Valuation of contracts under the Procurement Act 2023: the official guidance, explained

The key facts

• Valuation rules exist because different types of contract have different thresholds, and those thresholds trigger different obligations on contracting authorities.
• The rules sit in section 4 and Schedule 3 of the Procurement Act 2023. Section 4 requires authorities to estimate value using the Schedule 3 methodology and prevents deliberate manipulation of a valuation to avoid legal requirements.
• The general rule is to estimate the maximum value payable under the contract, taking account of variables such as options to supply additional goods, services or works, and options to extend or renew.
• Estimated values must be inclusive of VAT. This changed from 1 January 2021 following the UK's independent membership of the WTO Government Procurement Agreement.
• The estimate must include the value of any goods, services or works provided by the contracting authority under the contract other than for payment.
• Frameworks are valued by a particular method: the estimate is the value of all contracts that could be awarded under the framework.
• Concession contracts are not valued under the general rule. They follow their own method, because at least part of the value sits in the right to exploit the works or services.
• Schedule 3, paragraph 4 requires authorities to aggregate requirements where possible unless there are good reasons not to, and deliberately subdividing a contract to evade the Act is unlawful. Where a value cannot be estimated, Schedule 3, paragraph 5 deems the contract above threshold.

What this guidance is and who it applies to

This is the official guidance on the valuation of contracts published as part of the Procurement Act 2023 guidance documents for the define phase. It is aimed at contracting authorities that need to work out whether a proposed contract sits above or below the relevant threshold, because that answer determines which parts of the regime apply and what obligations follow.

The guidance is blunt about why the subject matters. Rules on estimating contract values are necessary as a result of there being different thresholds, and consequently different obligations on contracting authorities, for different types of contract. Valuation is therefore not an accounting exercise carried out after the fact. It is a gateway decision taken early, at the point a requirement is being defined, and it shapes the whole procurement that follows.

The legal basis is section 4 and Schedule 3 of the Procurement Act 2023. Section 4 requires an authority to estimate the value of a contract using the methodology set out in Schedule 3, and it restricts an authority from manipulating that estimate in order to avoid requirements imposed by the legislation. Schedule 3 then supplies the detail: how the estimate is built, the specific methods that apply to particular kinds of contract, and the mechanism that prevents artificial subdivision.

Although the duty falls on contracting authorities, suppliers have a direct interest in the outcome. The valuation decision determines whether a requirement is advertised through the full regime, and therefore whether a supplier ever gets sight of it.

The general rule: maximum value, VAT inclusive

The general rule under the guidance is that an authority must estimate the maximum value payable under the contract, taking account of any potential variables. The guidance gives the obvious examples: options to supply additional goods, services or works, and options to extend or renew the contract. The estimate is not the value the authority expects or hopes to spend. It is the ceiling of what could become payable if every option in the contract is exercised.

That distinction is where most valuation errors begin. A three year contract with two optional twelve month extensions is not valued on the three year core. A call off arrangement with an optional additional volume band is not valued on the base volume. If the contract permits it, the estimate must carry it.

Values must be estimated inclusive of VAT. The guidance notes that this represents a change: it applies since 1 January 2021, following the United Kingdom becoming an independent member of the WTO Government Procurement Agreement. Authorities used to working in net figures need to check that their internal thresholds, templates and approval papers all use the VAT inclusive basis, because a net figure sitting just under a threshold can easily be an above threshold contract once VAT is added.

The estimate also has to capture value that never appears as a payment at all. The guidance requires the inclusion of the value of any goods, services or works provided by the contracting authority under the contract other than for payment. Where an authority supplies materials, equipment, premises, data or staff time to the supplier as part of the arrangement, that consideration forms part of the contract value even though no invoice is raised for it.

Frameworks, concessions and contracts that cannot be valued

Some contract types do not sit comfortably inside the general rule, so the guidance sets out particular methods for them. Frameworks must follow the general valuation rule but also apply the particular valuation method set out for frameworks, which requires that the estimate of the framework is the value of all contracts that could be awarded under the framework. In practice that means the ceiling of the whole framework, not the size of any single call off, and not the volume the authority currently anticipates.

Concession contracts are treated separately again. The guidance is explicit that concessions are not valued according to the general rule in the Act but must follow the particular valuation method set out for concession contracts. The reason given is that at least part of the value in a concession sits in the right to exploit the works or services, so a method built purely around payments made by the authority would understate what is actually being awarded.

