For most public sector managers, just signing a contract with a private company is stressful enough: the tortuous negotiations, the endless legal documents, the costs. Now, the increasing number of companies willing to challenge contract awards in the courts – and so win damages or get the contract annulled – is lending a new terror to the procurement process.
Behind the rise in court cases is a dangerous combination of factors. The demand for public agencies to share more information on contract decisions has given extra ammunition to unsuccessful contractors. Companies' bidding teams are also under greater pressure, especially in a recession, to justify bid costs.
But the biggest reason for the rise is that the move towards framework contracts, and longer partnerships with the private sector, leaves unsuccessful contractors facing long spells on the sidelines.
Mike Mousdale, a partner with lawyers Eversheds, calls it the "market exclusion" factor. "If you don't get on a framework, you're out of the market for a long time, and it can be fatal for businesses," he says.
Whereas in the past a firm such as Eversheds would have been "surprised" to get one procurement case a year, they now have one every fortnight, he adds. This confirms a growing trend. The procurement consultancy Achilles recently noted at least 28 procurement cases in front of European courts: a small number, but 70% up on two years ago.
In one recent high-profile case, Northern Ireland's schools department had a £650m framework contract thrown out. A losing bidder, Henry Brothers, had argued the method used to choose contractors was flawed because no sample designs were required. The department is now letting schools contracts individually.
Local councils have been hit, too. Property firm Lettings International last year successfully challenged a framework contract for housing agents, set up by Newham Council in east London – again because the council hadn't properly explained how it was going to weigh up bids.
The cost of losing can be several million pounds, as public agencies face paying legal costs as well as damages based on the profit a firm would have made if it had won the contract. Back in 2000, the House of Commons authorities had to pay £5.3m to an American contractor, Harmon Facades, after the company failed to win work on Westminster's Portcullis House, despite bidding £2m cheaper than the winner. Legal costs of £4.6m brought the authorities' total bill to £9.9m.
Bad news for the public sector
The bad news for the public sector is that new European regulations will strengthen the hand of losing bidders. At present, companies can force the public sector to re-run a procurement only if they challenge it before the contract is awarded. After the contract is awarded, they can get damages, nothing more.
However, the EU remedies directive, which comes into force at the end of the year, allows some contracts to be thrown out (or ruled "ineffective", in technical terms) even after they have been signed.
It targets what are known as illegal direct awards: cases where a public agency should have held an open procurement, but instead awarded a contract directly to a favoured supplier.
That covers cases where a council gives a contract directly to an arm's-length company, but also where authorities make major variations to existing contracts without going out to tender again. "Authorities might believe they are able to effect a contract variation within the scope of the original procurement," Mousdale says. "But if someone challenges on that basis, the courts might rule that ineffective."
What, then, can contract managers do to avoid being sued? The key, says Jennifer Skilbeck, a barrister at Monckton Chambers, is to make sure that all the criteria used to decide the contract award, and their weightings, are made clear to contractors before they submit bids.
Public agencies must take care over the quality of information given to losing bidders, and shouldn't be afraid to explain how they arrived at decisions, Mousdale says. "A lot of authorities still are reluctant to disclose what they do and how they are doing it. But all of that – even the methodology – I would always advise them to disclose."
Councils should also decide what they want at the outset, rather than making changes midway, he adds. Any unavoidable changes must then be explained to all bidders: doing so may not offer absolute protection, but courts will take it into account.
Sadly, even with this advice, the surge of court cases will probably continue. The exact effect of the new European law isn't clear, Skilbeck says. "But on balance, we think it will lead to more challenges."
