When can public contracts lawfully be modified under the Procurement Act 2023?

This article considers the extent to which the Procurement Act 2023 (PA23 or the Act), which comes into force on 24 February 2025, will change the parameters regarding how this aspect of procurement law operates.

Background

Under the pre-PA23 regime, the general position was that modifications made to an in-life contract necessitated a new procurement process, unless a contracting authority could demonstrate that the modification fell within one of a number of specific 'gateways' for permitted modification.

This framework remains largely the same for public contracts that will be subject to the PA23, with some changes. Under the Act, in-term modification will not be permitted without the need for a new procurement unless it is either:

1. a ‘permitted modification’;
2. not a ‘substantial modification’; or
3. a ‘below-threshold modification’.

Permitted modifications

The PA23 retains the grounds for permitted modification from the prior regime, namely where the modification:

1. is provided for in the contract;
2. has arisen due to unforeseeable circumstances;
3. is for goods, services or works in addition to those already provided for in the contract;
4. is to enable the transfer of the contract on corporate restructuring.

Whilst, as is typically the case in the Act, there are some changes of wording from the corresponding provisions in the previous regime, these do not appear to be intended to involve any change in substance from the previous regime.

The Act also introduces four new grounds of permitted modification:

1. where a modification can be justified on the basis of extreme and unavoidable urgency or/and the protection of life;
2. where the modification is necessary as a result of a materialisation of a known risk (see further below);
3. where one of two new grounds specific to defence authority contracts apply.

The first of these (extreme and unavoidable urgency/protection of life) aligns the contract modification position with the equivalent provisions relating to direct award.  It can be expected that these grounds will be capable of being invoked only in exceptional circumstances (e.g. another pandemic). 

The grounds of modification for defence authority contracts provide greater flexibility in defence procurement to modify contracts (a) to take advantage of (or mitigate against the risk of) developments in technology; and (b) to ensure continuous supply of goods, services or works to the Armed Forces. 

Therefore, of most likely significance is the new ground of permitted modification based on materialisation of a known risk.  This is considered in more detail below. 

Materialisation of a known risk

The 'materialisation of a known risk' ground is intended to enable contracting authorities to modify contracts in the case of, to use Donald Rumsfeld's famous phrase, "known unknowns".

In order to rely on this ground of permitted modification, a contracting authority will as a first step have to:

1. identify a risk that could jeopardise the performance and successful delivery of the contract but which, owing to its nature, could not be addressed in the contract as awarded; and
2. describe the risk in the tender or transparency notice published at the time of award, and refer to the possibility of modification of the contract being required in future if the risk materialises.

Reliance on this gateway at some future point will therefore be dependent on careful consideration during preparation of the procurement to ensure that any such known unknowns are identified and described in the tender or transparency notice. 

If a "known risk" does materialise during the lifetime of the contract, the PA23 permits a modification to be made to address the risk, but only if all of the following conditions apply: 

1. The "known risk" has arisen other than because of any act or omission of the contracting authority or supplier.
2. The contract can no longer be performed to the satisfaction of the authority because of the risk having arisen.
3. The proposed modification only goes as far as is necessary to remedy the known risk.
4. The award of a further new contract would not be in the public interest.
5. Except in the case of a utilities contract, the modification does not increase the estimated value of the contract by more than 50%, ignoring (for the purpose of estimating the value of the contract) the fact that the risk has materialised.

This gives rise to an obvious question: what kind of risks did Parliament have in mind when introducing this ground of permitted modification? 

Contracts are axiomatically tools for allocating risk between the parties. If a specific risk to contract performance or delivery can be identified at the outset, then it is hard to think of circumstances in which that risk could not be provided for, at least to some degree, in the contract.   

The Cabinet Office guidance on contract modifications under the Act gives two examples of possible "known unknown" risks: (a) cyber attacks; and (b) RAAC crumbling concrete (in the context, for example, of a maintenance contract for school buildings).  Those are matters which undoubtedly could have a significant impact on contract performance if they were to arise in an appropriate case, but it is not immediately apparent why, for example, in the case of an IT contract it would not be possible to make at least some provision for what would happen (and the extra services/costs that might arise) in the event of a cyber-attack. 

