Procurement and a no deal Brexit

Public Procurement in Northern Ireland represents a very significant proportion of commercial transactions and plays an important role in the vitality of Northern Ireland’s economy. However, the unknown impact of Brexit continues to cast a shadow over this sector of the economy, writes Caroline Prunty.

A no deal Brexit is becoming more of a reality with the demise of Theresa May and her withdrawal agreement. The likelihood is that her successor will be a hardened Brexiteer and the level of risk of a no deal outcome is, as quoted by Governor of the Bank of England Mark Carney, “uncomfortably high”. 

For decades the UK and EU have carried on business on the basis of international treaties which have facilitated the free movement of goods, labour, and services. A no deal Brexit will inevitably change this landscape beyond recognition. There can be no doubt that these changes will present significant challenges to companies who have recently entered into procurement agreements or are in the process of tendering.

Companies tendering now have to consider various scenarios, including a no deal Brexit. It is clear that the contracting authorities in their tendering documentation require the bidders to both fix price and agree to delivery targets with significant KBI penalties where companies fail to make delivery targets. The significance of these penalties should not be underestimated.

The threat of a no deal Brexit entirely undermines the ability of companies to forecast prices in 2019 and beyond. There can be little doubt that the contracting authorities will continue to pursue the goal of obtaining the best possible fixed price, subject to quality, and lock this price in, well into the future. The real danger for companies is that by providing a price at a competitive level this could prove to be very detrimental in the not too distant future. The price of products is only likely to rise under a no deal scenario.

There are a number of issues that companies need to consider in terms of pricing. What will happen to the value of sterling in a no deal Brexit is worrying. If the value of the pound were to drop significantly, the cost of raw materials and imports could rise dramatically.

A no deal Brexit will undoubtedly result in a customs border with the consequence of duties and tariffs being imposed. A customs border will increase administrative costs in terms of the preparation of the necessary documentation to bring materials and products into the country. Moreover the issue of VAT has been cast into the spotlight, despite the Government’s previous announcement that a ‘no deal brexit’ would simply invoke the normal import/export rules in respect of supplies to or from the EU. The Conservative Party leadership battle has now introduced the notion that VAT may be scraped and replaced with an alternative form of ‘sales tax’!

In respect of delivery times, a no deal Brexit could have significant implications. Delays at customs, inspections and additional paperwork could have a negative effect on the ability of companies to meet delivery deadlines.

Companies will have to consider the stock piling of products in order to ensure that delivery times are met. Where there are multiple products involved, the stock piling of such products could potentially affect cash flow and resources. Nevertheless, it will be incumbent upon companies to assess their business models and take steps to ensure that the correct lead in times are in place.

The reality is that Brexit, in the absence of a free trade agreement, is inevitably going to make the process of preparing procurement documentation much more problematic. Companies will have to be realistic in terms of price but this is exceptionally difficult given the uncertainties involved. The companies that have already entered into procurement agreements with narrow margins and stringent delivery times may well have to consider whether it is financially viable to continue with these contracts in a no deal scenario. Companies, particularly small and medium sized organisations, will have to consider whether it is possible to exit these contracts early.

In respect of ongoing procurement processes, companies need to be very aware of the contractual terms in respect of early exit and should not enter into these contracts without carefully considering the various issues raised.

This article is not legal advice. MMW Caroline Prunty, Head of Commercial Litigation at Millar McCall Wylie, is a member of the Procurement Lawyers Association and advises in the field of public procurement.

If you need any advice on procurement issues, please contact:
Caroline Prunty
T: (028) 9020 0050

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