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TURCZA Kancelaria Radcow Prawnych | Poland

Value-adjustment of remuneration under the public procurement law in relation to contracts concluded before 1 January 2021 and after 31 December 2020

Valorization clauses are used to restore the state of economic equilibrium between the parties in a public procurement contract, disrupted by certain events that may occur during its execution. The execution of a public contract concluded for at least 12 months, raises the risk that external market factors will significantly affect the content, amount and ultimately the equivalence of the benefits agreed by the parties and fulfilled under the contract. The valorization clause is intended to minimize such negative impacts on the parties to the contract, which is in fact in the interest of both parties to the contract. The role of contractual valorization is therefore to make the contractor’s remuneration more realistic in the event of changes in the price of materials or costs related to the performance of the public contract. This is especially important in the current economic situation, causing – among other things – a significant increase in the price of materials and construction work, shortages of personnel and equipment, withholding product supplies, product components or materials, difficulties in access to equipment or in the implementation of transportation services.

On 1 January 2021, the Act of 11 September 2019 came into force. The Public Procurement Law (“New PZP“), introduced Article 439, according to which, in the case of contracts concluded for a period of more than 12 months, it is the duty of contracting authorities to determine the rules under which it will be possible to change the amount of contractor’s remuneration in the event of changes in the prices of materials or costs related to the execution of the contract. However, this does not mean that this provision will apply to all contracts concluded after that date.

The key provision for determining the relevant provisions that should apply to a public procurement contract is Article 91(1) of the Law of 11 September 2019, Introductory Provisions of the Law – Public Procurement Law (Journal of Laws, item 2020, as amended), (“Introductory Provisions”). It follows from the very content of the cited provision that:

“to the public procurement contracts and framework agreements referred to in the law repealed in Article 89 (and therefore referred to in the Public Procurement Law – footnote), concluded:

  1. before 1 January 2021,
  2. after 31 December 2020, following contract award procedures initiated before 1 January 2021.

current provisions shall apply”.

Based on the cited provision, it should be concluded that the date of initiation of the public procurement proceedings is decisive in determining the rules applicable to the public procurement contract. If the proceedings were initiated before 1 January 2021, regardless of the date on which the Agreement was concluded, the provisions of the Law of 29 January 2004 (“Old PZP”) should be applied.

Both the New PZP and the Old PZP contain provisions on contract amendments, on which the parties to the contract (the contracting authority and the contractor) may rely if they consider that an increase in remuneration is justified.

According to Article 144(1)(1) of the Old PZP, it is forbidden to amend the provisions of the concluded contract or framework agreement in relation to the content of the tender on the basis of which the contractor was selected, unless at least one of the following circumstances occurs:

  • the changes have been provided for in the contract notice or the terms of reference in the form of unambiguous contractual provisions that define their scope, in particular the possibility of changing the amount of the contractor’s remuneration, and the nature and conditions of the changes.

Although the provision is heavily underdetermined, after analyzing the case law, it seems that high inflation could be considered a circumstance that the contracting authority, acting with due diligence, could not foresee, and therefore that a price increase alone may be a reason for changing the remuneration under both the New PZP and the Old PZP. The Supreme Court, among others, in its judgment of 20 November 2008. (ref. III CSK 184/08) stated:

“Undoubtedly, a sharp increase in the prices of construction materials and services after a long, nearly 10-year period of their stabilization may be considered unforeseeable – at the time of concluding the contract – circumstance justifying a change in the lump-sum remuneration specified in a contract concluded under the regime of the provisions of this law, in force before its mentioned amendment.”

On 24 March 2022 the Public Procurement Office published on the official website the opinion entitled. “Permissibility of amending a public procurement contract under Article 455 (1) (1) and (4) and Article 455 (2) of the New PZP Act”, in which the Office confirms that military action in Ukraine (in principle) can be qualified as an external phenomenon that could not have been foreseen. Even though it refers to regulations that came into force after 1 January 2021, it seems that the standing could also be applied to the Old PHP.

The fact that the remuneration was specified as a lump sum is irrelevant – if the entity awarding the public contract (acting with due diligence) could not foresee such a significant price increase, it seems that even a lump sum remuneration can be changed.

Of course, the decision to amend the contract by increasing the contractor’s remuneration should be preceded by the ordering party’s thorough analysis of the information provided by the contractor. The contractor himself should demonstrate concrete data proving that the cost of performing the contract has indeed increased, preferably with relevant evidence (e.g., quotes from subcontractors, statements from wholesalers, distributors).