It may be that the requirement that the risk "could not be addressed in the contract as awarded" really means "could not effectively be addressed", with the result that the known risk ground could be used to plug gaps in the contract arising as a result of unforeseeable impacts.  Contracting authorities wishing to protect themselves against cyber-attacks (or other known risks) would be well-advised to cover this off both in the tender/transparency notice, to preserve the possibility of reliance on this ground, and in the contract (so far as practicable).  

Substantial modifications

As under the pre-PA23 legislation, modifications that are neither permitted modifications nor below-threshold modifications (see below) are allowed under the PA 2023 if they are not 'substantial'.  The Act provides that a substantial modification will be one which:

1. increases or decreases the term of the contract by more than 10% of the maximum term provided for on award; or
2. materially changes the scope of the contract; or
3. materially changes the economic balance of the contract in favour of the supplier.

The first of these tests is an innovation in the PA23 which has no equivalent provision under the prior regime.  On the face of it, this is a helpful addition to the contract modification "toolkit" in a number of ways.  First, it makes clear (to the extent that it was not already under the prior regime) that an extension to the term of a public contract without other modification (e.g. to the scope) is in itself subject to, and to be tested by reference to, the rules on contract modifications.  Second, and more significantly, it provides a firm legal basis for short-term contract extensions of the kind which are very commonly entered into towards the end of a contract where, in particular, a contracting authority needs to "bridge a gap" between contract expiry and a new contract coming into force.  Third, the reference to decreases in contract term makes clear that contract "de-scopings" resulting in a shorter term will be permitted within the 10% threshold.  This was also a point of uncertainty under the pre-PA23 regime.

Against that, however, it might be said that, by providing a bright-line threshold for determining when an extension or reduction of the contract term is "substantial", the PA23 loses some of the judgemental flexibility that existed under the prior regime, and could make reasonable contract extensions harder to justify.  For example, 10% of a 4-year term is 4.8 months, so for a 4-year contract, an extension of 5 months would by definition be substantial and an alternative justification would need to be found under the list of permitted modifications (if available at all).

It should also be noted that the 10% threshold is tested by reference to the maximum contract term "on award".  This implies that the relevant period is the total duration of the contract as originally awarded, including all possible extensions provided for in the contract.  However, where a contract is subsequently extended either below the 10% threshold or on some other ground of permitted modification, such extensions will not be taken into account for the purpose of calculating whether the 10% threshold is hit.

The test of material change of scope appears on the face of it to be identical to the pre-PA23 regime, which refers to a "considerable" change of scope.  However, it is noteworthy that the Act provides that a change of scope relates to the provision of goods/ works/ services "of a kind not already provided for in the contract".  This suggests that a mere change of scale – i.e. putting more work through a contract than originally anticipated – is not in itself to be treated as a change of scope and hence a substantial modification.  There would need to be a change in the kind of goods, works or services. 

The third test of substantial modification – a material change in the economic balance in favour of the supplier – is again brought across from the pre-PA23 regime with the addition of the qualifier "material".  Whilst the inclusion of a materiality threshold is undoubtedly helpful, the question of whether the modification would tip the balance will still fall to legal interpretation (potentially assisted by expert accountancy evidence). Case law under the prior regime, including the recent High Court judgment in James Waste Management LLP v Essex County Council [2023], will therefore continue to be highly relevant.

Below-threshold modifications

The Act defines a below-threshold modification as one which satisfies each of the following criteria:

a. The modification does not increase or decrease the estimated value of a public contract by more than 10%, or a works contract by more than 15%;

b. The aggregated value of the changes made on this ground is less than the threshold applicable to that type of contract;

c. The modification does not materially change the scope of the contract; and

d. The modification is not capable of being made on an alternative basis: in other words, it is first necessary to consider if the modification is a permitted modification or a non-substantial modification; only if it falls at each of those hurdles can it be assessed in terms of whether it may be a 'below-threshold' modification.   

