Are you a public contract supplier? How to deal with price increases and what the legal limits are

13 September 2022

Lukáš Regec, Partner |

A prominent theme in recent times has been the rising cost of construction work, supplies and services, either due to shortages or rising prices of energy and other inputs. This situation complicates the implementation of public contracts, especially where contracts have already been concluded and the price increases were not foreseen to such a significant extent. In addition to the duty of care, contracting authorities are then bound by the limits set by the Public Procurement Act for changes in obligations, which according to the Act can only be immaterial.

An immaterial change to a public contract obligation is a change that does not allow for the potential participation of other suppliers, does not affect the selection of the most suitable tender, does not change the economic balance in favour of the selected supplier and does not significantly expand the scope of performance of the public contract. In practice, this means that, for example, the time limit for the performance of the contract cannot be significantly extended, the maturity of invoices cannot be shortened, or the commercial terms and conditions that were the subject of the evaluation and thus influenced the selection of the most advantageous tender (level of service, including technical assistance, conditions and time limit for delivery or completion of performance, etc.) cannot be changed.

A modification will always be deemed to be insignificant if it does not change the nature of the public contract and, apart from the prohibition on exceeding the financial limits for the type of public contract, if its value does not exceed 15% of the original value of the obligation in the case of works. For supplies and services, this figure will be 10% of the original value of the obligation. A broader scope of possible change of the obligation from a contract to a public contract (up to 50%) is then legally possible if it passes the test of the conditions defined for it. The necessity of such a change and the related economic or technical impossibility of changing the supplier, or unforeseeability (with due diligence), are essential for assessing the acceptability of a larger change.

For any amendments made, if more than one amendment is made to a single contract, the sum of the values of all such amendments will be the relevant value. This subtle sentence needs to be emphasised in the context of the interpretative opinion of the Ministry of Regional Development, confirmed by the Office for the Protection of Competition, which states that it is necessary to take into account the absolute value of the changes made in order to calculate the value of a change to a public contract obligation. It is therefore not the sum resulting from adding the price of additional work and subtracting the price of omitted work, but the absolute value of the two figures.

So, if we have an original contract worth CZK 10 million, additional works worth CZK 1.4 million and omitted works worth CZK 300,000, then the change in the obligation is worth CZK 1.7 million. It does not fit within the basic limit of the insignificant change limit described above if it exceeds 15% of the original value of the obligation.

The motivation of both the contracting authority and the contractor to award omitted work that falls short of the limits described above because of this procedure is thereby significantly reduced and public funds may be wasted rather than saved by omitted work.

The contracting authority is not obliged to agree to any modification of the obligation under the public contract, even within the limits of immaterial changes described above. By law, the contracting authority is only entitled to do so, unless the selected contractor is entitled to such a modification in case of need. However, it will often not be efficient or cost-effective for the contracting authority to insist on an undeliverable change, and it will be appropriate to seek a modification of the obligation that is in accordance with the law and acceptable to the contracting authority. However, if the necessary modifications to the obligation cannot be accommodated within these limits, there is often no choice but to terminate the contract in question and call for a new procurement procedure. At present, this has negative consequences for public finances in that in the new award the contracting authority must take into account price increases when setting the expected value and has to increase the budget of the relevant contract, in particular because it has to expect significantly higher bids. The contractor then faces the uncertainty of whether it will be able to compete in the new procurement procedure.