In other words, to realistically think about increasing the remuneration of a contract concluded under the PZP regime, the contractor should submit a proposal to the entity awarding the public contract, which includes analysis that leads to the conclusion that the calculation made by the contractor before submitting the bid is no longer valid. After reviewing the materials from the contractor, the entity awarding the public contract should confirm that the exact cost of performing the contract has increased, to increase the remuneration by that amount.

The next legal ground for amending the contract when inflation is a primary factor may also be Article 144(1)(6) of the Old PZP. In light of this provision, it is permissible to amend the concluded contract or framework agreement if the total value of the amendments are less than the amounts specified in the regulations issued pursuant to Article 11(8) of the Old PZP and less than 10% of the value of the contract originally specified in the agreement in the case of service or supply contracts, or less than 15% of the value of the contract originally specified in the agreement in the case of works contracts. Thus, the scope of change made under this provision, entailing a change in the value of the contract (the contractor’s remuneration), depends on its value. At the same time, it should be noted that the provision clearly indicates the possibility of making multiple changes, provided that their total value does not exceed the value specified therein. It should be emphasized that to make such changes, it is not necessary to meet any additional prerequisite for the admissibility of material changes to the contract. Article 144(1)(6) establishes the so-called value threshold of non-substantiality of changes to the contract. The general guidelines limiting the freedom of changes indicated in paragraph 1b (changes must not lead to a change in the nature of the contract or framework agreement) will apply to changes made under this provision.

The calculation of the value of permissible amendments should be made, taking into account the provision of paragraph 1d, in light of which, if the contract contains provisions providing for the possibility of increasing or decreasing contractor’s remuneration due to circumstances other than a change in the scope of the contractor’s performance, the permissible value of the amendment to the contract (up to 50% of the contract value) shall be determined based on the value of the contract originally specified, taking into account the changes resulting from those provisions.

As for the moment from which the valorization should be counted, due to the lack of provisions in this regard in the Old PZP, it is worth using the provisions of the New PZP as a reference. The benchmark to which we compare changes in remuneration will, as a rule, be the date of conclusion of the contract or the date of bids’ opening. The latter should be the date of choice if the contract is concluded more than 180 days after the deadline for submission of bids. In this case, the initial date for determining the change in remuneration shall be the date of opening of the bids.

Referring to the New PZP, it was decided to include a provision in the text of Article 439, covering the issue of a salary adjustment clause. According to this provision, all contracts subject to the provisions of the PZP, covering construction work or services, concluded for a period of more than 12 months, ought to contain an indexation clause, providing for the possibility of modifying the remuneration, in the event of a change in the price of materials or costs related to the execution of the contract.

The above change has significantly affected the position of the contractor, as currently the obligation to valorize the remuneration follows directly from the law.

It is worth mentioning at this point, however, that in the case of contracts concluded for less than 12 months or supply contracts, the insertion of an indexation clause by the contracting authority is solely at their discretion.

The New PZP requires that the provisions containing the valorization clause consist of the mandatory elements specified in the second paragraph of the said Article 439. These include, among others:

  1. the level of change in the price of materials or costs,
  2. the initial date for determining the change in remuneration,
  3. the method of determining the change in remuneration (e.g., with reference to the CSO indices or the list of materials used and price changes),
  4. the impact of the price change on the cost of contract performance,
  5. the maximum value of the change in remuneration and the period during which subsequent changes in remuneration may occur.

When including a valorization clause in a contract, the ordering party is free to determine the values of the above elements, taking into account the individual specifications of the contract, the anticipation of changes in material prices or the ordering party’s estimated costs and financial capabilities. At the same time, it should be noted that the valorization should not be of a sham nature. Cases in which clauses are formulated that are illusory in nature and are only an expression of the apparent fulfillment of a statutory obligation should be considered contrary to the public procurement law. The cases of formulating clauses which are illusory and express only the apparent fulfillment of a statutory obligation should be considered contrary to the provisions of the public procurement law.

The provisions in the contract regarding the rules for changing the contractor’s remuneration ought to be in harmony with the requirements on how the bidder calculates the bid price, as defined by the contracting authority in the terms of reference for the contract (ToR). The point is that in the event of circumstances requiring valorization of remuneration, it should be technically feasible, having as a basis the bid estimate attached to the contract, as well as drawn up in accordance with the expectations of the ordering party.

In conclusion, not every contract entered into after 30 December 2020, within the framework of a public procurement will include valorization provisions. This means that many of the larger projects currently under public procurement are not secured by an indexation clause. In order for the contract to be amended, the contractor as to demonstrate that, under certain circumstances, the process of performing the contract in accordance with the original assumptions is not possible as a result of force majeure, which in turn creates a real risk that the performance of the contract will not be economically justified for the contractor.

Written by:

Marek Turcza


+48 61 666 37 60

Article from – TRENDS Real Estate No 9

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