The aim of all of these new developments is to try to bring more consistency and predictability to the way of working with the UK public sector.

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1 20 August 2013 UK Public Procurement Law Digest: Policies, Policies, Policies By Alistair Maughan The UK and EU procurement law landscape in 2013 has been notable for the relative lack of interesting and novel cases. But, to entertain us all, the UK Cabinet Office has proved that procurement policies are like buses: sometimes, they all just seem to come at once. This issue of the UK Public Procurement Law Digest looks at 4 separate policy announcements that will affect the way in which bidders on public sector projects will be evaluated and how the interaction between contracting authorities and bidders will be managed. WHAT ARE THESE POLICIES? The Cabinet Office policies cover, firstly, three closely related areas where authorities need to assess and evaluate various aspects of bidding entities and, secondly, a New Ways of Doing Business initiative. The new policies cover: Bidder past performance; Bidder financial risk; and Promoting tax compliance. The aim of all of these new developments is to try to bring more consistency and predictability to the way of working with the UK public sector. The Cabinet Office s New Ways of Doing Business initiative includes a new model contract, proposed by the Cabinet Office as the future template for the majority of material public sector ICT procurements. The model contract sets out revised approaches to issues such as capped pricing, limitation of liability, ownership of intellectual property rights and payment upon termination. POLICY ON BIDDER PAST PERFORMANCE It has been a source of frustration in many parts of the UK government for some time that the public sector has been seemingly unable to take account of concerns about a bidder s past performance on a contract for one part of government when assessing a bid for new work to another part of government. In the light of the perceived problems with many public sector ICT and outsourcing projects in the past, it s perhaps surprising that it has taken until now for the UK government to produce a centralised policy designed to take account of bidders past performance when assessing the award of future government contracts. The Cabinet Office s procurement policy note is designed to address this issue Morrison & Foerster LLP mofo.com Attorney Advertising

2 The policy applies to the procurement by UK central government departments and agencies of goods and services with a value of 20 million or more in relation to ICT, facilities management or business process outsourcing. For such projects, contracting authorities will be required to take a consistent approach to the consideration of bidder past performance, and ensure that their tender documents include minimum standards for reliability based on bidders past performance. To give effect to this policy, bidders will be asked to provide specified information, including certificates of performance, about their past performance on central government contracts over the previous 3 years. Contracting authorities should then satisfy themselves that bidders previous government contracts have been satisfactorily performed in accordance with their terms or, where there is evidence that this has not been the case, that the reasons for such failure will not recur if the bidder were to be awarded the new contract. The type of evidence that will, in the future, be required for central government contracts includes a statement of the main goods sold or services provided by that bidder in the previous 3 years. This may be limited by relation to the types and categories of goods and services required under the contract now being awarded in order to obtain more focused evidence. Bidders will also be required to obtain certificates from those departments where the previous services were required. If a certificate can t be obtained, the certification may be provided by the supplier itself. If a contracting authority remains unsure whether previous contracts have been satisfactorily performed after review of this evidence, the correct course of action is to exclude that bidder on the grounds that it has failed to meet the minimum standards of reliability. Contracting authorities don t have to accept the evidence that a bidder has submitted. Any department may seek to verify information provided for example, by asking other departments for input. There is a requirement, of course, to treat all bidders equally when considering whether to verify such data. Indeed, that principle underlies the policy generally. The Cabinet Office has reminded contracting authorities that there is a key requirement to observe the fundamental principles of equal treatment and non-discrimination, transparency and proportionality guaranteed by the Public Contracts Regulation. The Cabinet Office has re-issued the standard government pre-qualification questionnaire to reflect the contents of this procurement policy note. For many years, the supplier community has feared the possibility of an informal blacklist of bidders by central government departments. In reality that has not transpired. The system of procurement by the UK government has remained largely contract-by-contract or department-by-department. Individual departments have not taken steps to read-across to other parts of government and look at bidder performance elsewhere. This has exacerbated some of the criticism by the bodies charged with oversight for the UK procurement system, such as the National Audit Office and the Public Accounts Committee. POLICY ON BIDDER FINANCIAL RISK The policy on bidder past performance does not, however, extend to potential concerns about a bidder s financial situation, including, for example, whether it may have been taken over by a foreign entity Morrison & Foerster LLP mofo.com Attorney Advertising

