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Procurement manual: guide to procurement within BERR. Section E: managing the procurement process - part 2

URN No: URN 08/1509/A6

Department for Business, Enterprise and Regulatory Reform procurement manual section E: part 2 - managing the procurement process

E. MANAGING THE PROCUREMENT PROCESS

E.5 Contract Strategy
E.6 Gateway Reviews
E.7 Risk Management
E.8 European Union Directives

E.5 CONTRACT STRATEGY

E.5.1 Contents

Introduction
Contractual approaches
Contract Types
 - Cost Reimbursement Contracts
 - Fixed Price Contracts
 - Capped Price Contracts
 - Incentive Contracts
 - Framework Contracts
 - Stage Payment (Milestones)
 - Single or Competitive Tender

E.5.2 Introduction

The advice in this section should be read in conjunction with the guidance available in the OGC's Successful Delivery Toolkit and in particular the guidance within the Requirements Definition and Procurement Strategy section of this document.

For all procurements over £10,000 in value it is important to determine the most appropriate contract strategy at the earliest possible stage.

The contract strategy should take into account the following elements:

•        how the various stages of the contract (from setting the strategy, right through the various steps to contract management) are to be managed,

•        options for procurement - purchase, rent, hire, etc.,

•        contractual approaches and types of contract to be used,

•        basis of pricing and payment arrangements,

•        use of single or competitive tender,

•        conditions of contract,

•        the impact of Intellectual or Industrial Property and associated rights (see Section D.4 - UK Legislation)

The contract strategy should also take into account relevant aspects of BERR policy, such as:

• policy on the environment (see Section A.7 - Environmental Issues in Purchasing) may affect the way a specification is prepared (defining the product and selecting appropriate standards)
• policy on small firms (see Section A.6 - Small and Medium Enterprises) may affect the make-up of the list of companies invited to bid for work and the way a contract is broken into lots (to enable small firms to bid)
• EU Directives (see Section E.8 - European Union Directives), remembering also that
• • the possibility of contract renewal needs to be taken into         account in assessing the value of a contract for EU procurement threshold purposes and
  • R & D procurement can fall within the scope of the EU Services Directive if the Department is retaining intellectual property rights.

The contractual approach and type of contract selected must be appropriate to the procurement. A range of factors needs to be considered, including:

•        Departmental policy (see above)

•        allocation of risk (see Section E.6 - Gateway Reviews)

•        in-house resource availability (e.g. for design and project management)

•        importance of timescales

•        project complexity and size

•        importance of precise requirements and quality

•        availability of funding

•        availability of standard design or component detail

•        market conditions

•        lifetime costs.

The paragraphs below describe various contractual approaches, contract types and payment arrangements. Bear in mind that the choice of contractual approach, contract type and basis of payment should represent an appropriate balance between cost, time, control and risk.

E.5.3 Contractual Approaches

In many cases, procurement is a relatively straightforward process. Once the business case has been approved, the end user creates the specification and the procurement staff identifies a suitable supplier and places a contract. However, not all procurement can be effectively managed in this way. For more complex projects it may be appropriate to consider placing a management contract and/or undertaking sequential tendering.

a.        Management Contracts

For large and complex projects (typically major works projects but also increasingly for the procurement of a range of contracted-out services) it may be appropriate to award a contract to a specialist contractor to manage the breakdown of the project into suitable packages, to supervise the whole process of tendering for these packages and possibly also to manage the contracts once awarded.

Such an approach can be very effective when specialist contract management skills and knowledge are needed. However, care needs to be taken to ensure that the Department retains sufficient intelligent customer capability to be able to manage the appointed management contractor effectively.

b.        Sequential Tendering

Where a project or requirement is too complex to be covered by a fully pre-planned contract, sequential tendering is an alternative.

The overall project is broken down into a series of smaller packages each of which is competitively tendered as and when the detailed requirements are known. This approach should lead to a shorter overall time-scale than a fully pre-planned approach and can provide a better fit to your requirements by leaving some of the detailing until later in the process. This can be particularly important where rapid technological change is envisaged.

A major disadvantage of this approach is that the overall cost remains an estimate until the last package contract is awarded. This factor is particularly important in obtaining overall approval for the project, as approval authorities tend to prefer strategies with a single decision point and closer control over total cost at the outset. This disadvantage is also of relevance to projects that approach the EU Directives thresholds and care should be taken in such circumstances that sequential tendering does not become improper disaggregation.

E.5.4 Contract Types

There are a number of contract types to choose from. Those most likely to be encountered by BERR procurement staff are:

a.        Cost-Reimbursement Contracts (time and materials); Cost Plus Contracts

Cost-reimbursement contracts are those in which the contractor is reimbursed for the cost of labour and materials actually used in the contract, plus a fee for supervision, head office expenses and profit. The fee may be a fixed amount or a percentage of total prime cost.

Cost-plus contracts may be appropriate if the work is very urgent or if it is hard to decide how much work is required. However, as there is no risk to the contractor and no financial incentive to work efficiently or to seek ways to save money, it can be difficult to ensure that best value for money is obtained. They should, therefore, be avoided whenever possible.

b.        Fixed Price Contracts

These are considered to be the most effective type of contract. They benefit both parties. They give an efficiency incentive to the contractor and the Department knows from the total cost from the outset.

