Price Adjustment in Public Procurement contracts (II)

1. Emergency Government Ordinance no. 64/2022 (hereinafter referred to as “EGO 64/2022”) regarding the adjustment of the prices and of the value of the general estimates within the projects financed from non-reimbursable external funds was enacted in the context of the current unpredictable events (the war in Ukraine, SARS-CoV-2 pandemic, 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 projects financed from non-reimbursable external funds. Emergency Government Ordinance no. 64/2022 regarding the adjustment of the prices and of the value of the general estimates within the projects financed from non-reimbursable external funds has been published in the Romanian Official Gazette, Part. I, no. 472/11.05.2022 and entered into force on the same day
2. The Emergency Government Ordinance no. 47/2022 regarding the price adjustment of public procurement contracts / sectoral contracts / concession contracts / framework contracts, despite its long and comprehensive preamble referring to the price increase affecting all types of projects irrespective of their source of financing, was restricted to a very limited area of projects, leaving out the major infrastructure ones financed from non-reimbursable external funds.
3. The issue has been addressed within the new EGO 64/2022 which applies to projects financed from non-reimbursable external funds.
4. Considering that the EGO 64/2022 is applicable to pending contracts and awarding procedures launched after 11.05.2022, we will further analyse the provisions related to pending contracts within Section I and the provisions related to tender 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 64/2022

5. Our analysis is focused on the public works contracts, whereas EGO 64/2022 covers as well the products supply and services contracts. Therefore, EGO 64/2022 is applicable, inter alia, to the following contracts funded partially or fully from non-reimbursable external funds, already concluded on 11.05.2022 (when EGO 64/2022 entered into force) – Articles 1 par. (1) and 3 par. (2) a):

• work public procurement contracts and framework contracts regulated by Law no. 98/2016;
• work sectoral contracts and framework contracts regulated by Law no. 99/2016.

6. As per Article 3 par. (10), the work contracts to which EGO 64 / 2022 applies:

• Do not include a price adjustment clause or
• If they do include a price adjustment clause:
• such clause is applicable by fulfilling some cumulative conditions or after a period of time from the conclusion of the contract or
• such clause does not cover the price increase caused by unpredictable conditions provided by EGO 64/2022 (e. the war in Ukraine, SARS-CoV-2 pandemic, the increase of gas and electricity prices, of the fuel etc.)

1.2.      The procedure applicable for the price adjustment

1.2.1.  Conditions for applying the adjustment

7. In order to benefit from the price adjustment, the following conditions have to be met - Article 3 par. (13) and (4):

• a) the change of the economic conditions, on the basis of which the price of the contracts was based, intervened after the deadline for the submission of the bids;

This condition is determined by reference to the day of the submission of the bid. - Article 4 par. (1)

• b) the change, provided in letter a), could not be taken into account by the contracting parties at the time of initiating the awarding procedure or of the direct procurement, respectively at the time of developing the tender;

This condition is determined by the employer considering what was predictable for the contractor when developing the bid. - Article 5 par. (1)

• c) the contractor, in the situations provided in letters a) and b), could not objectively determine the correct extent of the contractual risk in the financial offer;

This condition is determined by reference to the contractual risk from the financial offer. The performance of the contract has to be excessively onerous. - Article 6

• d) the contractor proves the increase of the costs on the basis of which the initial price of the contract was based, including by updated price offers on its significant cost elements and by declaration on his own responsibility that, during this period, he did not benefit from facilities granted to the business environment by the governments of the states where the contractors have their residence in order to mitigate the effects generated by the economic crisis in relation to the implementation of the contract.”

This condition is determined by the employer considering the costs and the extension of the time for completion. - Article 7

• no late payment interest / surcharges for late payment / damages / other similar penalty clauses have been applied to the contract for:
• the failure to comply with his contractual obligations or
• exceeding the time for completion, in case the time for completion has not been amended as per the contract clauses or by the law. - Article 3 par. (14)

1.2.2.  The request for adjustment

8. The adjustment of the prices for the outstanding works on 11.05.2022 will be made only upon contractor’s specific request in this regard, submitted to the employer no later than 10.07.2022 (60 days from entry into force of EGO 64/2022). The failure to submit such letter leads to contractor’s loss of the right for price adjustment. - Article 11 par. (2) and (5)
9. The contractor shall prove within the request that the conditions provided at par. 5 are met and shall specify the quantity and the value of the outstanding works at 11.05.2022.

