect of retendering costs.
So what should you do now?
We are awaiting further engagement directly with CCS to clarify these issues. Until then, we recommend the following.
In-scope organisations
- Include the new standard clauses in all relevant contracts entered into on or after 1 May 2018.
- As a matter of contract management, consider how best to manage the prime contractors’ ongoing reporting requirements so that information can be shared with CCS.
Prime contractors
- Consider the extent to which supply chain arrangements are already in place before contact award. Where possible, if subcontract arrangements can be confirmed prior to a contract award, these would not need to be tendered for after contract award.
- Prime contractors should familiarise themselves with the Contracts Finder and ensure that robust internal processes and tender documents are developed to conduct tender exercises through the portal.
- Consider the costs of complying with these new requirements and the impact that may have on price proposals to in-scope organisations.
SMEs and other subcontractors
- Establish internal processes to ensure that they are regularly checking/receiving notifications from Contracts Finder to ensure that they are aware of any new opportunities that arise.
How can Burges Salmon help?
If you would like to discuss any of these issues further, please contact John Houlden, Patrick Parkin or your usual Burges Salmon contact.