A fixed price contract is one where the Contractor bids a fixed price for undertaking the work. This is usually shown as a single sum, rather than as a day rate with a total number of days. Such a sum will be clearly indicated in the contract. The Contractor is then bound to satisfactorily complete the task for this quoted sum. He assumes the risk for failing to do, but equally will benefit if he can complete it within his own estimated timescale.

Fixed price contracts are of two main types:

•        Lump Sum Contracts and

•        Measured Contracts.

In lump sum contracts, a single total price (the lump sum) covers the whole contract. This is considered suitable for major works if they can be precisely defined and described in detail in the contract documents, and also for minor works and alteration and repair jobs. However, fixed price contracts can be applicable in a range of circumstances when the scale and nature of a procurement can be clearly defined in advance.

In measured contracts, price is fixed in the sense that bidders quote itemised prices for doing work and supplying materials, using a bill of quantities, but the total price payable is determined by measuring the amount of work done and materials supplied, multiplying by the agreed price for each item and totalling.

c.         Capped Price Contracts

These will be the most familiar types of contracts found in the Department, particularly for procuring professional and consultancy services. They are similar to cost re-imbursement contracts, in that a daily fee is agreed at the outset. However, the fee will include any profit element and the total number of days will also be fixed at the outset.

Such a contract will be along the lines of, as an example, "£400 per day at a maximum of 20 days" and, in this example, is capped at £4,000 for the total contract price. This cap must be clearly indicated in the contract/purchase order. If the contractor is able to complete the task within the stipulated number of days then his bill will be less than the capped amount. If, however, he needs additional days to complete the task, he has to make the case for the cap to be increased. There may be good reasons for so doing, but they need to be investigated, and the reasons for extending the cap recorded.

Contracts should never be let solely on the basis of an agreed daily (or other period) fee, without including a cap on time or cost.

d.        Incentive Contracts

Incentive contracts give the supplier an incentive for success. They have been widely adopted in the construction industry as an alternative to cost plus contracts in cases where the cost can be estimated roughly, so that a figure for target cost can be agreed, but not with sufficient accuracy to arrive at a fixed contract price. They are intended to motivate a supplier to achieve target cost by sharing with them any savings they manage to make, while obliging them to stand part of the expense if costs are above target.

Multiple incentive contracts extend this by including in the contract monetary incentives for achieving other targets, such as delivery performance and quality performance (e.g. customer satisfaction). With multiple incentive contracts, there can be a problem balancing one desirable objective, such as high performance, against another desirable objective, such as early delivery or low prices. Care needs to be taken in setting and balancing the monetary rewards embodied in the incentive clauses to ensure the contractor optimises on a balance of objectives which is in the Department’s interest rather than his own.

e.        Framework (Call-Off) Contracts

Framework, or call-off, contracts set the terms on which the Department will make future purchases of supplies or services. For details on the use of such contracts see Section E.9 - Frameworks.

   f.    Stage Payments ("Milestones")

Payments can only be made when goods or services have been satisfactorily supplied in accordance with the terms of the contract. For straightforward purchases this will mean payment on satisfactory completion of the contract.

For some contracts it can be appropriate to agree payment at predetermined stages, often referred to as "milestones". This can also be used as an alternative to regular re-measurement of the quantities of work and materials expended or the percentage completion level of a contract.

By setting various "milestones" along the path towards completion of a contract the need for re-measurement is avoided and payments can be tied to stages of partial completion. Careful selection of "milestones" can also be used to minimise risk to BERR by ensuring that payment is only made at stages where it would be feasible for a contract to be taken over by another contractor, if necessary.

    g.    Single or Competitive Tender

Competitive tender is the normal method by which BERR lets its contracts. Single tender action (STA) should be the exception, particularly for contracts over £10,000 in value. It can be more difficult to demonstrate that value for money has been obtained when STA is used and there are increased risks of accusations of impropriety.

The exceptional circumstances that may make STA permissible, include:

•        no alternative sources of supply

•        procurement need can be met only by proprietary or specialist equipment

•        continuing the use of specialist professional services (but only once)

•        for technical reasons

•        supplier offering an innovative product or service

•        private sector financing the major part of the work.

Shortage of time in itself is not normally adequate justification for STA. This is particularly so where it is proposed to renew a supply or continue a service, because there should have been ample opportunity to plan for the contract to be re-tendered.

STA can be justified as a means of extending a contract (not already containing specific provision for extension) where an imminent policy change or an unavoidable delay in re-tendering would otherwise result in the interruption to an essential service or supply.

STA should be used only once to extend or re-let a contract. In addition to value for money considerations, re-letting contracts by STA further increases the risk of accusations of impropriety.

STA is subject to more rigorous scrutiny than competitive tender, so you should ensure that:

•        you allow adequate time (it may actually take longer in the end if you have to demonstrate that a competition cannot be held)

•        you try to locate alternative sources of supply before using STA

•        your case is fully justified in accordance with the criteria laid down

•        you do not disclose to the supplier that he is the only tenderer.