1.2.3.  The justificative note issued by the employer

10. According to Articles 10 and 11 par. (2), after receiving contractor’s request submitted in due time, the employer:

• analyses if the unpredictability conditions are met;
• drafts a justificative note that must be approved by the its legal representative and
• if the conditions are met, concludes an addendum in this regard no later than 30 days from receiving contractor’s specific request. - Article 11 par. (3).

11. The justificative note shall establish - Article 43:

• the unpredictability of contractual rebalancing;
• the contractual clauses that need to be rebalanced;
• the manner in which the contractual imbalance is manifested in relation to the existing contractual clauses, including by presenting supporting documents in this respect;
• the financial impact of the financial imbalance by applying the formula for adjusting the price existing in the contract to the value of the outstanding works;
• the financial impact of the contractual rebalancing by applying the price adjustment formula at the value of the remaining balance of the contract.

12. Apparently, the content of the justificative note above described is only applicable when a specific formula is required, e. the one described above in par. 35 below related to other types of work contracts than those related to the transport infrastructure of European or national interest and to major infrastructure water, wastewater and waste projects.
13. The justificative note will determine whether the rebalance of the contractual obligations are required. If the difference between the financial impact of the contractual rebalancing and the financial impact of the financial imbalance divided to the financial impact of the contractual rebalancing is equal to or less than 10%, no adjustment will be approved. - Article 43 par. (2) - (3)

1.2.4.  The constitution of the implementation contingency (“rezerva de implementare”)

14. According to Article 9, in order to apply the adjustments, the employer shall establish an implementation contingency (“rezervă de implementare”) which is defined by Article 9 a) as the fund required for the implementation of public procurement contracts / sectoral contracts / framework agreements and other categories of contracts, constituted within the limits and under the conditions provided by this emergency ordinance to ensure the categories of expenses that are unpredictable for the price adjustments, which could not be naturally foreseen on the date on which the tender was submitted, but which are strictly necessary for the implementation of the contracts.
15. The implementation contingency is designed for payments of the price adjustments. - Article 9 par. (1)
16. The implementation contingency is firstly constituted of a percentage of maximum 23 % from the value of the outstanding works on 11.05.2022 and can be used only for the payment of the price differences. It can be supplemented by up to 10 % from the value of the outstanding works on the day of the request, only if payments of minimum 75% of the value of the implementation contingency have been made. - Article 9 par. (3) - (5)
17. The implementation contingency increases the value of the project and shall be included in the technical economic indexes of the project. - Article 9 par. (8)
18. The payments made are determined within the contingency as the difference between value of each payment as it was adjusted and the price without the adjustments. - Article 9 par. (9)

1.2.5.  The addendum

19. The addendum is concluded based on the justificative note and shall include - Article 10 b):

• its subject matter;
• the value of the implementation contingency;
• the way of reporting the implementation contingency;
• the payments that can be made from the implementation contingency;
• the price adjustment formula;
• the quantity and the value of the outstanding works on 11.05.2022 until the taking over;
• any other provisions required for the constitution, reporting and payment from the implementation contingency;
• annexes - including the documents proving the fulfilment of the unpredictable conditions

20. In case the main contract currently provides a price adjustment clause, the addendum may also mention, if the parties agree, that the formula is replaced by the one included in EGO 64/2022. - Article 11 par. (4)
21. The addendum increases the contract price with the value of the implementation contingency. - Article 10 b)
22. The addendum shall be concluded in 30 days from the registration of contractor’s request for price adjustment. - Article11 par. (2).
23. According to Article 3 par. (11), in case of contracts including a lump sum or with a lump sum and a price adjustment clause that is applicable only after a period of time, the formulas provided in Section III shall be effective until the price adjustment clause included in the contract becomes effective. It appears, on a logical interpretation of the provision in question, that the adjustment is applicable lawfully without the need to follow the procedure to sign an addendum, until the adjustment formula included in the contract becomes effective. However, our advice is that even in this case to submit a request for the price as per section 1.2.6 below.

1.2.6.  The application of the adjustments within the contracts

24. The adjustment will apply only for the outstanding works on 11.05.2022 and until the final taking over. - Article 17 par. (1)
25. According to Article 17 par. (3), the price adjustment shall apply for each payment request during the performance of the following contracts:

• work contracts including (i) a lump sum or (ii) with a lump sum and a price adjustment clause or (iii) with a price adjustment clause;
• work contracts related to the transport infrastructure of European or national interest and major infrastructure water, wastewater and waste projects including (i) a lump sum and a price adjustment clause or (ii) with a price adjustment clause.

