Public procurements and price increases : Laws combating inflation

In the past few years, public procurements have been guided by a logic of cost reduction. However, in light of the current surge in prices, the public sector and companies holding public contracts are seeking to mitigate the effects of inflation and instability.  

Indeed, the shortage of certain raw materials and the rise in supply prices, accentuated by the war in Ukraine, are likely to have consequences on the execution of public contracts.

As in the case of the health crisis which, at the beginning of 2020, affected the award and performance of public procurement contracts, the current context may require the rules for execution of these contracts to be adapted.

This article aims to give public sector professionals a general overview of the possible adaptations of public procurement rules in the EU in order to counteract the effects of price volatility.

1. The French Response

In French public procurement law, three options appear to be possible in order to obtain a modification of the financial conditions of a public contract during its execution.

Firstly, it is possible to apply a price revision clause provided for in the contract (1), it being specified that the latter is required when the services covered by the contract are exposed to major uncertainties due to reasonably foreseeable changes in economic conditions during the performance period.

Secondly, and in particular if the implementation of the review clauses would not be sufficient to cover the additional costs, economic operators may request a so-called "dry" modification of the financial clauses of the contract (2).

In an opinion dated September 15, 2022, the Conseil d'Etat (the French administrative supreme court) expressly admitted the modification of the financial clauses of public procurement contracts in the current context of inflation and exceptional increases in raw materials' prices.

In this opinion, expressly referring to EU procurement Directive and to its implementation in the French Public Procurement Code, the Conseil d'Etat considered that the fact that contract prices are in principle final does not prevent them from being modified, provided that:

• the modification results from unforeseeable circumstances and does not exceed 50% of the initial amount;

• the modification, regardless of its amount, is not substantial; or

• that it is a small modification (below the European thresholds and below 10% of the amount of the initial contract for service and supply contracts).

Finally, the contractor may apply the theory of unforeseen circumstances (théorie de l'imprévision in French) (3). Unforeseeability, a long-standing case law creation, allows the holder of a public contract to obtain compensation from the administration when he/she is confronted with an event that could not be foreseen at the time of the contract's conclusion, outside the will of the parties and which causes a disruption in the general economy of the contract.

2. The Dutch Response

The Dutch Procurement Act stipulates that concluded public procurement contracts can only be amended if the amendment does not constitute a so-called material change (in Dutch: wezenlijke wijziging). The Dutch Procurement Act further provides an exhaustive list of permitted amendments (which are thus considered not to be material changes) and which we will discuss below.

If the concluded public contract itself provides for the possibility to amend the contract

In assessing whether a contractor is able to amend its prices, the starting point is assessing the public contract itself (including the terms and conditions applicable thereto) to determine whether the parties have explicitly agreed upon such possibility. It is not uncommon that price adjustment or indexation clauses are provided for in public contracts. If that is the case, the parties are entitled to make adjustments irrespectively of the monetary value of the adjustment. However, the parties are only able to invoke such clause if the clause allowing for such adjustments (in Dutch: herzieningsclausule) is clear, precise and unequivocal. In addition, the modification may not alter the overall nature of the contract.

If the concluded public contract does not provide for the possibility to amend the contract

Even if the public contract does not itself provide a clause following which amendments are possible (such as a price revision clause), small price (or other) adjustments are allowed, if;

• the monetary value of such amendment is below 10% of the initial contract price in the event of service and supply contracts (and 15% in the event of contracts for works);

• the monetary value of such amendment is below the European thresholds (which thresholds are updated on a regular basis, lastly by the delegated regulation (EU) 2021/1952); or

• the amendment does not alter the overall nature of the contract. 

In addition, the contractor has the following two possibilities under Dutch law to request the adjustment of the contract, including of the prices: 1) invoking the concept of so-called "unforeseen circumstances" (in Dutch: onvoorziene omstandigheden) or 2) relying on the principles of reasonableness and fairness (in Dutch: redelijkheid en billijkheid).

The first possibility allows the contractor to request a court to amend the contract if circumstances occurred which were not factored into the contract at the time of concluding the public contract and which are of such nature that the contractor cannot expect unchanged continuation of the contract. The threshold to successfully invoke "unforeseen circumstances" is high.

The second possibility for the contractor would be to argue that applying the prices as set out in the concluded public contract would be unacceptable according to the standards of reasonableness and fairness. These principles have an overriding effect and terms of a contract can be set aside when the enforcement thereof would be grossly unjust under the circumstances at hand. Again, the threshold for being able to invoke this is very high.

Lastly, it is also possible to request the amendment of the contract if (i) necessary additional works are needed provided that the additional works do not exceed 50% of the initial amount and (ii) a replacement of the contractor is needed.