Three points are noteworthy about this definition:

1. The PA23 does not specify at what point the "estimated value of the contract" is to be measured.  The Cabinet Office guidance suggests that it is to be measured at the time of valuation i.e. just before the modification.  However, no basis in the Act is given for this interpretation, which could be difficult to apply and evidence in practice.  It is suggested that the cautious approach for contracting authorities would be to continue to value below-threshold modifications by reference to the contract value at award (as in the pre-PA23 regime).
2. Point (b), however, limits the impact of any debate about when to measure the estimated value of the contract by capping the total value of all below-threshold modifications at the threshold for the contract in question.  Thus, in a central government services contract, for example, the total aggregate value of all below-threshold modifications could not exceed (at the time of writing) £139,688, irrespective of whether you take 10% (in the case of services) of the estimated contract value at award, or 10% of the (potentially higher) estimated contract value at the point of modification.  The latter approach will simply result mathematically in the threshold being hit earlier than the former. 
3. Point (d) is a new provision which appears to be related to the aggregation rule.  Effectively, it means that if a modification can be justified as a non-substantial or a permitted modification, the value of that modification will not count towards the aggregation of below-threshold modifications up to the relevant threshold. 

Overall, the provisions of the PA23 on below-threshold modifications are complex (and not, it is suggested, a huge improvement on the similarly difficult provisions of the pre-PA23 regime).  When looking to rely on the below-threshold ground, authorities will need to tread with great care to be sure that the ground applies and look back at both the value and the justification of previous modifications.

Convertible contracts

The PA 2023 also introduces the concept of 'convertible contracts', whereby a contract that did not at the time of award fall within the definition of a public contract becomes a public contract (as defined) following a modification.  Mainly, it can be foreseen that this will arise in cases where the value of a modification will take the value of the contract over the relevant threshold for the application of the PA23.  However, conceivably, a convertible contract could also be one where a change of scope/ services results in a previously exempt contract ceasing to be so and hence result in it becoming a public contract within the meaning of the Act.

In such cases, the 'converting' modification can only be made in the first place if it is a permitted modification, a non-substantial modification or a below-threshold modification.  Further, once an originally below-threshold contract has 'converted' into a public contract by reason of a modification, subsequent obligations applicable to public contracts, for example publication of contracts over £5 million, will apply.

Transparency

A very important change in the PA23 is the requirement on contracting authorities to publish a contract change notice (CCN) in the case of all contract modifications, save for (broadly speaking) non-substantial and below-threshold modifications. 

A CCN will have to be published in the case of modifications resulting in a change of contractor in the event of corporate restructuring, irrespective of whether the modification is also non-substantial or below-threshold. 

A modification that triggers publication of a CCN cannot be made before the CCN is published but no mandatory standstill applies. A voluntary standstill of not less than 8 working days may be applied.

This is a significant shift from the pre-PA23 regime where no publication of contract modification was required.  Authorities and utilities had the option of publishing a voluntary ex ante transparency notice, or VEAT notice, applying a 10-day standstill where they wished to seek protection from the modification being declared ineffective. However, in practice, many (perhaps the large of majority) of contract modifications went below the radar.  The PA23 will therefore greatly increase the visibility of contract modifications in the public and utility sectors – see further our blog on transparency generally: Transparency of procurement under the Procurement Act 2023 – more information but less openness?

In addition, where a modification is to, or results in, a contract valued at over £5 million, the modification must be published.  In the case of contracts originally valued at over £5 million, this will be done by publishing either a copy of the contract as modified or the modification on the central digital platform.  Where the modification results in a contract being valued over £5 million which previously fell below that threshold, strictly speaking, only the modification needs to be published.  However, the Cabinet Office guidance recommends that, in line with contracting authorities' duty to have regard to transparency, the whole contract as modified should be published in this situation.

If you would like to discuss any of the issues raised in this blog, please contact Nick Pimlott or James Groves.

The content of this blog does not constitute legal advice and is provided for general information purposes only. Specific legal advice should be sought before taking any actions based on the content of this blog.