Price adjustment in public procurement contracts (I)

Analysis of EGO 46 / 2022

1. Emergency Government Ordinance no. 47/2022 (hereinafter referred to as “EGO 47/2022”) regarding the price adjustment of public procurement contracts / sectoral contracts / concession contracts / framework contracts was enacted in the context of the current unforeseeable events (the war in Ukraine, the increase of gas and electricity prices, of the fuel etc.) and is meant to tackle the problem of price increase of construction materials and other related elements of costs related to the public investments. Emergency Government Ordinance no. 47/2022 regarding the price adjustment of public procurement contracts / sectoral contracts / concession contracts / framework contracts has been published in the Romanian Official Gazette, Part. I, no. 377/15.04.2022 and entered into force on the same day.
2. Despite its long and comprehensive preamble referring to the price increase affecting all types of projects irrespective of their source of financing, the applicability of EGO 47/2022 seems to be restricted to a very limited area of projects, leaving out the major infrastructure ones financed from non-reimbursable external funds.
3. In this respect, while art. 1 par. (1) of the EGO 47/2022 states that it applies to projects financed from public funds as per Law no. 500/2002[1] (including those allocated from the non-reimbursable external funds budget), art. 2 point (a) provides that EGO 47/2022 does not apply to contracts financed from non-reimbursable external funds. In a correct interpretation of these legal provisions, it would follow that while art. 1 par. (1) states the rule, art. 2 point (a) is the exception, meaning that only projects financed from non-reimbursable external funds escape the EGO’s area of application. Furthermore, art. 2 point (a) makes no distinction between projects fully or just partly financed from non-reimbursable external funds. As long as the law does not make the distinction, that cannot be made by the interpreter / the one who applies the law. In these conditions, in a correct interpretation, EGO 47/2022 is not applicable to any major infrastructure projects which is fully or partly financed from non-reimbursable external funds. The conclusion is quite upsetting and surprising and we should wait and see how the contracting authorities will apply the provisions of EGO 47/2022 in the near future.
4. Considering that the EGO 47/2022 is applicable to both pending contracts and contracts to be signed based on ongoing tender procedures, we will further analyse the provisions related to pending contracts within Section I and the provisions related to pending awarding procedures within Section II and in the end, respectively in Section III, we will describe the adjustment formulas.

I.           PENDING CONTRACTS

1.1.      Contracts that fall under the applicability of EGO 47 / 2022

5. As mentioned in the cover letter, the main comment related to the sphere of application of EGO 47/2022 concerns the split between projects financed from non-reimbursable funds, on one hand, and projects financed from any other public budget, on the other hand. From the corroborated reading of art. 1 par. (1) and art. 2 point (a) of EGO 47/2022 it follows that it does not apply to any contracts financed from non-reimbursable funds.
6. EGO 47/2022 is applicable, in principle, to the following contracts pending on 15.04.2022 (when EGO 47/2022 entered into force) – Article 1 par. (2):

• Works public procurement contracts and framework contracts;
• Works sectoral contracts and framework contracts;
• Works concession contracts;
• Contracts / framework contracts including technological and functional facilities and / or machinery and equipment:
• required for the fulfilment of the works and for putting into operation and / or
• designed for equipping investment objectives / projects or for the repair and maintenance works regulated by the Government Decision no. 907/2016[2] (machinery, technological and functional equipment that requires assembly; machinery, technological and functional equipment that does not require assembly and transport equipment; facilities);
• Public procurement contracts / sectoral contracts / framework contracts for performing feasibility studies and / or technical designs related to the transport infrastructure of national interest and which include geotechnical studies.

7. Our analysis is focused on the public works contracts, whereas EGO 47/2022 covers as well the products supply and services contracts. The work contracts above described may be:

• concluded before 2016, e. before entering into force of Law 98/2016[3], Law 99/2016[4] and Law 100/2016[5]:
• irrespective if they include or not a price adjustment clause – Article 1 par. (4) point a).