3 Looking beyond the specifics of previous bidder contract performance, the Cabinet Office has also issued guidance on how contracting authorities should assess bidders financial standing and financial risk. This policy is designed to assist authorities to mitigate financial risk through both financial and non-financial means. In part, the need for this public policy note stems from the increased financial risk inherent in the economy as a result of the on-going recession. However, it s also worth remembering that it remains a key target of the UK government to encourage participation in the procurement process by small and medium-size enterprises (SMEs). In August 2103, the government set a target that 50% of new ICT spend by central government should go to SMEs. While a laudable aim, by definition SMEs have fewer resources than larger providers and may be more susceptible to financial instability. It s likely that the need for risk mitigation in relation to SMEs will have been a driver behind the new policy. The policy note provides advice for contracting authorities on the assessment of bidders financial standing during a procurement exercise. Such financial assessments are intended to assess the risk to the public sector which would result if a potential bidder were to go out of business during the life of a contract or have inadequate financial resources to enable it to perform the contract. Also, a proper financial assessment provides a basis for elimination from a procurement in justifiable circumstances where a potential provider is in a present financial state that might pose an unacceptable risk to the public sector. A number of general principles apply: (a) Public bodies should undertake a financial assessment of bidders in a manner which is proportionate, flexible and not overly risk-averse. The essential goal is to ensure that value is delivered to the taxpayer and that public bodies comply with the relevant procurement laws. (b) All potential providers should be treated fairly and with equal due diligence. There is no basis for discriminating against SMEs or, indeed, public service mutuals, simply because they do not fit into standard boxes in a financial structure. (c) The policy note confirms that a bidder s financial standing is only to be considered as part of the overall bidder selection criteria. It should not be taken as proxy for a bidder s ability or inability to deliver its solution. (d) In general, the Cabinet Office considers that authorities should ask for accounts for the past 2 years of trading or, if those are not available, other information that is sufficient for assessment purposes. If a potential provider (e.g., an SME or public service mutual) has only been recently established and doesn t have 2 years of accounts, authorities should exercise flexibility. (e) The Cabinet Office stresses that credit rating reports can be useful to provide a view of bidders financial standing. But these are not appropriate as the sole assessment tool and are not a substitute for the examination of accounts and other documentation provided by bidders. (f) The Cabinet Office recommends that public bodies should not impose arbitrary minimum requirements on contract limits (i.e., size of contracts that can safely be awarded to particular bidders) set by turnover because these might have the effect of barring SMEs or new businesses from bidding Morrison & Foerster LLP mofo.com Attorney Advertising

4 (g) The Cabinet Office suggests that contracting authorities ought to take a risk-based approach to the need for business insurance. There is no minimum level of insurance coverage required by law. Authorities should ensure the required cover is proportionate and reflects the nature of the work to be done and the risk involved. (h) The Cabinet Office addresses the need for a deed of guarantee or other performance bond but fails to provide helpful guidance as to when such extra contract protections may be necessary. (i) Finally, the Cabinet Office suggests that public bodies should look at other methods to mitigate risk without recourse to financial instruments e.g., contract management and monitoring procedures, step-in rights in contracts, or escrow arrangements where appropriate to protect particularly important software and technology assets. POLICY ON PROMOTING TAX COMPLIANCE The third of the Cabinet Office s recent policy notes addresses the issues of how authorities ought to use procurement to promote good tax compliance by providers to government. This policy note coincides with a key initiative by the current UK government to promote tax compliance and create a disincentive for companies that bid for government contracts to use aggressive tax avoidance techniques. The new policy applies to all bidders on central government contracts with a value of 5 million or more. The Cabinet Office will require authorities to ask relevant questions at the pre-bid stage that require bidders to state whether their tax affairs have given rise to a criminal conviction for tax-related offences or to a penalty for civil fraud or evasion, or whether any tax returns submitted after 1 October 2012 have been found to be incorrect as a result of HMRC challenge. If a supplier has to answer yes to any of these questions, it must provide further detail about any incident of noncompliance and the penalty applied. It may also provide details of any mitigation undertaken. Where a supplier declares that it has had an occasion of non-compliance, the contacting authority can decide whether to exclude that supplier from the procurement process. The Cabinet Office intends to issue further guidance as to how to assess suppliers responses to these questions and HMRC will offer a point of contact for support for central government departments on issues arising. Interestingly, this policy note does not go as far as many thought it might. Some government departments have previously included appropriate tax compliance as a contract requirement and reserved for themselves a right to terminate a contract in the event that a bidder s tax behaviour is found to be unlawful or if a bidder engages in aggressive tax-avoidance behaviour that brings the government department into disrepute. The point is to ensure that government departments are not found to be entering into contracts with companies which practice aggressive tax avoidance techniques. NEW WAYS OF DOING BUSINESS INITIATIVE The Cabinet Office s New Ways of Doing Business initiative is intended to be the first of a number of projects aimed at standardising the way that the UK government does business with its strategic suppliers. It's a key goal Morrison & Foerster LLP mofo.com Attorney Advertising

