Risks with public contract amendments

The correct application of procurement contract amendments has always been a hot topic. This is supported by the list of the Procurement Monitoring Bureau's (“PMB”) most commonly discovered inconsistencies throughout the procurement procedure, where, among other things, the proposed method for amending a procurement contract has frequently been negotiated insufficiently or in a manner that is inconsistent with the Public Procurement Law (“PPL”).[1]

The implementation of several procurement contracts has become challenging in practice due to the current geopolitical situation, which is significantly being affected by cost hikes and resource shortages.[2] Therefore, the question of how to correctly prepare amendments to a procurement contract is on the top agenda of several contracting authorities.

This article outlines the Senate’s ruling in case SKC-89/2022, that was issued on 20 October 2022 (“Judgment”). In this instance, the Senate evaluated the tenderer’s right to an extension of the deadline for the completion of the works if the contracting authority had suspended or delayed performance of the task, due to circumstances beyond the tenderer’s control.[3]

This article will briefly address three specific questions:

1. First, what are the considered essential amendments to a procurement contract;
2. Second, a brief analysis of the cases when it is permissible to make significant amendments to a procurement contract; and
3. Third, the main conclusions expressed in the aforementioned Judgment regarding the admissibility of amendments to a procurement contract.

 What are considered significant amendments to the procurement contract?

Article 61 of the PPL, second paragraph, states that the following situations qualify as “significant” amendments to the general agreement or procurement contract:

• The amended provisions of a procurement contract and general agreement would enable the submission of different offers or the participation or selection of additional candidates or applicants in the procurement if they had been included in the procurement procedure documents;
• The economic balance (for instance, the distribution of risks and the means to compensate them) stipulated by the procurement contract or the general agreement is changed in the interests of the procurement;
• The supplies, services, or construction work covered by the procurement contract are not covered by the general agreement or the originally executed procurement contract;
• The applicant (the tenderer) chosen during the procurement procedure is replaced by a different provider.

The following amendments may be viewed as significant, according to the IUB’s explanation:

• permission from the contracting authority allowing the supplier to substitute professionals with lower qualifications who do not satisfy the criteria for those specialists with qualifications that are mentioned in the offer and which fulfil the stipulated requirements;
• Extending the duration of the contract’s performance (which was evaluated when determining the winner);
• reducing the amount of work;
• making a payment in advance that was not specified in the procurement documentation;
• Change of the payment method, even when only one payment was intended: switching from post-payment to pre-payment or to a more advantageous payment method, paying in instalments.[4]

The examples provided by IUB, which would be regarded as significant amendments to the procurement contract, are obviously not all-inclusive.

It should be noted, in general, this is an issue that should be examined on a case-by-case basis, since it would constitute a significant revision to a procurement contract. The amendments, however, are the contracting authorities’ responsibility. The contracting authority oversees the contract and must be able to evaluate how the revisions will actually affect the level of competition, taking into account the unique circumstances of the market, the variety of providers, the executor's financial commitments, etc. However, the contracting authority is free to, of course, request advice on specific matters from the relevant authorities and specialists. This can considerably increase the final decision’s validity.

When can the procurement contract be significantly changed?

In general, there are three instances when significant amendments to a procurement contract may be made.

1. The procurement contract determines on its own whether changes are permissible, in light of the circumstances outlined in the contract.[5] The same indexation, term extension, etc., may occur in such circumstances. In this regard, it is important to keep in mind that if the contract wording just gives a general suggestion of the potential of altering the contract, alterations will not be regarded as reserved.[6]
2. The contracting authority needs additional construction works, services, or supplies that were not part of the original procurement and switching suppliers would result in a significant cost increase and be impractical for a variety of technical or financial reasons, such as substitutability or compatibility with the services, goods, or equipment already purchased in the initial procurement.[7] Of course, in this situation, it is necessary to consider the fourth clause of Article 61 of the PPL, which states the number of revisions cannot exceed 50% of the original contract price of the procurement contract.
3. According to Article 61, Section 3, Clause 3 of the PPL, significant amendments to a contract are required for reasons that the contracting authority could not objectively foresee. Additionally, the total cost of such revisions cannot be more than 50% of the total cost of the original procurement contract.

