Pay adjustment for contractors completing public orders – government announcements
The Ministry of Development and Technology is engaged in works over a special law governing adjustment of pay under procurement contracts, which is to be presented as soon as possible.
REASONS FOR CHANGES
A sudden decrease in the economy in recent months, limitation of access to raw materials, considerable increase of material prices and costs caused by the Russian invasion on Ukraine directly affected expenses incurred in connection with completion of contracts, which has a particularly negative effect on the situation of entities which are to be paid lump remuneration. There is a special group among such entities: contractors and subcontractors engaged in performance of public procurement contracts.
Although the new public procurement law, i.e. the Act of 11 September 2019, no longer provides for the sole criterion of price, which was replaced by the “value for money”, the price is still important and may account for as much as 60% of the bid assessment. Contractors who would like to win a contract still need to define their remuneration so that it is more attractive than that offered by other contractors, i.e. the lowest.
Current legal status
The current Public Procurement Law provides for mandatory adjustment clauses with respect to the following contracts:
- contracts concluded for a period longer than 12 months
- contracts for construction works and services.
Additionally, contractors are obliged to include contractual provisions on remuneration in such a way that the subcontractors’ rights are not less favourable than those under their contract with the contracting entity. As regards the other contracts, a change of the contract relating to remuneration should be specifically described in the contract (according to Art. 455 par. 1 sec. 1 of the Public Procurement Law), which is not always the case.
Currently however, most adjustment mechanisms do not allow for restoration of the balance between the Parties, as they envisage an increase of pay by maximum 5-10% but with respect to the entire contractual term and with the first adjustment being possible only after 12 months of contract performance. Additionally, the law does not apply to those contractors who make supplies and whose contracts are shorter than 12 months.
Additionally, the adjustment clauses do not apply to contractors who entered in contracts before the effective date of the new regulations, and who could not include provisions in their subcontracts that would be less favourable than those binding the contractor with the contracting entity. Also the economic conditions in which the contracts were concluded differed considerably from the current situation, for example the level of inflation was less than 3% annually.
OPINION OF THE PPUBLIC PROCUREMENT OFFICE
The first sign for the public procurement sector that pay adjustment was required was the opinion issued by the Public Procurement Office on 24 March 2022, in which the Office supported the possibility of amending public procurement contracts adversely affected by the conflict in Ukraine, based on the clause of extraordinary change of circumstances under Art. 455 par. 1 sec. 4 of the Public Procurement Law in a situation where:
- the contract does not contain an adjustment clause,
- the anticipated adjustment clause will not enable restoration of the parties’ economic balance.
This stance may also apply to changes introduced in contracts performed under the previous Act of 29 January 2004, because the provision of Art. 144 par. 1 sec. 3 has the same wording as the above provision of the new act, as indicated by the Public Procurement Office when issuing its opinion and referring to the previously issued opinion on applicability of this clause.
No willingness of the parties – the legislator interferes
In addition to the stance taken by the Public Procurement Office and recommendations of the General Prosecution of Poland, it needs to be emphasized that contracting entities must also be willing to change contracts, and they, bound by the budget rules, are not willing to adjust contractors’ pay.
The planned legislative solutions are to apply to both: contracts concluded before 1 January 2021 (when the law did not provide for the obligation to include an adjustment clause) and after 1 January 2021. For this reason, with respect to contracts concluded before 1 January 2021, the special law will provide for the possibility to include adjustment clauses. As regards contracts concluded after 1 January 2021, after fulfilment of the requirements set forth in the special law, the adjustment limits adopted in the existing contracts can be increased.
In case of contracts concluded before 1 January 2021, if the contractor demonstrates that changed prices of materials or costs actually affect the cost of completion of the contract, the parties can change the contract and adjust the contractor’s remuneration in observance of the 50%-50% division of risks between the parties or change the scope of performance or the date of completion of the entire or part of the contract, or temporarily suspend performance of the entire or part of the contract.
Additionally, the list of contracts subject to the obligation of inclusion of an adjustment clause in supply contracts and contracts for construction works and services longer than 6 months will be extended (currently the adjustment-clause obligation applies to contracts concluded for longer than 12 months and to contracts for construction works and services).
As declared by the Ministry, the special law will not provide for an automatic and mandatory adjustment.