PLC Construction blog: the hidden cost of public procurement

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Summary: Do we need to think a little more carefully about what the public procurement rules cost to implement? Few people could disagree with the government’s stated procurement policy to: “… buy the goods, works and services that it needs under a fair and open procurement process, guarding against corruption and seeking to secure value for public funds with due regard to propriety and regularity.” However, for some time there have been mutterings about whether the rules themselves have contributed to the increased cost of public procurement. Commentators have noted that the cost of publically funded projects has risen well above inflation. And then there are the other costs.

Do we need to think a little more carefully about what the public procurement rules cost to implement? Few people could disagree with the government’s stated procurement policy to: 

“… buy the goods, works and services that it needs under a fair and open procurement process, guarding against corruption and seeking to secure value for public funds with due regard to propriety and regularity.”

However, for some time there have been mutterings about whether the rules themselves have contributed to the increased cost of public procurement. Commentators have noted that the cost of publically funded projects has risen well above inflation. And then there are the other costs.

West Coast Mainline as an example 

The government’s climb down over the selection of FirstGroup to operate the West Coast Mainline in early October and the findings of the interim investigation, released on 29 October 2012, that there were “significant errors”, a “flawed process” and “inadequate planning” in that procurement, have highlighted the significant cost consequences of when a procurement process is mismanaged. 

Transport Secretary Patrick McLoughlin has estimated the cost of reimbursing four companies for the cost of their bids will be £40 million, but you need to add to that the government’s cost in running the procurement process and the cost of the investigations. The government also has to re-run the procurement, adding further to the overall costs of the process. 

Challenging the procurement process 

Data suggests that there is an increase in the number of disgruntled bidders who are challenging the procurement process. That leads to another little-discussed cost impact: the effect on the courts. 

At the International construction law conference, hosted by TeCSA and the SCL at the end of September, Coulson J reported that 50 new cases had been issued in the TCC in this year alone regarding the application of the procurement rules. 

What are these claims all about? 

The grounds for challenge range from issues of whether the authority has treated the bidders equally and transparently, to whether the authority has committed a “manifest error” by, for example, failing to evaluate a bid correctly against the relevant criteria. 

With public procurement accounting for 20% of the GDP and the government planning massive investments in construction and infrastructure, the value of some of these contracts is huge and the stakes are high. In many cases, damages won’t adequately compensate a wronged tenderer and so a different remedy is sought. For example, if a contract: 

  • Has not been signed, the courts have the power to order that the contract award decision be set aside and the procurement process terminated.
  • Has been signed, the courts have the power to give a declaration of ineffectiveness, rendering the contract unenforceable for the future.

But with such potentially dramatic consequences, these disputes need to resolved quickly, ideally before the contract is entered into with the winning tenderer. 

Timescales involved 

The courts have been widely praised for their excellent, speedy service in dealing with challenges. Indeed, Coulson J referred to the TCC’s desire to develop ways of working that respond to the needs of the dispute and, in particular, for them to be dealt with quickly. But I do wonder whether one of the reasons that so many claims have been issued is the time frames involved. 

From 1 October 2011, depending on the remedy sought, the period for challenging a procurement process was reduced to only 30 days from either: 

  • The publication of the contract award notice.
  • When the tenderer knew or ought to have known of the alleged breach of the procurement rules (albeit that the period can be extended at the court’s discretion to a maximum of three months from the date on which the claimant has knowledge).

This leaves the parties with little time to: 

  • Investigate the tender process to evaluate whether the procurement has complied with the rules
  • Weigh up the risks and costs associated with issuing a claim.
  • Enter into pre-action correspondence or pursue settlement without the involvement of the court.

Indeed, with the stakes being so high, perhaps it is inevitable that disgruntled bidders are taking the plunge and issuing proceedings before fully investigating and evaluating their claims. 

Bidders are understandably reluctant to rely on the “wait and see” approach. A concerned but ultimately successful bidder, under the new time limits, is now having to raise concerns through the courts while the procurement process is on-going. 

However, that is not to say that all of these claims are being settled soon after proceedings are issued, when the parties have time to consider the issues more fully. So many raise new issues that even when the investigation into the facts is concluded, legal questions remain which need to be heard. Indeed, Coulson J equated it to the early days of adjudication, where there were many judgments in a short period which shaped the law. 

Therefore, while the rules remain as they are and the law remains as unsettled as it is, I suspect that we will continue to see a rise in the number of cases taking up time and resources in the TCC, which itself brings further public costs.

This blog was first published by PLC Construction as part of our regular construction blog series in which we share our practical experiences of working in construction and engineering and give our opinion on the current and future legal developments that shape and will shape the industry. Please select the link for other PLC Construction blogs.

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