Rising prices of construction material complicate the public procurement process and performance of public contracts
In early September, the Czech Ministry of Regional Development and the Office for the Protection of Competition issued an opinion on the price increase of construction material. This way, the authorities respond to the rising prices of reinforcing steel, thermal insulation, scrap iron and other material by tens or even hundreds of per cent. The reason for the price rise is a lack of the mentioned goods on the market and related long delivery times. The authors of the opinion present possible solutions to the problems that can arise in the public procurement market as a result of this situation.
Difficulties may arise both with the already performed public contracts and with procurements whose competitive tendering has not been finished yet or is in its preparatory phase. In all cases, it is necessary to reflect the current situation as the construction material prices may be expected to stay high in the following months.
Performed public contracts
To what extent the situation is to be reflected depends on the contracting authority. However, they are not obliged to increase the agreed prices. After concluding the contract, only insignificant changes enabled by Section 222 of the Act on Public Procurement (hereinafter the “APP”) can be made, such as changes adjusting the contract value, however, only up to a certain limit of the original value of the obligation. Any other agreement on a change of the obligation between the parties must also be in line with Section 222 of the APP.
The contracting authority must not allow a significant change in the obligation without having conducted a new tender procedure. However, they can implement changes that have been stipulated in the tender documentation and subsequently in the contract. These are usually the inflation clauses, reservation of deadline postponement or change of supplier. If it is not possible to reach the purpose of the procurement not even using the changes enabled by Section 222 of the APP, the contracting authority can terminate or withdraw from the contract. The supplier can also terminate the contract in the case that they are not able to meet the contractual obligations.
The main risk in the current procedures is the suppliers’ inability to execute the contract for the price stated in the bid, and thus their rejection to conclude the contract or problems during the execution. The contracting authority can handle the situation by changing the tendering documentation if the deadline for proposal submission has not been over yet and thus the risks related to the material price growth can be reflected.
Contracting authorities should consider reserving the right to make changes in the tendering documentation to be able to respond not only to the movement of the construction material prices. They can do so using inflation clauses or clauses enabling changes in the final prices if the input prices change. At the same time, they should respect the price increase rate so that it corresponds to their financial possibilities, e.g. by determining a limit of a total admissible price rise.