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Sat September 25 2021

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Pitfalls of the Social Value Act

25 Jun 18 The Cabinet Office has announced plans to extend the scope of the controversial Social Value Act. Contractors need to beware, says Anna Beadsmoore.

Anna Beadsmoore is head of legal indemnity at insurance broker Gallagher
Anna Beadsmoore is head of legal indemnity at insurance broker Gallagher

Bidding for contracts in the public sector isn’t what it used to be. The Public Services (Social Value) Act 2012 delivered new dynamics to the process.

It has had two unintended consequences: it was meant to help the local SME compete against the corporate giants, but the big corporates have just created a corporate social responsibility (CSR) industry and continued to clean up.

Secondly, it has introduced uncertainty into contract awards, with winning bidders having to take out insurance to protect themselves from legal challenges against misinterpretation of the legislation.

The collapse of Carillion, one of the biggest providers of public services, has brought the requirements of the Act into sharp focus once again, prompting the government to extend its scope.

With renewed scrutiny on the awarding of public contracts, the potential for costly litigation flowing from such decisions has become a real risk area for contractors and developers.

The Act requires local government bodies to consider the social consequences of awarding contracts to the companies answering tenders. Intended to incentivise good practice and reward community-conscious organisations, the legislation places responsibility on the bidders themselves to prove that the way they do business positively impacts the social and economic value of the local area. It was meant to give a natural advantage to smaller, local companies, but in reality it has given larger companies with more established corporate social responsibility (CSR) policies an edge. After all, smaller companies cannot dedicate as much resource to proving their social value. That said, the legislation brings risk for any company that bids successfully for a large public contract.

The Act encourages local authorities to consider the social value elements of awarding a contract, and therefore pushes the private sector to comply with these requirements. It drives CSR best practice by encouraging accountability not only among those responsible for procurement, but also private sector tender participants seeking to secure the contract. They are forced to focus on their obligations to the communities where they hope to deliver new services or developments. In this respect, the rules – which came into effect five years ago on 31 January 2013 – should prove positive for the local population.

However, the Act is far from straightforward. A lack of guidance around the implementation of its provisions has been widely acknowledged, and the written advice offered is very basic. Further, the Act is seen by some as a barrier to smaller companies when they tender for a public contract, since it creates more hoops to jump through, and requires continuous monitoring of the effectiveness of the promised social value that successful bidders are expected to deliver. Indeed, social value itself is not a clear-cut deliverable. Arguments over its definition began almost as soon as the Act was passed in 2012, since the term can be interpreted in many ways.

Similarly, the Public Contracts Regulations Act, which replaced 2006 regulation, includes a requirement that the supply chain involved in executing a public contract is compliant with social, environmental and employment law. This piece of legislation fits hand-in-glove with the Public Services Act. Finally, although the Act does not replace procurement law, its requirements should be considered within EU procurement law.

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The collapse of Carillion in January 2018 brought the Public Services Act back into the spotlight. In turn this highlights the significant risk developers and contractors could face, when working with local authorities, even after they have been declared a successful bidder.

Carillion continued to be awarded large new contracts, across a wide range of services, even after its difficulties and financial challenges began to emerge.

It is this set of circumstances that has prompted a review of the way such contracts are awarded, and heavier scrutiny of the bidding process. At least 25 local councils had contracts with Carillionm for services ranging from catering and cleaning to engineering and road maintenance.

Since the collapse of Carillion hit the headlines, contracts awarded in the past have come under fresh review. Some failed bidders are deploying the requirements of the Public Services Act to challenge local authorities’ historical decisions on tenders that they failed to win.

For example, a housing association acting as a contracting authority followed a restricted tender procedure, but none of the bids it received were deemed appropriate. It then began a negotiated procedure, without prior publication, in line with section 32(2) of the Public Contracts Regulations 2015. Although the housing association had obtained legal advice and was confident that the process it had followed was compliant with the Regulations, some amendments were made to the contract originally advertised. The contractor was, therefore, concerned that the award may be open to challenge by a third party arguing that the conditions had been ‘substantially altered’. It felt it necessary to take out an insurance policy against its exposure to legal and professional costs, as well as abortive pre-construction fees, in the event of a successful legal challenge to the contract award.

In another recent case, a quasi-public body intended to award a public works contract in relation to the construction of a student accommodation block. Although legal advice suggested that the contract award would most likely be compliant with the Public Services Act, some uncertainty remained in relation to the correct interpretation of the legislation. As a result of this uncertainty, insurance was required to protect the contracting authority from financial losses in the event of a third-party challenge.

Winning a major contract should be a cause for celebration, not a time to worry. However, the reality is that any firm that has been awarded a public sector contract may, down the road, face a legal challenge to the decision. The Public Services Act simply increases the scope for such challenges.

About the author: Anna Beadsmoore is head of legal indemnity at insurance broker Gallagher

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