The "partnering" approach in construction (advocated by the Egan and Latham reports) stresses the importance of longer relationships and continuous improvement over the former "lowest price wins" culture as a means of reducing claims and delivering greater predictability in terms of time and cost of projects.

Thus many public sector frameworks have been created which aim to incentivise better performance over a period of time and a number of projects. One of the main contractual vehicles for "partnering"-style projects is the NEC 3 suite of contracts.

A key element of both frameworks and partnering is that the contractor is usually appointed on quality-based criteria and percentage rates for overheads and profit, and the underlying cost of labour and materials (referred to in NEC 3 as the Defined Cost) is likely to be fixed only after award of the contract to the contractor.

A recent case (Henry Brothers -v- Department of Education for Northern Ireland), raises serious implications for this approach, and for frameworks and partnering contracts generally.

Background

DENI advertised a 4 year framework for schools construction worth £550-£650 million. 12 to 16 contractors were to be invited to tender and 8 were to be chosen as members of the framework. Henry Brothers got through the PQQ stage and were invited to tender. The criteria were 70% quality and 30% commercial. The commercial criteria consisted mainly of fee percentages (to be charged on top of the actual construction cost). At the heart of DENI’s assumptions was that the construction cost for different contractors would always be the same because they were sourcing from the same market.

Therefore the key commercial differentiator was the fee percentages. Even when it came to awarding specific schools contracts under the framework, the fee percentages were still the key commercial factor and no attempt would be made to establish the actual costs of the project until after appointment of the contractor.

Henry Brothers were unsuccessful at tender and challenged.

Henry Bros’ challenge

Henry Brothers argued that the assumption above was flawed, in that the underlying construction costs would vary significantly between contractors because of differing levels of efficiency and prices and discounts which they could negotiate with sub-contractors. They asked for an order setting aside the decision to award the framework contract.

The Court’s ruling

Over the course of three hearings, the Court came to the following decisions:

• The procurement rules state that a framework must either contain all the terms necessary for performing a specific contract, or where it does not do so, those terms must be established by re-opening competition (secondary or mini-competition).
• The failure to consider the actual costs of a project either (a) when awarding the framework or (b) at the mini-competition stage for specific projects meant that there was no objective exercise carried out to see how the contractors might compete on cost elements.
• Therefore not all the substantive terms on pricing were determined by the framework agreement or at the mini-competition stage. A large element of negotiation and agreement of actual prices would take place after the decision had been made to award a specific contract to a contractor.
• DENI’s approach to the framework and to the price-fixing mechanism therefore contravened the procurement regulations and EU law.

Remedies

DENI argued that the framework agreement should not be set aside because under the procurement regulations, a contract may not be set aside after award has taken place and damages are the only remedy. The Court rejected this argument and found:

• A framework agreement is not a "public contract", because it does not itself require any performance by the contractors and gives no guarantee as to whether any work will be awarded. It is purely a mechanism for awarding public contracts. Therefore the protection above does not apply.
• The protection would apply to contracts for schools which had already been awarded under the framework and these could not be set aside.
• The judge considered that in this case, damages would not be an adequate remedy to compensate Henry Brothers for the opportunity which they had lost.
• The judge also considered the "balance of convenience" and the public interest in renewing the schools infrastructure in Northern Ireland, but felt that it was best not to perpetuate the situation under which further specific contracts would be awarded in breach of the regulations, and value for money could not be demonstrated.

Therefore the judge ordered that the decision to award the framework should be set aside.

Conclusions

In order to avoid challenges, public authorities will need to ensure that there is adequate competition on the pricing terms either at primary stage (awarding the framework) or, where this is not possible, at secondary stage (mini-competition for specific projects). Post-award discussions on pricing will be in breach of the procurement rules (unless it really is the case that prices will be common to all contractors in that market and will not vary).

The decision probably does not mean that every last aspect of the project price has to be determined in advance. This may well be impossible and runs counter to "partnering" objectives of collaborating to establish risk and cost. However, it does mean that authorities must find some way of objectively testing which contractor can deliver the best overall price (including both rates and actual costs).

The impact for frameworks is particularly concerning. Frameworks may be open to challenge and setting aside even after they have been awarded, although frameworks which have been established a long time are probably safe as setting them aside after a number of years operation may well not be in the public interest, and the courts will probably take into account the fact that no challenge was made promptly at the time of award.

Nonetheless, the effect is that authorities will need to review their procedures for awarding both construction frameworks and "partnering" style contracts like NEC.

For further information please contact Simon McCann by telephone on 029 2038 5400 or by email.