Rules on public contract changes are clear as mud

LONDON, ENGLAND - MARCH 01:  The Supreme Court where judges are to consider appeals over the 'bedroom tax' on March 1, 2016 in London, England. Also known as under occupancy or the spare room subsidy, the bedroom rax deducts 14% from the benefit of a tenant if they have an unused bedroom.  (Photo by Chris Ratcliffe/Getty Images)
LONDON, ENGLAND - MARCH 01: The Supreme Court where judges are to consider appeals over the 'bedroom tax' on March 1, 2016 in London, England. Also known as under occupancy or the spare room subsidy, the bedroom rax deducts 14% from the benefit of a tenant if they have an unused bedroom. (Photo by Chris Ratcliffe/Getty Images)
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Strict rules rightly govern contracts awarded by public bodies, and, in some cases, by utilities. Contractors must make clear not just their costs, but also exactly what they will do: so what happens when the buyer’s requirements change during a project? Recent regulations which sought to offer clarity have simply shifted this grey area.

The complex nature of major public works means a requirement to change what is required of a contractor (and what they will be paid) is hardly uncommon. However, even where both parties agree, the position until recently was that material amendments would amount to the award of a new contract and so require a new tender process.

“What is a material change?” was the million dollar question. In an effort to answer it, revised provisions have set out a series of potential safe harbours within which parties can be confident a change will not be problematic. The rules say a change must have been provided for in the initial procurement documents. This means contracting authorities must have considered various potential outcomes from an early stage. Such clauses must be clear, precise and unequivocal and set out the scope and nature of possible modifications or options.

There is no limitation on the monetary value of changes allowed, yet modifications are not permitted to alter the overall nature of the contract. These two aspects are potentially difficult to reconcile, and the Supreme Court has already suggested the law is as clear as mud – though it used different terminology.

On National Savings & Investments’ decision to use a pre-existing outsourcing contract with Atos to deliver new services, the Court concluded changes to the contract were not substantial. It placed particular importance on the original procurement process and the fact that the contract allowed for the instruction of additional services of the same type, in line with pre-determined payment mechanisms.

This ruling has implications for regulated Scottish organisations using one of the popular construction standard form contracts such as the NEC3 Engineering and Construction Contract Option A, a lump sum contract with a priced activity schedule. When posting a contract notice, it is crucial to consider what is being described to the market as the value of the contract: this must be clear but, given the potential for this to change, it is advisable to avoid limiting it too tightly.

Changes to the scope of works are dealt with as compensation events; where an instruction is given to a contractor changing the scope, the contractor is also instructed to submit a further quotation, which may be accepted or rejected. Yet standard compensation event provisions can still raise issues. The Schedule of Cost Components and rates and lumps sums in the Activity Schedule will not necessarily cover all works in the varied scope or risk allowances, potentially allowing a contractor to give an inflated premium price, as the time to go through a further procurement process is not available. Also, a significant enough change could alter the contract’s overall nature.

Given all these variables and the fact that rules intended to clarify this area have only served to shift the grey area into more specific aspects of contract law, it is more risky than ever to treat any construction contract, even a well-used standard, as off-the-shelf and ready to use.