The collapse of Carillion has brought the Public Services Act back into the spotlight, raising risks to developers and contractors working with local authorities of time-consuming and costly litigation proceedings.
Much more than a construction company, Carillion badged itself as an ‘integrated support services business.’ In 2016, Carillion had sales of £5.2bn, with an impressive market capitalisation of almost £1bn. The following year, the company collapsed under the weight of £1.5bn of debt, despite attempts between Carillion, its lenders, and the government to reach a suitable restructuring deal. Its demise immediately led to questions as to how the company had continued to secure new contracts from local authorities, and has led to a review of the awarding of large contracts.
The power of the Public Services Act
The Act requires local authorities and government bodies to consider the social value of the contracts they award. The Act gives smaller, local businesses a natural advantage. Bidders must prove that how they do business positively impacts the local social and economic value of their area, incentivising good practice and rewarding companies that support communities.
Since the collapse of Carillion hit the headlines, the bidding process and the awarding of public contracts has been scrutinised heavily. Using the Public Services Act, a company which was unsuccessful in the awarding of a bid can challenge the decision of the local authority. This can cause many problems for the winner of the bid, such as project delay and costly litigation.
For example, Developer A wins a bid for the construction of a hospital. Developer B who did not win the contract, feels that the contract was awarded unfairly and a number of factors were not considered. Under the Act, Developer B has 6 weeks to challenge the decision. During this process an investigation can be instigated, causing the project to stall. Meanwhile, the successful bidder, Developer A, may have already incurred project costs such as building materials and the hiring of extra staff.
Due to the challenge, there is a court case and legal fees need to be paid. The court finds the process was unfair and orders another tender to take place. Developer B subsequently wins this contract, leaving Developer A with financial losses.