26. In this regard, the Contractor shall justify the adjustment by using the cost index in construction for the cost of material, realised. - Article 17 par. (4)
27. 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. The final price of the works contract shall remain within the value of the technical and economic indicators related to investment objectives / project subject matter of the contract. However, if the technical and economic indicators are exceeded, they shall be updated according to the law. - Article 11 par. (6)
28. The adjustment is not a substantial one, but the new price cannot exceed 50 % of the initial price of the contract, including where successive modifications have been occurred. - Article 8
29. However, in case of contract signed: - Article 18

• based on a direct procurement procedure, the new contract price shall be less than 450.200 lei without VAT;
• based on a simplified procurement procedure, the new contract price shall be less than 26.093.012 lei, without VAT for public procurement contracts / framework agreements for works and less than 2.089.574 lei without VAT for sectoral public procurement contracts / framework contracts for works.

1.2.7.     The possibility to terminate de contract

30. If the contractual balance cannot be redressed and the formulas cannot cover the real cost increased, the parties can agree to terminate de contract until 10.07.2022 without being liable to any negative consequence like penalties, negative certifying document etc. - Article 7 par. (4) - (6).

II.         AWARDING PROCEDURES

31. EGO 64/2022 may be applicable to the following awarding procedures launched after 11.05.2022 related to:

• public infrastructure - Article 1 par. (3)
• transport infrastructure of European or national interest and to major infrastructure water, wastewater and waste projects. - Article 30

32. In cases where the awarding procedures were pending on 11.05.2022 and the contracts are concluded after 11.05.2022, without any provision related to the adjustment of the prices under EGO 64/2022, the request to the employer detailed in section 1.2.2, shall be submitted in 30 days from the conclusion of the contract. - Article 11 par. (1)

2.1.      Public infrastructure

33. In such case, the cost indexes in construction will be adjusted by using 2022 as reference year.

2.2.      Transport infrastructure of European or national interest and to major infrastructure water, wastewater and waste project

34. If such adjustment clause is included in the tender documentation, it shall be also mentioned that the contractors are obliged to break down the financial offers for the following values: - Article 34 par. (1)

• values ​​for each significant cost element[1];
• values ​​that are not included in the price adjustment.

35. The contractor has the obligation to break down the value of the payment statements submitted to the employer for each value of the significant cost elements according to their weights, as well as for the values ​​that are not included in the price adjustment. - Article 35
36. The contractors may not apply the price adjustment formula provided in par. 37 below for values ​​higher than those communicated at the deadline for submission of the bid for the significant cost elements that are the subject-matter of the financial offer, except for the situations in which the value of the significant cost elements has been modified by an additional act. - Article 36

III.        ADJUSTMENT FORMULAS

37. For the work contracts, the formula is the following: - Article 17 par. (4) and (8) a1)

Vapl = Vm x [(%av + %p) + (1 - %av - %p) x ICCmr/ICCmlr] + (Vpl - Vm) + (1 - %cpm) x {(Vpl - Vm) x [(%av + %p) + (1 - %av - %p) x ICCr/ICCplr] - (Vpl - Vm)}

38. For contracts related to the transport infrastructure of European or national interest and to major infrastructure water, wastewater and waste projects, the formula is the following: - Article 17 par. (5) and (8) c1)

V_apl = V_m x [(%av + %p) + (1 - %av - %p) x ICC_mr/ICC_mlr] + (V_pl - V_m) + (1 - %cpm) x {(V_pl - V_m) x [(%av + %p) + (1 - %av - %p) x ICC_r/ICC_Rlr] - (V_pl - V_m)}

39. For the awarding procedures for contracts related to the transport infrastructure of European or national interest and to major infrastructure water, wastewater and waste projects, the formulas are the following: - Article 31

Vapl = Vpl + (Vsl - Vpl) x Sigma10i = 1 ci x ICCrci/ICClrci

cu condiţia ca: Sigma10i = 1 ci = 1

or the one provided in par. 36 supra, if the conditions are met. - Article 37

[1] According to Articles 31 par. (2) and par. (2) j), significant cost element means any specific cost category of the nature of materials, labor, machinery, equipment and other costs of a similar nature which have a significant share in the value of the and transport infrastructure of European or national interest and to major infrastructure water, wastewater and waste project are strictly necessary for its implementation

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