London Councils Community Benefits and the Small Lots Exemption David Mosey Partner, Projects and construction department Trowers & Hamlins LLP 4 April 2011

Procurement priorities Value for money – need for savings (will arms length lowest price tendering also deliver high quality goods and services or are other processes/closer analysis going to produce better results?) Economic sustainability – maximum opportunities for local businesses and employment/training of local residents (needs close working relationship with contractors/service providers)

Procurement priorities (cont/d) Community benefits for residents as additional benefits from goods/services procured – what is proportionate, how can it be secured and how is it best costed/evaluated?

Innovation and partnership Need to think about different ways of providing and buying goods/services Necessary to improve value for money while not reducing quality Need to work within EU procurement, but to look for techniques/exemptions/post- award processes that deliver results Need to work with, rather than against, contractors/service providers/suppliers

Effective procurement Selection processes Mobilisation and contracting processes Improvement processes Measurement processes All need to be clear and properly documented so as to meet stated requirements

Defining community benefits Sustainability Training and apprenticeships Local jobs Small businesses and social enterprise

Overview of the proposed approach EU limitations (background) Contract packaging (small lots) Structured involvement in contractors supply chains

Scope Facilities management (repairs and maintenance, cleaning, grounds maintenance etc) Construction Back office services (customer services, printing, advertising, recruitment etc) Other areas (cleaning, car-park management, catering etc)

SMEs and Local Businesses EU procurement does not permit insistence on use of SMEs or local labour by appointed contractors. Best value obligations compromised if procurement structure does not lead to lowest price or most economically advantageous tender. Need for local government to generate opportunities for local businesses/residents wherever possible. Alternative approaches through the small Lots exemption and through second tier supply chain re- engineering.

Small Lots exemption Regulation 8(12) of the Public Contracts Regulations Opportunity, when valuing a contract to establish relevant financial threshold for public works/services/supplies, to exclude a small Lot and procure this in a different way. Exclusion of small Lots from the OJEU Notice and subsequent procurement procedure creates flexibility for local authorities to address local issues through procurement.

Small Lots £64,826 for services and supply contracts or £810,580 for works contracts Less than 20% of aggregated value of all contracts for the relevant services/ supplies/works An opportunity to reserve particular services/supplies/works for smaller businesses (i.e. local opportunities)

Limits on small Lots exemption Cannot lower overall EU threshold by taking out small Lots Works - £3,927,260 net of VAT Services and supplies - £156,442 net of VAT Aggregation rules will apply when assessing total of goods/services/works identified as small Lots

When can a small Lot be created and how should it be treated? A small Lot contract is to relate to the outcome of any works which is sufficient of itself to fulfil an economic or technical function. Could be a bridge, a hospital, a block of flats, a house, a community centre or a programme of roofing works or cyclical painting. Can be broken down into separate works packages but not so as to artificially disaggregate an overall works programme or to convert works into services or supplies.

What about services and supplies? Services and supplies contracts are subject to aggregation rules where entered into in order to fulfil a single requirement. Current EU limit for services and supplies (£156,442 net of VAT) will be applied to the aggregated single requirement. Small Lots exemption in relation to services/supplies needs to be considered in light of all contracts for same type of services/supplies even if awarded at different times.

What about small Lots and frameworks? Small Lots exemption applies to contracts but less clear how it applies to framework agreements. Query how bundling of works/services/supplies under a framework could be combined with excluding small Lots? Suggested that exclusion of small Lots needs to be proportionate to the overall framework and to the work intended to be awarded under that framework each year. Need to look at individual frameworks very carefully.

Bundling/debundling of services contracts Consider, for example, estates services comprising different activities such as graffiti removal/cleaning of common parts/bulk rubbish removal/grounds maintenance Possible identification of one service easily separated from the others and let as a small Lot Provided it does not comprise more than 20% of overall requirement for estate services

Practical assistance to SMEs Procurement procedures need to be simple and not unduly onerous for small companies Advertisement in local press/internet sites where SMEs will have access Review level of administration in terms of questions raised/information requested at prequalification and through invitations to tender Meet the client events and other means of easier access

Supply chain re-engineering Combination of savings with added value ideas after completion of EU processes Jobs, apprenticeships and other training opportunities can be achieved through this system Depends on conditional two stage appointment for: Single Project Framework Agreement Long-Term Contract

Supply chain re-engineering Worked example of Hackney Homes Appointment of five Decent Homes contractors, post- selection review of supply chains and conclusion of joint second tier agreements with suppliers/subcontractors Combination of shared savings with training and employment activities Proposed as National Skills Academy for Construction project

Supply re-engineering – local government initiatives Second tier review of suppliers/sub- contractors/sub-consultants first pioneered by London Borough of Hackney. Adopted by other members of supply chain management group (Newham and Haringey) and being seriously considered by other London boroughs/ALMOs.

Supply re-engineering – local government initiatives Savings through supply chain re-engineering audited by independent consultants and reviewed by DCLG/HCA/ OGC. Savings achieved by Hackney of up to 20% combined with long term appointment of supplier/sub-contractor/ sub-consultants. Assessment on savings combined with added value through improved warranties/reduced carbon emissions/reduced waste. Strong case for use of local businesses/SMEs with relevant expertise.

Supply chain re-engineering and highways Second tier supply chain re-engineering adopted by Surrey County Council in its Highways Maintenance Contracts with Carillion and Ringway. Surrey initiative now being considered by SE7 group of Councils (East Sussex, West Sussex, Hampshire, Kent, Brighton and Hove and Medway). Supply chain management initiative also under review by Department for Transport with a view to sporting wider groups of local authorities nationally.

What is supply chain re- engineering? Appointment of contractors under conventional EU procurement processes (restricted procedure or competitive dialogue). Inclusion of contract conditions/processes/ deadlines for re-assessment of second tier sub- contractors/suppliers/sub-consultants put forward by successful bidders – after award of main contracts.

What is supply chain re- engineering? Basis for review will include business cases and second tier tenders to achieve lower prices for particular sub-contract/supply/sub-consultant packages combined with added value. Tendered prices/proposals of main contractor remain the starting point on i.e. supply chain re- engineering cannot give rise to higher prices or poorer value for money than the approved tender.

What is supply chain re- engineering? – Supply chain re-engineering cannot involve nomination or direct selection by the client as this would require new EU procurement procedures. Supply chain re-engineering therefore led by the appointed contractor under agreed contractual provision/processes/deadlines, subject to client monitoring/approval at each stage.

What is supply chain re- engineering? Legitimate client interest in the exact terms of the sub- contract/supply agreement/sub-consultancy agreement entered into following supply chain re-engineering. Significant potential to link second tier supply chains appointed by the different contractors on behalf of different clients/the same clients undertaking comparable works programmes. For this purpose need alliancing agreements to link the local authority clients and their main contractors in joint supply chain re-engineering initiatives.

Thank you Dr David Mosey