The justification for STA must be put in writing, approved by the budget holder and placed on file for audit purposes. It is also good practice for Directorates to monitor closely the overall extent of the use of STA.

STA of Professional Services 

All non-competitive procurements (“Single Tender Actions” or STAs) of professional services with a likely value of £50-250K, must be sent to the responsible Director General or Agency Chief Executive for approval.

This applies for approval of both new contracts and extensions to existing ones. These arrangements have been approved by Secretary of State and are consistent with the revised guidance issued by OGC following the NAO Report on Acquisition of Professional Services 2001. 

A definition of professional services can be found in Section E.2 in paragraph E.2.5.a Definition of Professional Services.

E.6 GATEWAY REVIEWS

E.6.1 Contents

Introduction
Benefits
What to Do
Low Risk Projects
Medium/High Risk Projects

E.6.2 Introduction

All new procurement projects in civil Central Government (including Agencies and NDPBs) are subject to Gateway Reviews. The Gateway Process has been developed by Office of Government Commerce (OGC) and examines a project at critical stages in its lifecycle to provide assurance that the project can progress successfully to the next stage. It is designed to be applied to projects that involve the procurement of services, construction/property, IT-enabled business change or procurement projects establishing framework contracts. Procurements are any finite activity designed to deliver a government requirement and involving government expenditure. 

The Gateway Process is based on well-proven techniques that lead to more effective delivery of benefits together with more predictable costs and outcomes. The process reviews the project at critical points in its development. These critical points are identified as Gateways. There are up to 6 Gateways during the life cycle of a project, 3-4 before contract award and two looking at service implementation and confirmation of the operational benefits. The process emphasises early review for maximum added value.

  E.6.2 Benefits

The aim of the Gateway process is to provide assurance and support for Project Owners (POs) and Senior Responsible Owners (SROs) in delivering their responsibilities and ensuring the success of their procurement project. Benefits include assurances that:

•        Realistic time and cost targets for projects established are achievable

•        The necessary skills and expertise are available and deployed on the project

•        The project is sufficiently resourced

•        All the stakeholders covered by the project fully understand the project status and the issues involved

•        The project can progress to the next stage of development or implementation

The Office of Government Commerce site contains full details about the Gateway Process.

E.6.3 What to do

First decide whether the procurement is a distinct project or just part of an ongoing process. If in any doubt, the IWS Commercial Office and OGC Gateway Helpdesk  can provide advice but ultimately this is a decision for line management.

Once a procurement project is identified it should be risk-assessed as early as possible in the process i.e. once a sufficiently clear picture of the project is available. This is achieved by the Senior Responsible Owner (SRO) or Project Owner (PO) completing the OGC’s Project Profile Model (PPM) which is on the OGC website.

The Project Profile Model (PPM) contains three spreadsheets from which the most appropriate should be selected by the staff completing it (i.e., IT-enabled Business Change, Property & Construction or Service Procurement). As stated in the PPM guidance notes, it provides a standard set of high level criteria against which the degree of difficulty and risk can be assessed.

Completion of the PPM produces a total score that indicates the level of risk involved in the procurement project:

•        Low Risk - Score of 30 or below (the lowest score is 14)

•        Medium Risk - Score of 31-40

•        High Risk - Score of41 or more

  E.6.4 Low Risk Projects

For procurement projects scoring 30 points or below (the lowest possible score is 14) the SRO/PO should consider whether a Gateway Review is warranted. For procurement projects scoring at the lower end of the Low Risk category an assessment should be made of the reasonableness of devoting resources and time to a review. These should be commensurate with the level of value likely to be added. In addition to the PPM score, other factors that should be taken into account include: 

•        Whether the procurement planned is novel or routine, and

•        The skills and experience of the procurement team.

Actual contract value is included in the PPM risk assessment. While the likelihood is that lower-scoring procurements will not need to be reviewed and that higher-scoring ones will, circumstances may differ in each case and SROs/POs need to take all relevant factors into account.

Where it is decided that a Gateway Review is appropriate for a Low-Risk project, the SRO/PO or Project Manager acting on his/her behalf should send the risk assessment form to the Project Centre. Low-Risk Reviews are undertaken by teams selected from a panel of nominees from BERR, its Agencies and NDPBs. The Project Centre, in consultation with the SRO/PO, will appoint a Review Team Leader from the panel for each low-risk Review.

Decisions made during the course of the above process should of course be documented on file with justifications.

 E.6.5 Medium/High Risk Projects

All IT procurement projects and other procurement projects scoring over 30 points (i.e. high and medium risk) are dealt with by OGC. SROs/POs should submit PPMs in these categories to the OGC Helpdesk  and consult them about next steps. The OGC Gateway Team need 6-8 weeks notice of a Review in order to undertake the necessary planning and team selection.

E.7 RISK MANAGEMENT

E.7.1 Contents

Introduction
Allocation of Risk
The Risk Management Process
Financial Stability of Contractors
Other Procurement Risks
Risk Analysis
Reducing Risk
Contingent Liability
Additional Information and Advice

E.7.2 Introduction

The advice in this section should be read in conjunction with the OGC guidance on Risk Management.

