Key takeaways
KPIs required for big contracts
Helps track supplier performance transparently
Poor ratings can limit future work
Public scores may affect supplier eligibility
Easier to exclude underperformers
No formal breach needed for disqualification
The Procurement Act 2023 (Act) and accompanying Procurement Regulations 2024 (Regulations) are now in force and in this update number 8 of our series, we look at how the Act introduces clear guidelines for establishing, monitoring, and enforcing supplier performance standards aiming to improve the accountability of suppliers in delivering goods and services to the public sector.
One of the key policy drivers in the design of the new regime is to take a more holistic approach to procurement and contracting, so that procurement deals not only with the award of the contract, but its ongoing management through its lifetime.
Key Performance Indicators
Under section 52 of the Act, contracting authorities are now required to set a minimum of three Key Performance Indicators (KPIs) for contracts which are in excess of £5 million in value and details of those KPIs must be published. If more KPIs are used in the contract, contracting authorities can indicate which they consider most material and it is recognised that these can change over time.
At least once in every 12-month period, during the lifetime of any such contract, and on termination, the contracting authority is required to assess the supplier’s performance against the KPIs and publish that information in a Contract Performance Notice (CPN). The relevant information which must be included in the CPN by the contracting authority is set out in the Regulations. These prescribe, at Regulation 39, a rating system set which ranges from “Good” indicating meeting or exceeding KPIs, and “Inadequate” where supplier performance is significantly below the KPIs. These ratings must be used, so contracting authorities will need to map these against any relevant contract mechanisms. The effect is to produce a system where, regardless of what each contract says about performance, there will be a consistent set of descriptors used to describe contract performance across the public sector as the contract matures.
Supplier Breach and the CPN
The CPN, as well as being used to publish the annual assessment of supplier performance against KPIs, will also serve as a means of making public other relevant information pertaining to the supplier’s performance of the contract. Contracting authorities must publish a CPN (in accordance with section 71(5)):
to report incidents of breaches of contract which result in partial termination, award of damages, settlement agreement; and
where the supplier is not performing the contract to the contracting authority’s satisfaction and has failed to improve performance after the opportunity was given by the contracting authority to do so.
The contract value threshold (£5m+) is not relevant to the use of the CPN in these circumstances .
This is significant because readers will recognise from our previous update on exclusion and disbarment that these are potential exclusion grounds – so that a supplier may become “excludable” from future procurements where such poor performance occurs. The CPNs therefore play a vital role in making poor performance of a contract publicly known, with potentially serious ramifications reputationally for a supplier but also excluding them from further opportunities in the public sector, and thereby incentivising performance.
What is the likely impact of these changes?
The publication of CPNs and assessment of KPIs adds a whole new layer of transparency to the operation of public contracts which for the first time puts supplier performance issues in the public domain.
As previously discussed, the Public Contracts Regulation 2015 applied a relatively high threshold before poor performance could be used to justify exclusion from public sector procurement (requiring that there was a form of serious sanction arising from the breach i.e. damages or termination.) The Act makes it clear that the right to exclude can now be engaged merely where the supplier has not performed the contract to the contracting authority’s satisfaction so the threshold for exclusion is much lower.
The selection and publication of KPIs by the contracting authority is designed to encourage proper and on-going contract management of high value contracts and to incentivise delivery by suppliers to ensure continued access to the marketplace. However, this may also create a marketplace where suppliers are likely to fiercely resist allegations of poor performance in current contracts to avoid reputational damage and the consequences of poor performance being applied in future procurements.