Adjustment shall be made only for the outstanding works on 15.04.2022 and until the taking over upon completion of the works – Article 3 par. (1).

• concluded after 2016, e. under of Law 98/2016, Law 99/2016 and Law 100/2016:
• if they do not include a price adjustment clause – Article 1 par. (4) point b)

Adjustment shall be made only for the outstanding works on 15.04.2022 and until the taking over upon completion of the works – Article 3 par. (1).

• if they do include a price adjustment clause as per GO 15/2021– Article 1 par. (8);

Adjustment shall be made only for the outstanding works on 15.04.2022 and until the taking over upon completion of the works – Article 3 par. (1).

• If they have a firm price (just for national interest transport infrastructure projects) - Article 1 par. (8)

Adjustment shall be made only for the outstanding works on 15.04.2022 and until the taking over upon completion of the works – Article 3 par. (1).

• if they include a price adjustment clause, but which is applicable only after a period of time from the conclusion of the contract and / or by fulfilling some conditions for its application – Article 7 par. (6).

Adjustment shall be made exclusively for the outstanding works on 15.04.2022, from 15.04.2022 and until the adjustment clause provided in the main contract is applicable and / or the conditions provided in the main contract are fulfilled – Article 7 par. (6).

• if they include a price adjustment clause related to inflation rate or other indexes (other than the price adjustment clause under GO 15/2021) – Article 7 par. (8).

Adjustment shall be made exclusively for the outstanding works on 15.04.2022 and only if the value resulting from applying the formula in the contract is lower than the one resulting from application of EGO 47/2022 – Article 7 par. (9) – (10).

1.2.      Procedure applicable for the price adjustment

8. The adjustment of the prices will be made only upon Contractor’s specific request in this regard, submitted to the Employer no later than 30.05.2022 (45 days from entry into force of EGO 47/2022). The failure to submit such letter leads to Contractor’s loss of the right for price adjustment – Article 3 par. (1) final thesis and Article 4 par. (1) and (5).
9. Contractor’s request shall refer to:

• the adjustment of the value of the outstanding works on 15.04.2022, by using the formulas mentioned in Section III of this memo;
• the conclusion of an addendum in this regard no later than 13.07.2022 (45 days from 30.05.2022).

10. According to Article 4 par. (2), after receiving Contractor’s request submitted in due time, the contracting authority is obliged to proceed with the legal steps in order for the addendum to be signed.
11. The addendum shall be concluded no later than 13.07.2022 and shall include:

• the quantity and the value of the outstanding works on 15.04.2022;
• the documents proving the outstanding works, that will be annexed to the addendum;
• the applicable adjustment formula mentioned in Section III of this memo;
• the percentage and the value of the advance payment;
• the percentage and the value of the profit and
• the reference date, e. the month before the deadline for submitting the bids; if it is before January 2019, the reference date shall be January 2019.

12. In case the main contract currently provides a price adjustment clause under GO 15/2021 (except the contracts concluded under Government Decision no. 1/2018[6]), the addendum shall also mention that the formula is replaced by the one included in EGO 47/2022 – Article 4 par. (4). If no request is submitted under EGO 47/2022, the price of contracts including already the formula resulting from GO 15/2021 shall remain subject to adjustment under the respective formula until the completion and taking over – Article 10 (1).
13. According to Article 3 par. (2) - (3), the price adjustment shall apply for each payment request during the performance of the contract. In this regard, the Contractor shall justify the adjustment by using the formulas provided in Section III.
14. The final price of the contract shall be established after the final submission of the payment request, based on the centralised situation of the works. It is very important to mention that the final price of the works contract shall lie entirely within the value of the technical and economic indicators related to investment objectives / project subject matter of the contract, except the case where the price exceeds this value due to the application of EGO 47/2022 – Article 4 par. (6).
15. The adjustment is not a substantial one – Article 8.