Main considerations expressed in the Judgment

In the Judgment, among other things, the clause of the contract was assessed, which provides for the tenderer’s right to receive an extension of the deadline for the completion of the construction works or any of its parts. The main findings of the Judgment in this regard are as follows:

1. The regional court’s decision that any contractual amendment that extends the contract’s term is inadmissible shall be recognised as incompatible with the legal framework of the public procurement procedure.
2. The significance of contract amendments is determined by their potential impact on the results of the public procurement tender if such a provision is already included in the procurement procedure documents, or if the economic balance shifts in favour of the selected bidder.
3. What makes this situation unique is that, according to clause 5.3.1 of the contract, the executor has the right to request an extension of time for finishing the construction work or any of its components if the client has stopped or delayed it for reasons outside the tenderer’s control.
4. The main issue is whether the plaintiff’s agreement to the technical interruption of the construction works and the construction supervisor’s request to halt the works due to the drop in air temperature could have served as justification for extending the deadline for the construction works in accordance with subsection 5.3.1 of the contract. For the purpose of deciding whether the pertinent contract amendments are admissible, this assessment must be made in conformity with the legal framework of the public procurement system.[8]

Conclusions

To prevent finding yourself in a position where the likelihood of making critical errors in the procurement procedure increases exponentially, contracting authorities should include the authority to significantly amend the contract in the draft contract. Such indications must also be sufficiently detailed and precise. Making a general mention to a prospective contract modification is insufficient.

[1]              The PMB’s explanation of 31 January 2020 "The most frequently found inconsistencies in the documentation and progress of procurement procedures" (updated on May 17 2022) is available at: https://www.iub.gov.lv/lv/skaidrojums-biezak-konstatetas-neatbilstibas-iepirkuma-proceduru-dokumentacija-un-norise#35.

[2]              Data on the increase in the level of maintenance and operation costs of construction, building materials, machines and mechanisms. Official Statistics of Latvia, Official Statistics Portal. Available: https://stat.gov.lv/lv/statistikas-temas/valsts-ekonomika/razotaju-cenas/preses-relizes/8737-buvniecibas-izmaksu-parmainas; Hāka Ž. The eighth fastest increase in labor costs in Latvia. Article in Dienas Bizness, 17 June 2013. Available: https://www.db.lv/zinas/bezdarbs-varetu-pieaugt-509791.

[3]              The judgment is analysed in this article only in the context concerning the admissibility of significant amendments to a procurement contract and in the context of the procurement regulation.

[4]              Explanation of PMB "Amendment of procurement contract and general agreement". Published on August 5 2020, updated on January 13 2022. Available at: https://www.iub.gov.lv/lv/skaidrojums-iepirkuma-liguma-un-visparigas-vienosanas-grozisana#publisko-iepirkumu-likuma-61panta-otra-dala.

[5]              PPL, Article 61, Section 3, Clause 1.

[6]              The Senate has indicated that it is not sufficient to simply refer to the text of the disclaimer. Clause 11 of the judgment of the Department of Administrative Affairs of the Senate of 20 June 2019 in case No. SKA-869.2019. The IUB has also indicated that amendments are not considered to be reserved if there is only a general indication in the contract. Explanation of IUB "Amendment of procurement contract and general agreement". Published on 5 August 2020, updated on 13 January 2022. Available: https://www.iub.gov.lv/lv/skaidrojums-iepirkuma-liguma-un-visparigas-vienosanas-grozisana#publisko-iepirkumu-likuma-61panta-tresa-dala-atjaunots-21122020.

[7]              PPL, Article 61, Section 3, Clause 2.

[8]              Clause 6 of the judgment of the Department of Civil Affairs of the Senate of 20 October 2022 in case No. SKC-89/2022.