3. The Belgian Response

As a matter of principle under article 9 of the Belgian Public Procurement Law of 2016 ("PPL"), public contracts in Belgium are awarded on a flat-rate basis ("forfaitair(e)").

Notwithstanding this principle, article 10 PPL allows for price revision in light of certain economic and social factors if the tender documents provide for a clear, precise and unambiguous price revision clause. Moreover, article 11 PPL requires the King to determine revision mechanisms in case of upset of the contractual balance due to unforeseen circumstances.

The modified Royal Decree of 14 January 2013 establishing the execution rules for public contracts ("RD Execution") regulates the specific and limited cases in which modifications to public contracts during their execution are possible without the need for a new tender procedure (articles 37 - 38/19 RD Execution). These rules in the RD Execution include material and procedural rules for price revision and unforeseen circumstances (specifically articles 38/2, 38/7, 38/9 and 38/10 RD Execution).

1) Price revision

Article 38/7 RD Execution determines the scope and conditions to follow for a price revision clause to be valid and, as the case may be, invoked by an economic operator.

A distinction is made between public contracts for works and certain specific services on one hand, and public contracts for supplies and all other services on the other hand:

• For public contracts for works and certain specific services, a price revision clause is mandatory, and the contracting authority is obliged to include a price revision clause in the tender documents. Such a revision clause must allow for the revision of prices reflecting at most the price evolution of the following main components: wages, social security contributions, prices of raw materials, prices of materials, and exchange rates. For these types of public contracts, a price revision of the main components on the basis of any index is in principle not possible (although the contracting authority could deviate from article 38/7 RD Execution by doing so explicitly in the tender documents).

• For public contracts for supplies and all other services, a price revision clause is optional and thus the contracting authority may include a price revision clause (but is not obliged to do so). If a price revision clause is included it must contain the modalities of a price revision taking into account multiple elements such as wages, social security contributions, prices of raw materials, prices of materials, or exchange rates. In case of difficulties establishing a price revision formula, the health index, consumer prices index or any other appropriate index can be used. Hence, a price revision based on an index is possible for these types of public contracts.

It stems from the above that the possibility to revise prices along the execution of a public contract always requires the inclusion of a price revision clause in the tender documents.

Any price revision must be based on objective and verifiable parameters, and must make use of appropriate weighing coefficients. Although it may never perfectly reflect reality, price revision must reflect as much as possible the actual cost structure incurred by the economic operator, including when costs go down. Hence, any price revision clause should always be reasonable and within reasonable margins (following the principle of reasonableness). If not, the price revision clause could be null and void.

In the event where the evolution of the abovementioned components and, in particular, the economic operator's costs become abnormal due to unforeseen circumstances, notwithstanding the existence of a price revision clause (or lack thereof), it may be possible for an economic operator to revert to the rules for unforeseen circumstances instead to compensate the costs incurred by those circumstances.

2) Unforeseen circumstances

Unforeseen circumstances may arise in two situations, which are addressed differently by the RD Execution: on one hand, for the contracting authority (article 38/2 RD Execution) and, on the other hand, for the economic operator (articles 38/9 and 38/10 RD Execution).

Where the contracting authority faces unforeseen circumstances, article 38/2 RD Execution requires for the following 3 conditions to be met:

1) The modification has become necessary due to circumstances that were unforeseeable for a diligent contracting authority;

2) The modification does not alter the general nature of the public contract; and

3) Any increase in price shall not exceed 50% of the value of the initial public contract.

If these conditions are cumulatively met, the ongoing public contract may be modified.

Where the economic operator faces unforeseen circumstances, articles 38/9 and 38/10 RD Execution require that the contractual balance of the public contract is upset to the disadvantage (article 38/9) or advantage (article 38/10) of the economic operator due to unforeseen circumstances.

In that regard, the following conditions apply:

• the invoked circumstances are beyond the control of the contracting authority;

• the invoked circumstances could not have been reasonably foreseen by the economic operator when submitting its offer, could not have been avoided, and the consequences thereof could not have been remedied despite the economic operator taking all necessary measures to that end; and

• the extent of the disadvantage or advantage for the economic operator must be:

  • at least 15% of the initial value of the public contract for supplies and services;

  • at least 2,5% of the initial value of the public contract for works (and certain services); and

  • in public contracts for works (and certain services) where "price" is the sole or a decisive (50% of the points) awarding criterion, the threshold for the extent of the disadvantage or advantage is reached:

    • as of 175,000 EUR for public contracts between 7,500,000 EUR and 15,000,000 EUR;

    • as of 225,000 EUR for public contracts between 15,000,000 EUR and 30,000,000 EUR; and

    • as of 300,000 EUR for public contracts above 30,000,000 EUR.

