10 November 2011 | Tim Heywood

Several aspects of public procurement rules can be criticised for encouraging contracting authorities to award large contracts rather than smaller deals that are generally ‘SME friendly’.

The rules only apply in full when the contract value is above the specified threshold. There may be a temptation to unbundle the requirement into a number of smaller contracts, each of which would be under the threshold, but the general rule on valuing public contracts states that where a contracting authority “has a single requirement for goods or services … and a number of contracts …are to be entered into to fulfill that requirement, the estimated value of each of those contracts for the purpose of [the threshold] is the aggregate of the value of the consideration which the contracting authority expects to be payable under each of those contracts”.

They prohibit “entering into separate contracts” or choosing a valuation method “with the intention of avoiding the application of these regulations to those contracts”.

A useful exception to the general rule allows authorities to bypass the public procurement rules (but not wider Community law) to a contract that: (i) has an estimated value of less than €80,000 (£70,013) for services or supplies or (ii) less than €1,000,000 (£875,158) for works, provided the aggregate of that contract and any other such contract is less than 20 per cent of the total consideration expected to meet the single requirement. This allows 
for small ‘lots’ to be awarded 
without having to apply the full procurement regime.

An example might be a local authority’s requirement for vehicle maintenance services valued at £400,000. It meets the requirement through eight smaller contracts (or lots) each worth £50,000 (below the threshold). A single lot could be awarded without applying the regulations. But a second lot could not be awarded that way because it would breach the 20 per cent ceiling.

Authorities can take advantage of this flexibility, but must be sure they:

1. Have not divided it up with the intention of avoiding the public procurement rules.

2. Observe the general rule by being clear about your precise requirement and if the value of all the elements is above the threshold the procurement rules must be followed. 

3. Keep within the limits of the exception (ensure the value of the “small” contract is less than €80,000 (£68,500) and 20 per cent of the total value.

4. Award the small contract or ‘lot’ by following a transparent and fair process.

5. Do not repeat the process if the value of the second small contract (taken with the first small contract) would mean breaking the 20 per cent barrier.

☛Tim Heywood is a director in the commercial department of Burges Salmon