The Department is exposed to many types of risk (i.e. the probability of incurring misfortune or loss). These are mostly, but not exclusively, finance related and concern physical assets, valued information and human resources. Departmental assets, information or services are increasingly being obtained through procurement. It is therefore important that purchasers ensure that the risks inherent in any particular procurement are properly identified and that efficient and effective systems are in place to manage any risks that arise.

Risk can rarely be eradicated but they can be managed. Risk management requires a planned and systematic approach to identifying, quantifying and controlling risk. Risk management systems provide a framework and a range of techniques for assessing the costs and benefits of reducing risk.

All procurement is susceptible to risk. Good risk management will identify the likelihood of a misfortune occurring, predict the consequences and identify the options available for controlling the risks together with associated costs.

The risks the Department is exposed to are not confined to those with financial consequences. For example, the consequences of late delivery of brochures costing a few thousand pounds for a Ministerial launch are likely to be greater than a non-critical computer system failing to operate correctly on day one of its installation, even though the cost of the latter procurement is far greater. Good risk management will enable the degrees of risk and their consequences to be set in the context of Departmental priorities.

In procurement, it is important to identify and assess risks in the business case, in the contract strategy and in the contract management arrangements. The earlier in the contractual process a risk can be identified, the greater the level of control over it and the lower the cost of making provision for it in the contract.

Risks can change over time. Where contracts are of longer duration, they need to make provision for this and give sufficient flexibility for the changing risk to be effectively managed.

E.7.3 Allocation of Risk

Risks should be allocated to whoever is able to manage them at the lowest cost.

One of the key features of public private partnerships is the transfer of risk to the private sector partner. This is achieved by harnessing private sector management skills and is appropriate whenever it is genuinely possible to transfer control over a project and the associated risks to the private sector without disproportionate costs.

At the other end of the scale, transferring risk can be as simple (and hopefully as automatic) as ensuring that goods come with a manufacturer’s guarantee.

Often, the supplier is best placed to handle risk. BERR’s General Terms and Conditions ensure that, in the main, liability rests with the contractor. Specifications should also ensure that, as far as possible, risks are transferred. Making suppliers liable for the consequences of poor risk management often provides an incentive to improve performance, particularly management effort. The contractor's performance will nevertheless still need to be monitored because if the contractor fails to take remedial action the Department may have to resolve the problem itself (possibly by commissioning someone else to do the work).

However, risk should not simply be transferred for its own sake. The Department could find itself paying for inappropriately transferred risks through higher charges. Making suppliers liable for the consequences of risks which they have no chance of managing is likely to be not only costly but also futile.

Where there is doubt about where responsibility for managing a risk should lie, compare the cost of transferring the risk with that of retention. Obviously, the cost of transfer from one party to another should not exceed the cost of retention. The cost of performance bonds and insurance needs to be taken into account and, because the Crown usually indemnifies itself, the notional cost of that self indemnity should be included when comparing management of risks in-house (or by another Government Department) with external contractors.

E.7.4 The Risk Management Process

To manage risk successfully you need to:

a.        identify the risks to which the Department is exposed;

b.        quantify the magnitude of the exposure and the probability of the risk occurring;

c.         assess whether it is more practical and economical for the Department or the supplier to manage various tasks and allocate them accordingly;

d.        identify possible options for controlling retained risks and appraise their costs and benefits; and,

e.        agree and implement a risk management strategy.

E.7.5 Financial Stability of Contractors

The financial stability of the contractor is a key consideration if a contract:

•        is of large value

•        is of long duration

•        is high profile, or

•        involves significant other risks.

For guidance on procedures for assessing the financial viability of a potential contractor see Section E.4.16 - Conducting a Financial Appraisal.

E.7.6 Other Procurement Risks

Identification of risks is central to putting effective risk management arrangements in place. This requires expertise and an enquiring open-minded approach to risk analysis.

Risks can arise in relation to the inherent nature of the products or services being acquired and the methods of manufacture, delivery and performance used. Risks can be affected, adversely or for the better, by the procurement options used, particularly where there are choices, e.g. between purchase, hire, rental or partnering arrangements.

Consider the risks relating to dishonesty of contractors or their personnel, professional liability, security of information handling and infringements of intellectual property rights.

There can also be issues relation to consequential risks, such as product liability, Departmental public liability or environmental impact.

The above examples are by no means exhaustive. Take advice from those with expertise in the particular market. For large or particularly sensitive projects it can be advisable to procure specialised risk management expertise (see Section E.7.10 - Additional Information and Advice).

E.7.7 Risk Analysis

To enable decisions to be taken about the amount  of resources allocated to risk management it is important to identify both the probability and the consequences of a risk occurring. This is what is meant by risk analysis.

The outcomes from a risk analysis can conceptually be ranked in terms of the priority to be attached to a risk management strategy, as follows:

Table E.7-1: Ranking Risks

For an effective risk analysis you should initially:

•        identify the main areas of risk inherent in the procurement

•        identify other important uncertainties affecting the main costs and benefits

•        make at least broad quantitative judgements about the consequences of each risk, paying particular attention to those risks with the greatest range of possible outcomes (particularly relevant when new technology is involved) and to those whose outcomes may be irreversible

•        make at least broad quantitative judgements about the probabilities of the risks occurring, paying particular attention to those risks with the most serious consequences.