There is also a rule for the case where no credible estimate can be produced. Schedule 3, paragraph 5 deems a contract to be above threshold where its value cannot be estimated. The guidance frames this as protecting compliance with the United Kingdom's international obligations: rather than allowing uncertainty to pull a contract out of the regime, uncertainty pushes it in. Authorities should treat that as the default outcome of an unresolved valuation, not as a loophole.

Aggregation, subdivision and the anti avoidance rule

The most operationally significant part of the guidance is the treatment of aggregation. Schedule 3, paragraph 4 requires authorities to aggregate requirements for the purposes of valuation where possible, and the guidance is clear that deliberately subdividing a contract in order to evade the requirements of the Act is unlawful. Splitting a single requirement into several smaller awards so that each falls below a threshold is not a valuation technique. It is a breach.

The rule is not absolute, however. The guidance permits requirements not to be aggregated where there are good reasons. The examples it gives include delegated budget structures, where spend genuinely sits with separate parts of the organisation, and scenarios where not aggregating would lead to better value outcomes, for example where breaking a requirement into lots opens it to a wider and more capable field of suppliers. The guidance also refers to flexibility around separate operational units, which recognises that large organisations do not always buy as a single entity.

The practical test is intent and evidence. A commercially reasoned decision to run separate procurements, recorded at the time with the reasoning set out, is a defensible application of the good reasons exception. A pattern of similar awards, made close together, to similar suppliers, each landing conveniently under a threshold, invites the opposite reading. The difference between the two is almost always the quality of the contemporaneous record.

Applying this in practice

Valuation should happen at the define phase, before the route to market is chosen, because the threshold answer determines the route. Working backwards from a preferred route to a convenient value is exactly the manipulation section 4 is written to prevent. The sequence matters as much as the arithmetic.

Build the estimate from the contract as drafted rather than from the budget as approved. Read the option clauses, the extension mechanism, the volume flexibilities and any provisions under which the authority will hand over goods, services or works to the supplier without payment. Add VAT. Then compare the resulting figure, not the net core value, against the relevant threshold.

Where a framework is in prospect, value the framework as the total of all contracts that could be awarded under it, and record that ceiling clearly so that later call offs are governed by a figure the market has actually seen. Where a concession is in prospect, use the concession method and evidence the exploitation value rather than treating it as a low value contract simply because little cash flows from the authority.

Finally, treat aggregation decisions as decisions in their own right. Record what was considered as a single requirement, whether it was aggregated, and if not, the good reason relied on. That short note is the difference between a defensible commercial judgement and an allegation of artificial subdivision made years later without any surviving context.

How eSourcing Data helps

Valuation is a decision that has to be evidenced, and evidencing decisions is what the eSourcing Data platform is built for. Estimated values, the assumptions behind them, the option and extension periods included, the VAT inclusive figure and the threshold conclusion can all be captured against the procurement record at the define phase, so that the reasoning is stored at the moment it is made rather than reconstructed afterwards.

The aggregation question benefits most. Because requirements, awards and suppliers sit in one place, teams can see related spend across the organisation before deciding whether to treat requirements separately, and can record the good reason where they choose not to aggregate. That gives internal audit, and anyone reviewing the procurement later, a clear line from the estimate to the route to market and on to the notices published. Framework ceilings can be held against the framework record so that call off activity is measured against the value that was advertised.

The platform supports the surrounding workflow too: notices, evaluation and supplier management for above threshold procurements, and lighter workflows for lower value requirements, all against a single audit trail. eSourcing Data does not make the valuation judgement for you, and it is no substitute for reading section 4 and Schedule 3. What it does is make sure the judgement you made, and the reasons for it, are still there when someone asks.

What to do about it

1. 1Value every contract at the define phase, before selecting the route to market, and record the estimate and its date.
2. 2Estimate the maximum value payable, including all options to extend, renew or supply additional goods, services or works.
3. 3State values inclusive of VAT, and update templates, thresholds and approval papers that still use net figures.
4. 4Include the value of anything the authority provides to the supplier under the contract other than for payment.
5. 5Value frameworks as the total of all contracts that could be awarded under them, and value concessions using the concession method.
6. 6Document aggregation decisions: what was considered together, whether it was aggregated, and the good reason where it was not.
7. 7Where a value genuinely cannot be estimated, treat the contract as above threshold and proceed accordingly.