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edition 4 (209)
April 2016
Construction

Diminishing the price factor

The maximum price weighting in public procurement is to be set at 60 pct in the latest legislative reforms

Rafał Ostrowski

Diminishing the price factor
“The new regulations are a step in the right direction and a sensible outline,” says Jan Styliński, the president of the board of the Polish Association of Construction Employers

For the Polish construction sector, particularly when it comes to infrastructural public procurement, one of the biggest problems has always been that the cheapest companies won the contracts. But now, on the eve of an amendment implementing EU directives, the Polish legislator is making another attempt to remedy this lamentable state of affairs

One result of the road construction boom in Spain of the 1980s and 1990s was the emergence of Spanish construction giants – which shows us how poorly the Polish market has benefited from its own road-building programme. Nothing of that scale has emerged in Poland from what should have been a bonanza for the industry; and, in fact, many contractors even went under. Now Spanish companies remain at the forefront of the companies fighting for Polish infrastructural contracts, whereas our companies are not only absent on the Spanish market but their presence in other European countries is negligible too. The sector blames the public procurement system for this state of affairs, especially the insufficient valorisation of construction materials, the refusal of the ordering parties to introduce contract changes and the intense rivalry based on prices. Instead of choosing the best offers, i.e. those that provide the best quality-to-price ratio, ordering parties have invariably simply gone for the cheapest ones.

The term ‘the most advantageous’ offer, used in the current amendment, is not unfamiliar in Polish legal circles. Another term it employs is ‘the cost of the product’s lifecycle’, which, according to the legislator, is supposed to help choose the most advantageous offers, is not new either. The actual novelty in the new legislation is the rule that the price will not constitute more than 60 pct of the weight of all the procurement criteria. “Such provisions should result in the discontinuation of the inimical practice of competing exclusively on the basis of price,” claims Renata Piwowarczyk, the director of the legal department of construction company Karmar.

The end ofthe dictate?

However, opinions are divided. “Stipulating a limit to the price criterion is the most banal solution and I am also afraid that it will be ineffective. Deeper and more systemic solutions are needed. It needs to be remembered that the Polish system has been struggling to shake off the dictate of the lowest price for several years now and it has not been very successful so far,” says Wojciech Merkwa, a legal counsel and public procurement specialist at the Jara Drapała & Partners law firm.

“The end of lowest price dictate” was first announced by the Polish government together with an amendment to the Public Procurement Law of October 2014, which limited the possibility of using the lowest price as the only criterion in tenders. However, the effect was only partial and the reform did not meet people’s expectations: although ordering parties started using additional criteria more often, these tended to be the simplest and least effective criteria. Apart from leaving the price as the dominant factor, constituting 90 pct in the tenders of the General Directorate of National Roads and Motorways (GDDKiA), additional criteria started to be included, such as the guarantee period (5 pct) and the execution period (5 pct). In many cases nearly all the tenderers fulfilled the last two criteria (such as the 20-year guarantee), thus obtaining the maximum number of points. The result of this was that the price remained the only criterion that still made it possible to differentiate the offers. This obviously meant that “the end of the lowest price dictate” was pure fiction. “Lowering the limit might not change the situation at all, as was the case before,” says Wojciech Merkwa.

They dont know what to do

“The problem is not the law itself but its implementation,” believes Marek Kowalski, the president of the public procurement team at the Social Dialogue Council and the representative of the Lewiatan Confederation. He emphasises that in many fields the ordering parties were not able to employ suitable criteria for a given business type. “It is necessary to develop good practices and standards for individual purchase groups. And such template groups will facilitate the usage of suitable non-price criteria by the ordering parties,” explains Marek Kowalski. The act of 2014 obliges the president of the Public Procurement Office to carry out such a study. However, this has not been done even though enough time has passed. The new president of the office, Małgorzata Stęciwilk, who took up the position in February, has emphasised in her interviews that she really wants her office to be more active in this field. She admitted that many ordering parties would already use non-price criteria if they only knew how to do so.