Guard against over optimism in the assessment of both the probability of a risk occurring and its consequences. Make appropriate allowance for any possible bias by checking the objectivity of your sources of information and looking at evidence from similar projects in the past.

Test the effects of different assumptions. A "sensitivity" analysis of how particular assumptions would affect particular project outcomes can be used to determine the viability of options for managing the risks and for identifying the point where a particular risk management option ceases to be viable because the costs outweigh the benefits ("switching point"). For complex projects, straightforward sensitivity analysis may not be adequate. In these cases the study of different "scenarios", might be justified.

For high value, high-risk projects consider whether a pilot project or more research is justified. If the pilot is successful subsequent contractual arrangements can be entered into for delivery of the project.

E.7.8 Reducing Risk

Risk management is not only about transferring risk to those best able to manage it but also about reducing the overall risk. By considering risk right from the outset, i.e. at the business case stage, there can be an opportunity to redefine the requirement, adapt the procurement strategy and develop the project management approach in such a way as to avoid or eliminate some risks altogether.

Among the factors to be considered are:

•        the case for a more flexible requirement or design

•        the case for a more flexible project which avoids commitment until nearer the completion date

•        the scope for better contractual arrangements

•        the availability of options offering greater certainty (including the option of not proceeding), if variability of outcome is the key risk.

Risk management is also about learning by experience. Ensure that, for any substantial procurement project, arrangements are in place for post project review, and that this draws out any important lessons about risk for the benefit of future procurement exercises.

E.7.9 Contingent Liability

One particular risk is that of contingent financial liability for the Department if a particular set of circumstances arise. Special procedures may have to be followed if the liability is large (in excess of £100k) and arise outside the normal course of the purchase and supply of goods or services in the discharge of the Department's business as authorised by Parliament (see Government Accounting).

Whenever such a risk is identified consult the relevant Resource Assistance Director in FRM. Where losses arise the procedures set out in the Accounting Memoranda should be followed.

E.7.10 Additional Information and Advice

Detailed guidance is provided in the "Management of Risk, A Strategic Overview", (The "Orange Book")  published by HM Treasury in January 2001. 

Further advice can also be obtained within BERR as follows:

•        on buildings and related assets consult the Building Facilities Management Unit of IWS Directorate to determine your responsibilities

•        on public liability and protective security consult the Corporate and Security Policy Unit of IWS Directorate

•        on capital expenditure proposals (except IT) consult FRM

•        on IT consult the Business Project Advisory Services of IWS Directorate.

Where the potential risks are likely to be large and you have insufficient expertise to carry out a risk analysis consult either your Directorate’s Economist (if you have one) or obtain external assistance from suitably experienced management consultants.

E.8 EUROPEAN UNION DIRECTIVES

E.8.1 Contents

Introduction
Aims
Applicability
     - Thresholds
     - Main Provisions
Participating States
Features Common to All Directives
     - Threshold Compliance
     - Prior Information Notices (PIN) (Indicative Notices)
     - Specifications
     - Timescales
     - Framework (Call-off) Arrangements, Contracts and Agreements
     - Procedures
     - Publication of OJEU Notices
     - Selection of Tenderers
     - Awarding the Contract
     - Debriefing Suppliers
     - Reporting and Statistical Requirements
     - Compliance
Sources of Additional Information

E.8.2 Introduction

European Union (formerly European Community) Directives on Public Procurement enact the requirement that member states should not impose quantitative restrictions, or measures with the equivalent effect, on trade between themselves. These Directives also endorse certain provisions of the World Trade Organisation (WTO) – formerly General Agreement on Tariff and Trade (GATT) - on Government procurement.

E.8.3 Aims

EU Public Procurement Directives are intended to guarantee fair and non-discriminatory international competition in bidding for goods, services and works above specified threshold values.

Specific aims include:

•        increasing transparency of procedures and practices;

•        facilitating stricter enforcement of the prohibition of restrictions on the free movement of goods and services;

•        incorporating changes to the WTO (formerly GATT) Agreement on Government Procurement where applicable;

•        developing the conditions for effective competition for public contracts;

•        reducing the imbalances in the application of the Directives between Member States by defining the extent of exemptions by sector;

•        laying down the applicable thresholds including, where appropriate, the WTO related threshold, in a single provision;

•        limiting the use of the single tender procedure by creating a negotiated procedure. This already exists in certain Member States and is considered exceptional and therefore only applies in certain specified cases;

•        defining the conditions where extreme urgency can be invoked and the method by which additional deliveries under existing contracts can be obtained;

•        adopting the common rules in the technical field to the new Community policy in respect of standardisation;

•        providing advance information on public purchasing programmes will allow potential suppliers within the Member Sates and Countries that are WTO signatories to show interest in such purchases and provide information on the conditions under which contracts have been awarded;

•        fixing certain time limits in order to avoid delays in the transmission of advance information notices and notices on contracts awarded; and

•        ensuring adequate time limits for the receipt of requests for participation and tenders in order to improve access and opportunities for a greater number of suppliers.