If the above conditions are met, the modification of the public contract can take the form of:

• extension or shortening of the execution period;

• other form of revision of the contractual terms (in case of very significant disadvantage or advantage); or

• termination of the public contract (in case of very significant disadvantage or advantage).

The application of the clauses under articles 38/9 and 38/10 RD Execution is subject to specific procedural rules and conditions listed in articles 38/14 to 38/18 RD Execution (eg 30-day deadline to invoke a revision clause, written statement of facts and impact thereof on execution and price, etc.). Hence, in order to successfully invoke these clauses, prompt and substantiated action of the economic operator is required.

3) Recent global events

In light of recent global events severely impacting the execution of public contracts and the impact of those events on prices, the Belgian federal government has enacted measures to mitigate the adverse effects of price increases and inflation and help authorities and business to navigate them in light of the abovementioned rules.

Recommendations from the Chancery of the Prime Minister

In July 2022, the Chancery of the Prime Minister has issued recommendations on price increases, notably caused by the war in Ukraine ("Recommendations"), particularly aimed at advising contracting authorities and economic operators on how to deal with them in view of the existing Belgian public procurement rules.

The Recommendations, which are non-binding, stem from the idea that in certain circumstances, recourse to a price revision clause may not be sufficient to compensate the contractual upset caused by recent global events and that contracting authorities and economic operators may be compelled to invoke rules on unforeseen circumstances (see above). Based on this, the Recommendations address the issue of the specific procedural requirements and conditions to be met in order to invoke the clauses on unforeseen circumstances under the RD Execution in so far as those requirements and conditions may prove more difficult to meet than those relating to a "classic" price revision clause pursuant to article 38/7 RD Execution.

The Recommendations therefore try to find a balance between the use of price revision clauses and rules relating to unforeseen circumstances, with a view to minimize the negative impact of these recent global events on ongoing public contracts. Both parties to the public contract are strongly urged to find a solution to keep the public contract going (and thus avoid disruption during execution or termination).

For ongoing public contracts, the Recommendations suggest using as much as possible the possibilities under article 38/9 RD Execution (unforeseen circumstances for the economic operator), as well as the options laid down in articles 38/2 RD Execution (unforeseen circumstances for the contracting authority) and articles 38/4 to 38/6 RD Execution (minimal and non-substantial changes to ongoing public contracts). Most importantly, emphasis is placed on finding a negotiated solution that works for both parties to the public contract.

On price revision, the Recommendations put forward the following three possibilities:

• replacement or modification of an existing price revision clause;

• modification of an existing price revision clause with limitation in time; and

• for exceptional cases, taking into account the actual prices and costs.

For future public contracts, the Recommendations strongly urge contracting authorities to include price revision clauses and revision clauses that deal with the upset of the contractual balance.

RD Advance Payments

In light of the abovementioned events and the liquidity problems they caused for a lot of economic operators, the Belgian federal government intervened and enacted temporary specific rules on advance payments in public contracts, which it laid down in the Royal Decree of 29 November 2022 on the granting of advance payments in public tender contracts due to the economic situation following the war in Ukraine ("RD Advance Payments").

The RD Advance Payments makes a distinction between ongoing public contracts, or public contracts whose tender documents were published on 19 December 2022, on one hand, and public contracts whose tender documents were to be published after 19 December 2022. The RD Advance Payments is applicable only for a limited period in time: it will cease to apply after 31 December 2023, i.e. it will not be applicable to public contracts whose tender documents will be published after that date.

For public contracts in execution or published before 19 December 2022, the contracting authority can grant an advance payment of up to 20% of the initial value of the public tender contract (incl. VAT), even without a specific clause thereto in the tender documents. In order to obtain such advance payment, the economic operator must file a written, dated and signed request thereto (containing all necessary information to make such payment) with the contracting authority (unless the tender documents already include an advance payment and the offer of the economic operator contains all necessary information to make such payment).

For public contracts published as of 19 December 2022, the contracting authority can only grant an advance payment of up to 20% of the initial value of the public tender contract (incl. VAT), when the tender documents contain a specific clause thereto. If it is not clear from the tender documents whether or not an advance payment will be granted, no advance payment will be granted. If the contracting authority has indicated in the tender documents to make use of the possibility to grant an advance payment (i.e. included a clause thereto), the contracting authority is obliged to grant the advance payment.

Any advance payment under the RD Advance Payments must be made within 30 days following the decision to grant such payments or following the conclusion of the public contract (depending on the situation), yet an advance payment can be suspended if the economic operator does not fulfil its contractual obligations. Late payment of the advance payment will generate interests for late payment and a lump sum compensation.