When the new Procurement Act 2023 (the Act) comes into effect on 24 February 2025, one of the key changes under the new rules is in relation to contract modifications, or contract variations. The aim behind this is to inject greater transparency around changes to public contracts and give clarity on when variations can lawfully be implemented, without triggering the need for a new procurement.

In this next article in our ongoing 'changing landscape' series on the Act, we delve into how the law will govern contract modifications - and what will change when, compared to the current rules.

How will contract modifications be governed under the Procurement Act?

Generally, the approach to modifications has been carried over from the current public and utilities procurement regimes, in that contracting authorities and utilities (authorities) may modify a public contract if the modification:

  1. is a permitted modification;
  2. is not a substantial modification;
  3. is a below-threshold modification; or
  4. is a light touch contract.

However, the Act includes a new permitted grounds for modification and a new concept of 'convertible contracts' - whereby a below-threshold contract becomes a regulated public contract where, if modified, its value ends up exceeding the relevant financial threshold. The permitted modifications also include four new grounds, highlighted in the section below.

In addition, new notice provisions will require authorities to publish "contract change notices" to signal their intention to modify public contracts before doing so, and allow them to observe a voluntary standstill period ahead of implementing the proposed changes. If the contract has a value greater than £5 million, an authority must publish a copy of the modification or the modified contract.

Permitted modifications

For all public contracts, including convertible contracts, Schedule 8 of the Act outlines the conditions under which contract modifications are permitted (subject to exceptions that apply to utility contracts). Some of them are new with the Act and are not covered in the existing procurement rules (we have flagged these in red below).

In summary, modifications are permitted under Schedule 8 without a new procurement where any of the following circumstances apply:

Modification was provided for in the contract

The modification:

  • was unambiguously provided for in the contract and the tender or transparency notice; and
  • would not change the overall nature of the contract.

Urgency and the protection of life [New]

The modification:

  • could be achieved by the direct award of a contract; and
  • is due to extreme and unavoidable urgency; or
  • is necessary to protect life, public order or safety.

Unforeseeable circumstances

  • The circumstances could not reasonably have been foreseen by the authority before the award of the contract; and
  • the modification
    • would not change the overall nature of the contract; and
    • would not increase the value of the contract by more than 50% (this ceiling does not apply to utilities contracts).

Materialisation of a known risk [New]

  • a known risk (i.e. a risk that the authority considered (when it awarded the contract) could jeopardise the satisfactory performance of the contract, but could not be addressed in the contract as awarded) materialises;
  • as a result, the contract cannot be performed to the authority's satisfaction;
  • the modification goes no further than necessary to remedy that fact;
  • awarding a further contract, rather than modifying it, would not be in the public interest in the circumstances; and
  • the modification does not increase the value of the contract by more than 50%, ignoring for this purpose the fact that the risk has materialised (this ceiling does not apply to utilities contracts). In considering whether a new contract would be in the public interest, an authority must consider whether a new contract could provide more value for money.

Additional goods, services or works

The modification provides for the supply of goods, services or works in addition to those already provided for in the contract, where using a different supplier would result in goods/services/works that are different from (or incompatible with) those already provided for in the contract, and

  • the authority considers that the difference or incompatibility would result in:
    • disproportionate technical difficulties in operation or maintenance, or other significant inconvenience; and
    • substantial duplication of costs for the authority; and
  • the additional supply does not increase the value of the contract by more than 50% (this ceiling does not apply to utilities contracts).

Transfer on corporate restructuring

The modification is a novation or assignment of a public contract, following a corporate restructuring or similar circumstance (as long as the new supplier is not an excluded supplier).

Defence authority contracts [New]

The modification is necessary in order to:

  • take advantage of developments in technology, or prevent or mitigate any adverse effect of those developments; and
  • ensure the Armed Forces can maintain their operational capabilities, effectiveness, readiness for action, logistical capabilities or safety (and to ensure there is continuous supply of those goods, services or works).

Substantial modifications:

The definition of what will amount to a substantial modification has been simplified, which should help contracting authorities to work out whether a proposed contract change is likely to be a substantial one or not.

A modification will be substantial (and therefore not permitted without a new procurement) in circumstances where:

  • it increases or decreases the term of the contract by more than 10% of the maximum term provided for on award;
  • it materially changes the scope of the contract (i.e. a modification providing for the supply of goods, services or works of a kind not already provided for in the contract), or
  • it materially changes the economic balance of the contract in favour of the supplier[1].

Below-threshold modifications

A modification (other than one that is already permitted by Schedule 8, or because it is not substantial) will also be permitted where it is a below-threshold modification[2]. This applies where the modification would not itself increase or decrease the estimated value of the contract by more than:

  • in the case of a goods or services contract, 10%; and
  • in the case of a works contract,15%.

In all cases, the aggregate value of a below-threshold modification must be less than the threshold amount for the type of contract (i.e. goods, works or services). In addition, a below-threshold modification must not materially change the scope of the contract.

Light touch contracts

Light touch contracts can be freely modified under the Act[3], providing greater flexibility to authorities.

How will you be affected by the new regime governing contract modifications?

This re-shaping of the rules around contract modifications will certainly provide more flexibility for authorities, as well as making it clearer as to precisely when public contracts can be varied without a new competitive procurement, and how far those variations can go. The added transparency brought about by the new requirement to publish contract change notices should increase accountability on the part of both authorities and suppliers, by preventing contracts from undergoing potentially significant change under the radar.

Equally, the increased transparency mandated by the Act may cause some nervousness given that information about proposed modifications will be placed into the public domain, and thereby potentially subject to greater scrutiny. This might have an impact on the types of changes that actually end up being made to contracts; and could act as a deterrent against varying contracts by, for example, extending them for longer than necessary, or implementing revised terms that overly favour suppliers.

To understand more about how the new regime will change the way procurements are carried out and managed, read our summary of the key things organisations need to know about the Procurement Act 2023. The summary outlines important changes that procurers and suppliers need to know, explores some of the sector-specific provisions under the Act, and provides next steps and resources to consider. It will also direct you to other articles in our changing landscape series for more details on important features of the Act and how you can prepare for a seamless transition to the new regime.

With thanks to Trainee Solicitor Briana Yarde for her assistance in preparing this bulletin.

Footnotes:

[1] Section 74(3).
[2] Section 74(4).
[3] Section 74(2).