E.8.4 Applicability

a   Thresholds

The Directives apply to procurements above specified threshold values.  These threshold values are reviewed on a regular basis, normally every two years.  The current thresholds for procurements in which BERR may be involved are as follows:

Table E.8-1: EU Procurement Thresholds - Valid from January 2008

Exceptions
All Directives permit certain exemptions. The figure for Services threshold value is as per the table above, with the exception of the certain Services that have a threshold of £139,893 (€206,000):

Table E.8-2: EU Services Exceptions Table

b  Main Provisions

The main provisions of the Directives are:

•        EU-wide Publication of contracts giving firms across the EU Community the opportunity to participate.

•        The use of non-discriminatory technical specifications that refer to EU Community-based standards wherever possible.

•        The use of objective criteria for selecting participants and awarding contracts.;

E.8.5      Participating States

The benefits of the EU Directives have been extended to other countries under the European Economic Area Agreement and various Europe agreements.  The EU is a signatory to the WTO (formerly GATT) Government Procurement Agreement (GPA).

The relevant states and countries included are as follows:

EU:  Austria, Belgium, Cyprus, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden and the United Kingdom.

E.E.A:  Iceland, Liechtenstein, and Norway.

Europe Agreements:  Bulgaria, Czech Republic, Estonia, Hungary, Poland, Romania, Slovakia, Slovenia, Malta, Latvia and Lithuania.

GPA:  Aruba, Canada, EU, Hong Kong, Israel, Japan, Republic of Korea, Liechtenstein, Norway, Singapore, Switzerland and USA.

From 1.1.1996 the GPA was extended beyond the central government bodies listed in Schedule 1 to the Supplies Regulations to cover local authorities, other public bodies and public sector utilities in ports, airports, water, urban transport and electricity sectors.  It was also extended to works and certain service contracts as well as supplies contracts.  Broadly speaking, compliance with the EU rules ensures compliance with the GPA, where it applies, and GPA suppliers etc. have the same rights as EU suppliers.

E.8.6 Features Common to All Directives

a.        Threshold Compliance

Where the Department traditionally purchases centrally, the threshold applies to the aggregate of all Departmental purchases of each type of goods. Where, for a particular type of goods, purchasing is carried out by local or separate units, the threshold applies to each unit's local purchases of these goods.

Contracts must not be split to avoid compliance. Furthermore, public bodies must aggregate the value of contracts for similar goods or services over the previous 12 months and allow for changes in value in the next 12 months, or forecast the value of purchases in the coming year, to determine whether a Directive applies. As the Department has not traditionally centralised its purchasing expenditure, the spends of Headquarters and each Executive Agency and Regional Office are assessed separately, unless a Framework is in place (see Section C.2.3 - Procurement Routes).

It is recommended that procurement exercises with an estimated contract value within 10% of Threshold levels should also be advertised in the OJEU. This would avoid OJEU advertising requirements being unintentionally breached.

A contract above the threshold can only be exempted from the provisions of the Directive on the grounds listed in the relevant BERR Short Guide (see E.8.8 -Sources of Additional Information below). For requirements that are urgent, the procedure may be accelerated. Procurement staff should consult the Procurement Policy and Services Unit (PPS) within IWS Commercial Office for guidance on exemptions.

During the course of a competitive tendering exercise, staff may become aware that the value of bids received exceeds the EU Thresholds, but bid invitations have not been extended through the OJEU notice procedure - as it was anticipated that the threshold would not be exceeded. In such a case the Group, Agency or NDPB Contact should seek advice from the IWS Commercial Office on how to proceed. It will be essential to ensure that staff demonstrate that a full analysis and estimate of likely contract value had been made when deciding on the procurement route. The IWS Commercial Office will keep a record of these cases, as they could expose the Department to potential criticism and legal challenge. The IWS Commercial Office record should identify individual members of staff or Directorates for targeted advice and possibly training, which "repeat offences". Where circumstances warrant it, the IWS Commercial Office may draw the matter to the attention of the relevant DG for action as appropriate.

b.        Prior Information Notices (PIN) (Indicative Notices)

"Contracting Authorities" (the individual public sector bodies, as defined by the Directives) may publish a Notice each April giving brief details of prospective contracts likely to be let in the coming 12 months: that is, contracts within each category which individually or in aggregate are expected to be above the threshold. Procurement Policy Services coordinate the Notices for HQ Directorates and BERR Agencies that are non-WTO (GATT) entities, and reminds other BERR "contracting authorities".

The open and restricted procedures may be shortened if the requirement has been the subject of a Prior Information Notice (PIN).

c.         Specifications

Specifications for contracts subject to the Directives must refer to a British Standard that implements a European Standard, whenever this is possible. The words "or equivalent" should always follow the British Standard if a European Standard is not used. Exceptions can be made:

• where the use of a European Standard is precluded by binding national rules e.g. on health and safety grounds; or
• where a derogation of the Directive applies:
• • no provision for establishing conformity
  • community measure prejudiced e.g. Directive 86/361/EEU on telecommunications terminal equipment;
  • incompatibility, disproportionate costs/technical difficulties; or
  • innovation.