5 of the Cabinet Office to introduce more standardisation across the range of government departments and the major contracts that are put in place with suppliers. This is all part of an over-arching commercial agenda from the Cabinet Office designed to increase value for money and, it hopes, make it easier for suppliers to know what to expect from government. There will be three main changes introduced as a result of the New Ways of Doing Business initiative. Firstly, a new set of standard contract terms for large-scale service provision will be put in place. Secondly, the Cabinet Office will apply a supplier management approach that maximises the value received from these contracts. Thirdly, there will be a new performance management and reporting regime to demonstrate whether value is being achieved. So far, the only change that has become apparent is the new model agreement which has been prepared by the Cabinet Office along with the Government Legal Service. The aim is to create a contract which is user-friendly or at least more user-friendly than the previous model ICT terms issued by the Office of Government Commerce. In putting the new model in place, the Cabinet Office has aimed to provide further precedent drafting for key schedules and consolidate clauses which require commercial input into specific annexes for ease of completion. The Cabinet Office also claims to have reflected issues that have arisen in the past and addressed new commercial structures. There are some helpful developments in the new model. These include new anti-bribery provisions inserted following the introduction of the Bribery Act 2010; the introduction of insolvency events that deal with alternative business structures; and equality provisions updated following the introduction of the Equality Act The Cabinet Office has also tackled the various issues that were previously of concern. So, for example: Supply chain protection: the authority may name and shame suppliers that do not pay their subcontractors within 30 days; Financial distress: the Cabinet Office has opted for a short-form version of the financial distress schedule which would generally be more acceptable to the bidding community; Insurance: the Cabinet Office has amended the insurance provisions to recognise that, in most cases, bidders will seek to use their own corporate policies and market practice rather than put in place project-specific insurance; Due diligence: the Cabinet Office recognises that there may now be a need for post-contract validation of certain commercial assumptions and has provided a structure to allow that to happen; and Promoting tax compliance: in pursuance of the procurement policy note already described, the model terms include a warranty and duty to note for the authority any occasion of tax non-compliance. The model terms also include an amended position on intellectual property rights in contracts. There is a new standard position on exclusions and limitations of liability, and open book and transparency will be mandatory features of all contracts Morrison & Foerster LLP mofo.com Attorney Advertising

6 The Cabinet Office also provides a new payment mechanism guaranteed maximum price with target cost pricing which it believes will incentivise suppliers to stay within the budget and incentivise contracting authorities to keep suppliers costs down. There is also a revised Key Performance Indicator and subsidiary performance indicator regime which has been rationalised to address performance failures and a new termination regime, including a new way of working out compensation upon exercise of authority termination for convenience. Unfortunately, the new model terms don t appear to address some of the issues that reduced the effectiveness of previous model agreements. For example, the Cabinet Office has not explained how it plans to implement a system to enforce the use of the model agreement. Regardless of the content, if the agreement were to be mandatory for all government contracting and bidders were dealing with basically the same agreement each time they contracted with government bodies, this could speed up whole contracting process. Furthermore, in practice the Cabinet Office needs to eliminate the tendency for contracting authorities to cherry pick from the model terms, i.e., adopt provisions that they like, but insert their own preferences on issues where they feel that the model is more supplier-favourable than they would like. The Cabinet Office has taken some steps to achieve a balance in the model terms, and contracting authorities ought not to be able to adopt unilaterally a more severe position than the model terms. Many of the contract structures adopted in the model terms already create a risk profile for bidders that either leads to higher-than-necessary risk premiums or to bidders simply choosing not to bid and any tampering with the overall risk balance will undermine the Cabinet Office s efforts so far. Contact: Alistair Maughan amaughan@mofo.com About Morrison & Foerster: We are Morrison & Foerster a global firm of exceptional credentials. Our clients include some of the largest financial institutions, investment banks, Fortune 100, technology and life science companies. We ve been included on The American Lawyer s A-List for 10 straight years, and Fortune named us one of the 100 Best Companies to Work For. Our lawyers are committed to achieving innovative and business-minded results for our clients, while preserving the differences that make us stronger. This is MoFo. Visit us at Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. Prior results do not guarantee a similar outcome Morrison & Foerster LLP mofo.com Attorney Advertising