New rules on sub-contracting to affect TMT sector

On 10 April, HM Government published Action Note 01/18 “Public Policy Note - Supply Chain Visibility”. The Note presents new measures designed to “level the playing field and increase the visibility of supply chain opportunities to assist suppliers, including SMEs, in bidding for work in its supply chains”. The guidance in the Note will be applied to new projects which are commenced after 1 May 2018.

Advertising sub-contract opportunities

The measures include new requirements for central government bodies and “non departmental government bodies” (entities which, while not ministries perform the same function as national government bodies) to include contractual obligations on private sector bodies to advertise on the Government’s “Contract Finder” website  any new subcontracting opportunities valued above a minimum threshold of £25,000 that arise after contract award (although public bodies will have discretion to raise this threshold to £100,000 if they consider the lower trigger point too burdensome).

These obligations are set out in a “model clause”, included at Annex A to the policy note which government bodies are urged to consider.  This is essentially guidance rather than a hard legal requirement but will nonetheless be likely to influence public buyers. The clause does not apply to subcontracts that were arranged or existed prior to the award of the contract, i.e. when a prime contractor has established its supply-chain as part of the tender process or to situations where the main contractor has confirmed it will not be using subcontractors.

The obligation will only be included in those contracts where this is considered to be proportionate. In practice, the Government envisages this will apply to contracts with a value of £5 million or more.  However, there may be exceptions, for example:

• where there are issues of national security, which mean that subcontracts cannot be openly advertised
• where a contract is to be delivered overseas and the resulting subcontracts can only be delivered by in-country partners and/or there are local laws, customs, or security issues that mean subcontracts cannot be advertised, and
• where the supplier has confirmed there will be no subcontracted spend.

This new requirement is quite significant in our view. Whilst the Public Contracts Regulations 2015 (PCRs)  require contracts above specified thresholds to be advertised, this does not generally apply to sub-contract opportunities. Advertising contract opportunities is obviously a good way to open up competition and to incentivise efficiency within the supply chain. 

Does the Note include obligations on how the tender should be conducted?

The standard clause does not specify how the advertised procurement is to be conducted, but suppliers are expected to allow a reasonable and proportionate amount of time to allow bidders to respond. This obviously differs from the PCRs, which require any tender processes to be fair and transparent and stipulates that bidders must be treated equally. We have set out some thoughts on this in our “Final thoughts section” below.

Upon award, the supplier should update the Contract Finder notice within 90 days with the details of the awarded supplier. This requirement has parallels with the PCRs, which require the publication of an award notice disclosing the identity of the preferred bidder. 

Reporting obligations

The Note also includes a number of model contract clauses that require reporting on the participation of SMEs and VCSEs (Voluntary, Community and Social Enterprises). VCSE's are a type of “non-governmental organisation that is value-driven and which principally reinvests its surpluses to further social, environmental or cultural objectives”, (examples include “small local community and voluntary groups, registered charities, foundations, trusts and the growing number of social enterprises and co-operatives”).

A clause on supply chain spend (Annex B to the Note) requires a successful supplier to provide In-Scope organisations with data on their direct spend with SME/VCSEs in the supply chain relating to that contract. Suppliers must disclose figures on (i) the value of contract revenue they subcontract out and (ii) the value that is subcontracted to SMEs or VCSEs. A reporting template is provided (Annex C), which includes a definition of spend that should/should not be included as contract spend. Again, these clauses should only be used in a contract where their inclusion is proportionate to the value. 

Final thoughts: What does this mean for you?

These new provisions will take effect in relation to new contracts signed after 1 May 2018. Chances are you will come up against them sooner rather than later if you work with Government bodies. 

If they are used in Government contracts, the new model clauses on advertising subcontracts will be a boon to SMEs and have the potential to open up new opportunities to this section of suppliers. Whilst in many cases supply chains are fixed at the outset of a project (often supply chain members are disclosed as part of the bid submission), in some cases they will be selected during the course of the contract. Sometimes suppliers will also need to be substituted. SMEs have complained that ICT opportunities are often too big for them to take on, so subcontracts represent a more manageable chunk of work for them to take on and avoid them missing out completely.

Although the Note is silent on how the selection of subcontractors should be made (once bids are received following the advertisement in Contract Finder), this does not necessarily mean that contractors can act in an arbitrary way when deciding which bidder to appoint. A number of court judgments in the UK and Commonwealth have highlighted that an implied contract can exist in a tender situation and that bidders can expect to have their tenders considered in good faith (e.g. Blackpool and Fylde Aero Club v Blackpool BC [1990] 3 All ER 25 and The Central Tenders Board v White (trading as White Construction Services (Montserrat) [2015] UKPC 39). 

Whilst it is unclear whether this principle applies in a tender being conducted by a commercial entity (previous cases have involved contracts awarded by government bodies), the fact that the overall context of the sub-contract award is a public project may lead the Courts to follow these authorities and conclude there is an implied contractual requirement for contractors to act fairly in dealing with interested bidders. 

The possibility of an implied contract existence means that legal advice should be sought when organising a sub-contract tender process. Please let us know if this is something with which we can help your organisation going forward, or if you feel you have been treated unfairly in the way your sub-contract tender has been evaluated.

This article was written by Paul Henty. For more information please contact Paul on +44 (0)20 7427 6506 or at paul.henty@crsblaw.com.