If a deviation applies, there must be a clearly defined strategy to move to a European Standard or common technical specification. Reasons for using a derogation must be shown in the contract notice.

If a European Standard or common technical specification does not exist, or if a derogation applies, a British Standard may be used. Specifications should not refer to proprietary brands, but where it is not possible to avoid this, the words ‘or equivalent' must be used.

d.        Timescales

The Directives lay down some minimum timescales aimed at giving prospective suppliers sufficient time to respond to Notices and ITTs.

There is an "accelerated procedure" which reduces the timescales for urgent requirements advertised under the restricted and negotiated procedures. The use of the accelerated procedure is an exception to the rule, is only permitted in certain situations and is likely to be challenged by the Commission. The reason for the urgency must be stated in the Notice.

You must build the timescales into projections for contract awards.

The Department can alert companies known to be interested in tendering but only after the Notice has been despatched to the OJEU. Such companies should be sent a copy of the notice. No company may be given information additional to that contained in the notice. You need to exercise care when speaking to potential suppliers prior to publication of the notice in the OJEU.

e.        Framework (Call-off) Arrangements, Contracts and Agreements

Legally binding agreements involving a commitment to purchase (e.g. Call-Off Contracts/Framework Contracts/CatalistFramework Agreements) must be awarded following the advertising and procedural rules in the Directives. Subsequent call-offs against the contract need not be advertised.

Framework Arrangements (Call-off Arrangements), establish the terms on which the Department and contractor may enter into any subsequent contract without commitment from the Department to buy anything.  Framework arrangements may be treated as if they are contracts provided they are advertised and awarded in accordance with the Directives. If Framework Arrangements are advertised and awarded in accordance with the Directives, there will not be any need to advertise individual contracts made pursuant to the arrangement.

Framework Arrangements that are likely to exceed the threshold should be advertised at the outset as though they were contracts. The maximum duration for all framework arrangements is four years.

The EC has stated that the award of an individual contract (under the umbrella of a framework arrangement) can only be made on the basis of the terms and conditions (including the pricing mechanism) established in the framework arrangement itself. No negotiation of price or the pricing mechanism already established in framework arrangements can take place at call-off (including the Office of Government Commerce buying Solutions Catalist and other framework arrangements available for Government Departments and Agencies to use). Where, in either framework arrangements or framework contracts, there are multiple suppliers and it is intended to mount a mini-competition between two or more of them, it follows that the mini-competition must not involve negotiation on the prices and pricing mechanism already established in the framework arrangement or framework contract. The award criteria for these mini-competitions should be a combination of (i) quality/methodology and (ii) resources/costs. During the mini-competition suppliers will have the opportunity to state the type of resources they would deploy and the daily rate or fixed price that they would charge to undertake the proposed task. The quoted price must relate to the rates in the relevant framework but may take into account any price mechanism (e.g. discounts) established within it. Negotiation on price outside these parameters is not permitted, even if offered by suppliers.

f.          Procedures

The Directives provide for four different procedures:

•        Restricted Procedure, whereby only invited suppliers may submit tenders; and

•        Open Procedure, whereby all suppliers interested in the contract can subsequently be invited to submit tenders;

•        Negotiated Procedure, whereby purchasing bodies may negotiate the terms of a contract with one or more suppliers of their choice (this can only be used in special circumstances, but in certain cases may be used without first publishing a contract notice).

•        Competitive Dialogue, this is similar to restricted procedure, however after the pre qualification stage dialogue takes place.  Suppliers discuss with the Department solutions to the procurement.  Proposals are evaluated and unsuitable solutions are not taken forward.  The Department at this stage, once clarification of the business need has been identified by working with the supplier, then asks remaining suppliers to bid for this work, just as the Restricted procedure.

The Department’s policy is to use the Restricted Procedure whenever possible and to make use of the Open and Negotiated procedures only exceptionally.

Deciding which procedure to use may be influenced by:

•        the nature of the supply of goods required (e.g. to match existing equipment the Negotiated Procedure may be necessary);

•        the urgency of the requirement (this may necessitate the accelerated procedure (see sub-Section d - Timescales above); and

•        the results of previous tendering exercises (e.g. no responses received under the Restricted Procedure).

The Negotiated Procedure may only be used where:

•        the Open or Restricted procedures have already been used and resulted in unacceptable tenders or irregular tenders;

•        the Open or Restricted procedures have already been used and resulted in no tenders;

•        the products are purely for research or development;

•        only one supplier is available for technical or artistic reasons or on account of exclusive rights;

•        extreme urgency exists for reasons that were unforeseeable and not attributable to the department; or

•        additional deliveries by the original supplier are justified.

When the use of the Negotiated Procedure can be justified, you must also consider whether it is necessary to publish a notice in the Official Journal of the European Union (OJEU).

g.        Publication of Official Journal of the European Union (OJEU) Notices

The European Commission Directive (2004/18/EC), which makes mandatory the use of standard forms for all Notices to be published in the Supplement to the Official Journal. This ruling came into force from 1 May 2002.

As Standard Forms are complex and time-consuming the Department uses a web-based software package for the generation of OJEU Notices and for their transmission to the OJEU office in Luxemburg. It is BERR policy that this software should always be used - no other method for the drafting and publication of OJEU Notices is permitted. IWS Commercial Office should be contacted for information on how to gain access to this software.

