Government Contracts 2018: Trends & Conclusions

Our research into the government contracts market comes at an interesting time for the practice area. A field of law so closely linked to politics has inevitably been affected by the turbulence in international affairs in recent months. There have also been also been a number of trends which appear to transcend domestic and international politics. The increasing litigiousness of the procurement process is having a range of effects on the market. Sources highlight the resurgence of PPP initiatives in a number jurisdictions, while changes to the tendering process and an increasingly experienced contractor market are also changing the way in which practitioners and clients operate. The coming 12 months are full of anticipation for those watching the government contracts space.

Litigation and specialisation

By some margin the most cited observation by sources this year has been the proliferation of litigation in the procurement process. Litigation in the government contracts space is having a number of effects for lawyers in the field. One such change is that the amount of work has risen, as lawyers are now increasingly expected to handle bid protests in the tendering process.

The growth in contentious work has not been limited to typically litigious jurisdictions according to observers. In fact, the trend appears to span the globe. One source states that, at present, “anything of significant value tends to end up in courts”. It seems a chain of compounding events has given rise to this situation. Procurement contracts are now viewed as too valuable to lose. With contractors facing the possibility of spending on litigation or losing a case, the option has increasingly been to opt for challenging the decision.

With contractors increasingly seeing government contracts bids as worth disputing, so practitioners at larger firms have found it difficult to navigate the conflicts of interest that can occur. This change seems to be reflected in our research with many lawyers leaving larger firms to move to or start up boutique litigation practices. Boutiques have a natural tendency towards lower fees, but the added competition in the market is also suppressing costs for contractors. Sources state, “Even sophisticated clients want to try and minimise their litigation spend and use firms who have the same types of skills.” Boutiques’ lack of conflicts means they are readily available to challenge decisions, further enhancing the legal competition in the space.

Across the legal world, third-party funding is having dramatic effects on legal practices and the field of government contracts is no exception. With contractors able to keep the financial cost of litigation off their books by outsourcing the financing of going to court, litigation, especially in high-value cases, can seem a worthwhile avenue to pursue.

Rather than the rise in litigation being hampered by the usual desire to reduce legal fees, contractors are instead seeing this cost contained by greater market competition and through third-party funding. As such, not only is the incentive to challenge a decision great, but the costs of doing so have not risen so much as to disincentivise the practice.

EMEA

Public procurement in the EMEA region remains vibrant, with many of the top practitioners in our research this year practising in the region. A number of issues are likely to produce major changes in the procurement market over the coming months. In Finland, there is ongoing legislation being formulated regarding the reorganisation of social and health services, while practitioners in Estonia have highlighted the difficulties that government budgetary restraints are having for authorities. One source states, “They are finding it challenging to obtain outside legal assistance when there is greatest need for it.” One response from players in the market has been to take on work teaching procurement authorities and explaining legal changes, so that they can be more self-sufficient.

Brexit is still a hot topic, with great uncertainty permeating a range of legal sectors. Government contracts is no exception to this. Commentators are not predicting immediate change, however, stating their understanding to be that procurement does not constitute an immediate priority for the government. With the UK already a signatory to the Agreement on Government Procurement (GPA), it is likely that many of the current rules will simply be transposed from the EU regulations which also incorporate GPA rules.

In Ireland, Brexit is leading to concerns regarding future levels of competition. As London-based firms navigate the uncertainty surrounding post-Brexit regulations, one expected consequence is for English firms to establish themselves in Dublin. Market observers in Ireland described to us how it is “very easy for UK firms to come and do work here because the law is very similar” and that “in terms of competition, this is something everyone is looking at”.

A number of market sources have highlighted what they feel to be the politicisation of the procurement process. However, the increased demand for social benefits of a government contract continues to be cited by lawyers in the field. When in the past a contractor may have had responsibility to build solely new homes or a railway station, market players are now highlighting the additional requirements set forth by governments. A developer may now, along with receiving the contract to develop a town centre, also be required to build a new local library. In the UK, one source predicts that “over time, when we move away from Europe, the regulations around this will be relaxed” to further enable their usage in government contracts. This is requiring greater creativity from lawyers according to market players, as advice to contractors increasingly needs to navigate such conditions.

In South Africa, a depressed economy has resulted in a fall in PPP infrastructure in recent years, with contractors looking to invest outside the jurisdiction. Business may pick up for practitioners in the region, however. One source expects that “a lot of opportunities will open up in the next 12-18 months” as “there is speculation that under the new government there will be a restructuring of state-owned enterprises”. Practices with a strong continental footprint are likely to benefit from the renewed interest of Indian contractors in competitive bid processes across the rest of the African continent. As India’s economy continues to expand, inbound investment is likely to keep rising. With this, practitioners in the African government contracts space can expect more work, and for it to have a more international focus.

Americas

In Chile, respondents state that “expectations are very high for the new government”. Resources, however, are low and this leaves procurement authorities in a difficult position to challenge and regulate the market. PPP contracts have been infrequent in recent years after the previous government changed their model for hospital construction to focus on publicly funded work. It remains unclear whether the new government will reverse this policy, leaving contractors and lawyers close to the jurisdiction in an uncertain position.

In the US, President Trump’s executive order to make firms “buy American, hire American” is shaping contractors’ decision-making in the jurisdiction. Commentators refer to the way in which “the strengthening of protections of US companies under procurement laws are beginning to creep in”. The broadening of the original Buy American Act is likely to see greater enforcement of the definition of an “American” good and more disputes over what this means. In turn, this could lead to a further rise in bid protests in the government contracts space and more work for practitioners.

Defence spending has recently received a large boost from the administration in the US, increasing base spending to $639 billion. Players close to the industry expect this to continue in the coming months, with government tenders already on the rise.

Lawyers in the US have noted a marked rise in the amount of competition from firms outside the jurisdiction. One source notes that “the US is a developing market in this space” and Canadian, European and Australian firms are taking advantage of their procurement experience. With “investors and contractors from those countries increasingly competing for US projects”, American lawyers are facing tough competition from outside firms with established connections to these investors.

Conclusion

With litigation continuing to rise and the proliferation of boutiques in that space, competition appears to be a key theme for the market at present. A trend towards divergence in the market, between larger firms working on central government and multi-jurisdictional projects and regional firms and boutiques covering highly specialised matters and projects, is also noticeable.

Our research reflects this competitive market, with a number of firms performing well this year. At the UK Bar Monckton Chambers and Keating Chambers both excel on the litigation front, while Bird & Bird stands out for its work across a number of industries. Washington, DC continues to dominate the North American space, with firms such as Morrison & Foerster and Wiley Rein both achieving impressive numbers of nominations in our guide this year. As political uncertainty continues to change regulatory norms in jurisdictions around the globe, practitioners in the government contracts field can expect to see their caseloads increase over the coming months.

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