Contract re-competition

Introduction

This paper provides guidance on the key issues surrounding re-competition of contracts. It predominantly applies to re-competition of existing contracts, but the implications of re-competition need to be considered for any new procurement project. Recognising that this note may be read at several different points in the procurement cycle, the note is split into what should be done when.

1. When drafting contract documents

For all contracts, including those that are long term and based on a partnering approach, it is essential to include provisions to make handover at the end of contract as smooth as possible.

• TUPE (Transfer of Undertakings (Protection of Employment)) clauses should be included in all contracts for services, even where, at contract signature, this does not seem likely to become an issue.

• Provisions are also essential for full sharing of any information that might give the incumbent contractor an advantage. Such information is to be provided to the department by the incumbent in time to be included in any invitation to tender.

• The contractor should be required to keep up to date the inventory of equipment passed to them at the outset of the contract, and there should be an up front agreement on who will own which pieces of equipment at contract termination. If equipment is specific to the contract, its value at contract end or a process for agreeing its value should be included in the contract.

• The level of servicing of any equipment specific to the contract should also be specified.

• Ownership and transfer of IT equipment and other tangible property, software and data should be made clear. Access rights should be outlined.

• For service contracts, arrangements to improve the relationship over time should be agreed at the outset, including regular meetings and where appropriate open book accounting and/or quality/cost improvement targets.

2. Eighteen months to four years before contract end (depending upon size, duration and criticality of contract)

2.1 Consider the extent to which the existing contract meets the requirements set out in section 1 above. So far as possible, negotiate with the incumbent contractor to insert any missing provisions.

2.2 Consider your ideal strategic approach using the Risk Allocation Model (parts 1-3). This will help you with your strategic assessment of whether to contract for inputs, an output or an outcome. The existing contract is often not a good guide to future needs. The next contract may need to be wider in scope, or to be split into a number of smaller ones.

2.3 The Risk Allocation Model should help you consider the four key elements in planning your strategy:

• Scope - is the requirement driven by future business needs rather than the degree of satisfaction with performance against current contract? Have you considered all options (e.g. outsourcing for an outcome, procuring outputs or inputs (which could include a level of insourcing) (Risk Allocation Model parts1, 2 & 3);

• Risk - do changes in technology, industry structure and capability mean that the risk allocation decisions taken when the current contract was signed need re-visiting? (Risk Allocation Model part 3)

• Flexibility - can the requirement be fully specified in a single complete contract? If not, can it be sensibly broken down into fully specified elements, or undertaken in-house or does the department have the resources to manage an evolving requirement within a looser partnering-style strategic framework? (Risk Allocation Model part 3)

• Partnership - consider the financial viability and business strategy of the supplier. Is its business strategy clearly focused and defined? Can it be aligned with the department's requirements? (If not, partnership cannot be secured).

2.4 An extension of the existing contract is only to be recommended when:

• There was scope within the original advertisement in the OJEU (of the current contract) for a possible extension to the length of time or value)

• The existing supplier is performing well;

• The existing supplier is also well placed to deliver your needs, which are defined as a result of the strategic assessment set out above;

• The supplier in question is not over-dependant on your department or government more widely;

• The market in question remains competitive. If there are few suppliers in a market place and you extend an existing large contract, competitiveness may be reduced. By extending a contract you are effectively excluding other suppliers, and one or more of them might quit the market as a result. Consult OGC if you think this is a possibility.

2.5 If you decide to go to competition:

• Take market soundings to ascertain which approach would attract a healthy number of bidders, then actively publicise your intention and manage the market's expectations to ensure that a robust competition will transpire

• Try to secure the incumbent supplier's interest in the re-competition to maximise competition and incentivise the incumbent to maintain performance levels until the expiry of the existing contract.

3. Pre-contract: When drafting tender documents and during tendering

• Ensure the OJEU advertisement covers any possible extensions to the contract at a later date

• To avoid complaints from unsuccessful bidders, ensure that the contract specifications, the choice of selection or award criteria and the conduct of the procurement do not breach the principles of equal treatment and transparency

• Although there are, in general, no legal restrictions under the EU rules on contract length, bear in mind that an excessively long contract could fall foul of the underlying objective of the EU rules to open up public sector contracts to competition. (The exception to this is for Framework Agreements which should be no longer than 4 years unless there are exceptional circumstances.)

• See section1 above for notes on terms and conditions to be included

• Where there is a strong incumbent, a 'level playing field' should be built so that all potential suppliers believe the contract is winnable and are incentivised to bid. In such a case, the following should be considered:

  - Senior staff should actively promote the openness of the competition to the market and to the incumbent contractor.
  - Provide bidders with full information on all aspects of the work. Include information notes, which are required from the incumbent.
  - Ensure that the incumbent does not assist with the specification of the new contract. An external expert (sourced competitively and excluded from bidding for the main contract) may be required to do this work.
  - Fund transition costs and disregard business continuity in the competition evaluation criteria.
  - Allow payment for a de-risking as 'proof of concept' stage (see Risk Allocation Model part 4).
  - Provide access to all sites and the most senior staff to impart operational understanding of the business and allow bidders to comment on the requirement specification.

If the contract is being tendered in the middle of a major project, then it may also be sensible to:

- Set up an agreement for payment of additional sums to retain the incumbent's key staff for a set transition period in order to help with knowledge transfer
- Avoid placing significant new demands on the incumbent when the in-service date of the new requirements falls post-contract award but before the transition of responsibilities. Having a clause in the contract, requiring the incumbent to make best endeavours to ensure a smooth transition to a new supplier, can provide useful leverage over maintaining performance.

4. Summary of key points

• Consider the strategic options needed 3 -to 4* years before the end of the current contract (*depending on the criticality of the service and original length of the existing contract)

• Where possible, consider restructuring or repackaging of the requirement (perhaps into smaller lots)

• Refrain from multiple extensions of contracts.

Policy Background

5. Why is re-competition important?

Re-competition is an important issue if the incumbent supplier becomes entrenched and, as a result, alternative suppliers are deterred from competing. This can create two fundamental concerns for government procurement: First, at the contract level, departments might be achieving sub-optimal (i.e. "second best") value for money; and second, at the market level, the public sector might be beholden to one or two dominant suppliers.

The government market place is particularly susceptible to market dominance in projects that involve:

• effective partnership working (client capture by supplier);

• long term contracts, where the incumbent builds an integral understanding of a department's core business (asymmetric information between suppliers)

• an evolving requirement (incomplete contract); and,

• the need for a contract which is long enough to attract bidders so that they can write their investment off while also providing the incentive to invest, innovate and maintain programme performance. (For example, vertically integrated IT-enabled business change programmes particularly show these characteristics.)

It is easier to prevent market dominance than to cure it. In cases where there is a high level of market concentration, consideration might be given to changing the scope of outsourcing contracts. Also, in assessing bidders in these circumstances, value for money considerations can include such issues as security of supply. An exit strategy with a realistic contingency should always be considered before the letting of a long-term contract (or introduced during intervening renegotiations), so that, in the case of poor performance, a competitive threat can be maintained during contract operation.

In summary, to prevent market dominance there is a need to:

• maintain the availability of a contestable marketplace so that government is confident of achieving competitive prices

• ensure that no one supplier becomes over-dependant on a department's business as that department, or government as a whole, could become exposed on a wider front, should that supplier be unsuccessful in the renewal of a significant contract.