A copy of any OJEU Notice should, when sent to the OJEU office, also be sent to the PPU for publication on the BERR website.  

h.        Selection of the Tenderers

The Directives set out rules for the selection of tenderers and award of contracts. These include:

•        excluding certain candidates or tenders;

•        selecting tenderers under the Restricted Procedure or selecting those to be invited to take part in a Negotiated Procedure;

•        the evidence that can be required to demonstrate that a supplier has a registered business and the financial, economic and technical capacity to fulfil the contract;

•        the award of contracts on the basis of either lowest price or of the ‘most economically advantageous tender' (but BERR policy is always to award on the basis of ‘most economically advantageous’ - see sub-section i - Awarding the Contracts below);

•        recognising existing schemes which give preference to certain tenderers; and

•        the treatment of abnormally low tenders.

The qualifications and selection of candidates for short-listing under the Restricted and Negotiated procedures must be based on non-discriminatory and objective criteria.

The number of candidates invited to tender must be stated in the Restricted and Negotiated procedure notices. BERR policy is to aim for 6 companies, where practical. The Directives refer to a minimum number of 5 and a maximum of 20. Tender numbers should be kept small to reduce the cost of tendering for contractors and the internal administrative burden.

Candidates and tenderers must provide a minimum amount of information enabling them to be appraised with regard to their skill, efficiency, experience and reliability. Under the restricted procedure this assists the short-listing process. It is important not to demand too much information at this stage (e.g. 50 companies may respond and send large packs of information including annual reports etc.). Additional information can be requested from the few companies invited to tender.

i.           Awarding the Contract

The BERR criterion for awarding a contract is always to award to the economically most advantageous bid. The alternative (allowed by the Directives) of lowest price must not be used.

Detailed evaluation criteria (e.g. quality, experience, and resources), must be stated in the Contract Notice or Invitation to Tender (ITT).

When a contract is awarded the Department is required to send a Contract Award Notice within 48 days for publication in the OJEU and to record details of the award for later inclusion in a statistical return.

j.          Debriefing Suppliers

It is good practice for the development of suppliers and their future competitiveness to offer a debriefing, so that all suppliers can understand why they were not selected and failed to win the contract. For general guidance on debriefing see Section E.13 - Debriefing.

The Department is required to debrief candidates who fail to be short-listed and unsuccessful tenderers within 15 days of receiving a written request.

An unsuccessful tenderer is entitled to be told the name of the successful tenderer but not the contract price. The range of prices should be disclosed if 3 or more bids have been received.

The Department is also required to explain to candidates and tenderers, who make a written request, the reasons for cancelling the tendering process and for not awarding a contract.

Debriefing should never be carried out by the inexperienced and must be accurate, otherwise complaints can result in EU infraction proceedings.

k.         Reporting and Statistical Requirements

For each contract awarded where the value exceeds the threshold a "report" must be placed on file and made available to the Commission on request. The reporting requirement is met by the completion of the Tender Tabulation form PF50 and supporting documents. Additionally, justification must be recorded if the negotiated procedure has been used.

On an annual basis for Supplies, Services and Works, the Department must submit a return to the Treasury for inclusion in the UK return to the EU. The report records the number and value of contracts awarded by each contracting authority above the threshold.  Contracts are listed by:

•        procedure used (Open, Restricted, Negotiated with and without prior notice);

•        category of the supplier or service (the CPV number) and;

•        nationality of the supplier or service provider.

The provision of this information is mandatory. All BERR "contracting authorities" must therefore maintain records from which it can be derived. IWS Commercial Office coordinate the return for the Department.

l.           Compliance

The related Compliance Directive (89/665/EEC), implemented in the UK by embodiment in the relevant statutory instruments sets out the administrative and legal provisions for reviewing and enforcing procedures leading to the award of contracts subject to the public procurement directives.

The Compliance Directive requires member states to have review arrangements in place and enables the Commission to:

•        investigate a complaint from an aggrieved company;

•        set aside award procedures;

•        demand correction to the relevant BERR procedures;

•        set aside an unlawful contract (but not a contract awarded lawfully);

•        award damages to the aggrieved company;

•        fine the Department.

Action to correct allegedly illegal measures may be taken by an independent review body whose findings will be legally binding or by the UK or European courts.

The Legal Services Directorate must be advised if the initial review demanded by the Commission indicates a possible breach of the procedures.

E.8.7 Sources of Additional Information

For specific guidance on the application of the Supplies and Services Directives you should refer to BERR’s Short Guide on EU Supplies Directive and WTO (GATT) GPA or Short Guide on the EU Services Directive, copies of which are currently available on BERRNet.

The threshold for procurement under the Works Directive is such that BERR procurement staff are unlikely to be affected. For further advice contact the PPS Unit within IWS Commercial Office.   The Building Facilities Management Unit within IWS Commercial Office should be consulted for advice on BERR policy and practice on works procurement more generally.

The Utilities Directive is not thought to apply to any BERR procurement activity. Address any questions about the Utilities Directive to the PPS Unit in IWS Commercial Office