II.         CONTRACTS TO BE SIGNED BASED ON TENDER PROCEDURES PENDING ON 15.04.2022

2.1.      Contracts that fall under the applicability of EGO 47 / 2022

16. EGO 47/2022 is also applicable to the contracts to be signed following procedures for awarding public procurement contracts / sectoral contracts / concession contracts / framework contracts of works, pending on 15.04.2022:

• if no price adjustment clause is included in the tender documents – Article 7 par. (1);
• if a price adjustment clause is included in the tender documents by reference to inflation rate or other indexes, including the adjustment clause in GO 15/2021 – Article 7 par. (2);
• if a price adjustment clause is included, but only if it is applicable after a period of time from the conclusion of the contract and / or by fulfilling some conditions for its application – Article 7 par. (5).

17. As per par. 3 supra, EGO 47/2022 does not apply, among others, to contracts to be signed following awarding procedures pending on 15.04.2022 related to projects financed from non-reimbursable external funds.

2.2.      Procedure applicable for the price adjustment

18. Where no price adjustment clause is included in the tender documents, the applicable procedure is the following – Article 7 par. (3):

• If the deadline for submitting the bid did not expire, the contracting authority is obliged to take the proper measures for including the adjustment clause established by EGO 47/2022;
• If the procedure is more advanced, the contract shall be signed as per tender documents and the Contractor shall request the contracting authority to include the price adjustment formula provided by EGO 47/2022, within 15 days from the conclusion of the contract, but no later than the day the notice to commence has been issued.

The request shall include the particulars listed above in par. 9. The contracting authority is obliged to proceed with the legal steps in order to conclude the addendum that shall be signed in 10 days from filing the request by the Contractor.

19. In case of contracts to be signed following tender procedures including a price adjustment clause by reference to inflation rate or other indexes, the contract shall be concluded as per the contents of the tender documentation, without any amendment of the price adjustment clause. If, during the performance of the contract, the application of the formula in the contract leads to a lower value than the application of the formula in EGO 47/2022, the formula in EGO 47/2022 shall apply. In this case, it is not clear whether a request for an addendum should be sent or not, however to be on the safe side, a request should be sent within 45 days from the entry into force of EGO 47/2022 stating that the applicant maintains its entitlement under EGO 47/2022. - Articles 7 par. (2), (4), (8), (11) and Article 4 par. (1).
20. In case of contracts to be signed following tender procedures including an adjustment clause, but which is applicable after a period of time from the conclusion of the contract and / or by fulfilling some conditions for its application, the adjustment mechanism provided by EGO 47/2022 shall apply from the conclusion of the contract and until the adjustment clause provided in the contract is applicable and / or the conditions provided in the contract are fulfilled – Article 7 par. (5). In this case, the EGO does not provide a requirement for submission of a request for an addendum by the contractors.

III.        ADJUSTMENT FORMULAS

21. For the works contracts, the formula is the following – Article 3 par. (4):

Va = Vo x [(1-p-a) x ICCn x ICC reference date + (p+a)]

22. For design contracts related to the transport infrastructure projects of national interest, the formula is the following – Article 3 par. (8):

Va = Vo x [IPCn / IPC reference date] / 100

[1] Law no. 500/2002 regarding the public funds.

[2] Government Decision no. 907/2016 on the stages of development and the framework content of the technical-economic documentation related to the objectives / investment projects financed from public funds.

[3] Law no. 98/2016 on public procurement (hereinafter referred to as “Law 98/2016”).

[4] Law no. 99/2016 on sectoral public procurement (hereinafter referred to as “Law 99/2016”).

[5] Law no. 100/2016 on the works and services concessions (hereinafter referred to as “Law 100/2016”).

[6] Government Decision no. 1/2018 for the approval of the general and specific conditions for certain categories of procurement contracts related to the investment objectives financed from public funds.

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