As this article explains, public institutions face compliance risks when engaging in recurring low-value contract extensions since this practice could constitute contract splitting if the total expenditure under the extensions exceeds the monetary thresholds that would require open tendering under the trade treaties. Public institutions need to adopt practices to monitor their recurring contracts and phase out any extensions that could result in contract splitting violations.
Defining the Terms of Analysis
To better understand the inherent risks associated with multiple extensions, it is helpful to define recurring contracts and contract splitting. Recurring contracts include existing contracts (which may have been originally directly awarded or awarded by tender) that require renewals or extensions beyond the scope of the original contract award. Notwithstanding open tendering duties that may otherwise apply to those new expenditures, retendering these contracts is often operationally challenging due to: (a) the relatively low value of those new expenditures when considered against the time and level of effort required for a new tendering process; and (b) the immediate operational needs related to the ongoing performance of the contracts in question.
At the same time, contract splitting, which is expressly prohibited under the trade treaties, refers to the practice of splitting or otherwise structuring a contract, contract renewal, or extension, in a manner that: (a) artificially reduces the anticipated total value of that expenditure when considering longer-term operational requirements; and (b) circumvents the tendering obligations that would otherwise apply to those longer-term expenditures.
In summary, while the operational pressure to quickly extend a lower value contract to avoid service and supply disruptions may not appear to be a big issue in the first year, institutions that continue this practice year after year for the same good or service run the risk of breaching the contract splitting rules through non-competed repeat expenditures.
When addressing this long-term issue, public institutions need to strike the right balance to enable short-term operational continuity within the context of longer-term compliance with otherwise applicable tendering obligations. Given the longer-term risks associated with recurring contracts, public institutions need to adopt protocols to monitor their recurring contracts and phase out any extension that could result in contract splitting violations. The scope of these protocols should include all new expenditures, whether under existing contracts or under newly awarded contracts.
Factors to Consider
When dealing with a recurring contract, a public institution should consider the following factors: (a) whether that anticipated value of that new expenditure would meet or exceed the value that would typically require an invitational or open tendering process; (b) whether complying with any applicable tendering requirements would create an inordinate short-term operational impact when considering ongoing operational needs and the time and cost of administering a new tendering process; and (c) whether the transitional costs of awarding the contract to a new supplier through a new tendering process would be disproportionate to the level of expenditure associated with that recurring contract.
Where a public institution, in consultation with procurement and legal advisors, determines that a new expenditure under a recurring contract would typically require a new tendering process but that a new tendering process or award to a new supplier would create an inordinate short-term operational impact when considering related time and operational costs, then that institution should (a) prepare a record to document the decision for proceeding with the new expenditure under a recurring contract; (b) obtain the necessary internal approvals for that new expenditure; and (c) document a longer-term procurement plan to bring any further expenditures for that requirement into compliance with otherwise applicable tendering obligations.
In addition to the above, public institutions should set a total expenditure limit on any future expenditure under a recurring contract while at the same time ensuring that those extensions are subject to a duty to report the recurring expenditures to the institution’s procurement oversight group. That oversight group should establish a clear mandate to phase out recurring contracts as part of a broader portfolio management strategy that also includes establishing supplier roster framework arrangements to better manage small multiple awards in compliance with trade treaty rules.
Future Considerations
Stated simply, public institutions should avoid awarding short-term deals in areas where longer-term needs are reasonably foreseeable. To avoid future contract splitting issues, public institutions need to engage in longer-term strategic planning. This means looking beyond the immediate timeframe to better ensure that new contract awards are properly scoped to address longer-term needs while also allowing sufficient time to properly retender future contracts.
