Tales from the National Appeal Chamber: A contractor may freely allocate the value of individual parts of a lump-sum fee | In Principle

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Tales from the National Appeal Chamber: A contractor may freely allocate the value of individual parts of a lump-sum fee

When valuing bids in a public procurement procedure as a lump sum, contractors may freely determine the value of individual parts of the contract. For the contracting authority, only the total value of the contract is relevant, and not the valuations of individual parts. But in every case the contractor should examine the documentation to determine whether the contracting authority has included any limitations in this respect. This is the guidance that can be drawn from the ruling by the National Appeal Chamber of 20 October 2020 (KIO 2101/20).

Facts of the case

A contractor whose bid was placed second in the ranking of bids appealed against the decision of the contracting authority. The contractor based its objections on the valuation method in which the other bid was found to be the most advantageous. According to the terms of reference, the contracting authority divided the subject matter of the contract into three parts: design works, construction works, and post-completion works. But the contracting authority obliged contractors to value their bids as a lump-sum fee.

In the competitor’s bid, the appellant noticed that the valuation of the design works (part 1 of the contract) was significantly overstated as compared to the valuation of the construction works (part 2) and the post-completion works, including post-completion documentation (part 3). Therefore, in the appellant’s view, there was an unauthorised advance payment, which was not provided for in the terms of the public procurement contract, according to which the contractor is obliged to perform works from its own funds and obtain payment only after they have been accepted. Thus, the appellant concluded that the contractor’s bid violated the prohibition of unfair competition by an unauthorised advancement of payment for construction works out of the fee for design works.

Did the contractor correctly value the lump-sum fee?

To answer this question, it is first necessary to consider the specific nature of a lump sum. A lump-sum fee amounts to one fee for the entire subject matter of the contract, with a risk for the contractor if at the stage of preparing the bid it incorrectly predicted the scope of works and costs (based on Art. 632 of the Civil Code in connection with Art. 14(1) of the Public Procurement Law). As the chamber found here, “Regardless of the costs incurred during performance of the task, the contractor has no right to demand revision of the agreed fee, in this case presented to the contracting authority in his bid. Nor is the contracting authority entitled to revise the fee if the entire fee has been paid, in this case, by the bidder.” In short, the lump-sum fee has a global character for completion of the entire task, and not, as in the case of a cost estimate, for completed stages of the task according to established unit rates.

In this case, the contracting authority requested bidders to state in the bid the amounts for each of the three individual parts into which it had divided the task. However, as the chamber stated, “The fundamental determination in the case is that a lump-sum fee is in force, i.e. for the entire task, and this is not changed by the fact the terms of reference are divided into three parts.” This is because the contracting authority is only interested in obtaining the most effective price among the bids submitted as a result of the tender. This is confirmed by the fact that the contracting authority did not specify the method of calculating the price or indicate the proportions between the total fee and the individual parts of the task. As a result, by overpricing the first part of the contract in comparison with the other parts, the contractor did not commit an act of unfair competition.

Contractor’s freedom to determine the lump sum for individual parts of the contract

In the case of a lump-sum fee, the contracting authority selecting the most advantageous bid is interested only in the total price of contract execution. This was confirmed by the chamber, which stated, “It is only up to the bidder to divide the fee for the entire task into individual parts within the framework of the applicable fee. There are no determinations or restrictions on the part of the contracting authority.” The chamber further reasoned, “Therefore, the argumentation of the contracting authority should be shared that there are no obstacles to the contractor including margins, profit or other overheads of the bidder in the first part, relating to design documentation.”

The situation would be different only if the contracting authority had included in the terms of reference any provisions limiting the calculation of costs, margins or profit. For example, if the contracting authority had specified what costs, margins or profit should be included in individual parts of the contract, or the ratio of the valuation of a part of the task to the valuation of the entire task, then an allegation of, for example, unfair competition could potentially be considered.

Allegation of unlawful advance payment of the second part at the expense of the first part

The chamber rejected completely the appellant’s claim, based on several arguments. First, in the opinion of the chamber, “The division of the fee into three parts does not change the nature of the fee, but is only related to the settlement dates in the situation of closing the separate stages of the task. Second, an advance payment is made before commencement of a task, before incurring costs, and not in the course of execution of the task, with no guidelines established by the contracting authority as to the method of calculating the price for the entire task, as well as for individual, separate parts. Third, only theoretically, there is, for example, no ban on purchasing construction materials in advance before commencement of works, during the preparation of design documentation, for example anticipating inflation, i.e. physical incurrence of costs, and thus the allegation of advance payment before expenditure drops out.”

To sum up, as in the terms of refence the contracting authority did not include any provisions on division of the total fee into separate parts or any other limitations on allocation of the lump-sum fee, the allegation of unfair competition based on advance payment could not stand.

Cyprian Herl, Infrastructure, Transport, Public Procurement & PPP Practice, Wardyński & Partners