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 point 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.
The methods for determining the value of a public sector Framework Agreement or Contract are governed by Regulation 6 of the PCR 2015. 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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