A ruling by the National Chamber of Appeals on February 15th concerning a tender held by the General Directorate of National Roads and Motorways (GDDKiA) for the maintenance of a section of the A2 motorway, confirms that they in fact do not know what to do. Being somewhat ahead of the amendment, the ordering party decided to employ a price criterion of 60 pct with 40 pct of the weighting of the decision being non-price criteria. The directorate wanted to assess the order execution concepts, awarding the most points to ‘the best’ and ‘the most efficient’ aspects of the bids. The National Chamber of Appeals, however, ruled that such criteria were too general. “When starting a procedure for awarding a public contract the ordering party has to have at least a general vision of the method of its implementation, otherwise the assessment of the proposals presented by contractors will in fact not only be subjective but arbitrary. A criterion description should provide a clear signal about the requirements and needs of the ordering party that the contractor has to satisfy. When principles for awarding points are not clear in individual criteria, it is impossible to determine how to prepare an offer in order to obtain the maximum number of points,” explains Justyna Tomkowska, a spokesperson of the National Chamber of Appeals.

Experts point out that considering the fact that the GDDKiA has such problems, other ordering parties might have even more serious issues. “The lack of good practices and standard documents is an issue not only for the GDDKiA, which is quite a substantial ordering party as well as in content-related terms. It is worse when it comes to local ordering parties,” believes Barbara Dzieciuchowicz, the president of the board of the Polish Economic Chamber of Road Building.

Exceptional means for exceptional purposes

Lowering the price criterion is not a common way for European countries to address the issues raised in the EU public procurement directives. “The approach adopted by the Polish legislator is also a peculiarity compared to the law in other European states, despite the fact that these directives are being implemented by all 28 member states,” points out Wojciech Merkwa. However, perhaps the unusual situation of the Polish market justifies the use of such untypical means. It seems that no other European country has to contend with such obviously low prices on such a scale as in Poland. “There is no other country that would spend as much as us on road construction and achieve so little in terms of market development. The issue of glaringly low prices in Poland has become a public problem. I think that the act also serves an educational purpose. With such a radical reduction of the price criterion, there will be much greater pressure on the leading bodies in the system, i.e. the ministries and the Public Procurement Office, to start demonstrating good practice and indicating how the criteria should be used,” argues Jan Styliński, the president of the board at the Polish Association of Construction Employers. He also emphasises that the act should not be mistaken for a detailed instruction, because this is not the role of legislation. “In my opinion the new regulations are a step in the right direction and a sensible outline. Now the question is to what extent the people in charge will be able to devise additional instruments so that the outline is filled in with reasonable content,” he adds.

WHAT DOES THE AMENDMENT CHANGE?

This is one of the most substantial amendments in the twelve-year history of the Public Procurement Law. Since 2004 the act has been amended 40 times. The latest reform introduces two EU directives to the Polish statute book: 2014/24/UE and 2014/25/UE. The amendment should become effective on April 18th, 2016, otherwise Poland could be subject to penalties and the freezing of EU funds. The act introduces a long list of amendments, some of which could be of great significance for the construction industry. These are just a few of them:

  • A uniform European order form. This mostly entails less bureaucracy. Contractors entering a tender will only have to submit a single (!) completed form – a kind of multi-page statement. In principle, this will not have to be accompanied by any of the additional documents that have made tenderers’ lives so miserable up to now. Only the winner of a tender will eventually have to submit the same paper work as they have done up to now.
  • Electronic communication instead of paper communication. This will come into force in a year’s time for tenders organised by the so-called central ordering party, while in all other cases it will be effective from October 18th, 2018. This should be a major help in facilitating communication.
  • More annexes. The catalogue of permissible amendments to public contracts will be refined, extended and made more flexible compared to the principles currently in force. This might make life easier for both parties to the contract as long as the ordering parties are not afraid to use the regulations due to the complexities involved in obtaining EU funding.
  • No to reference trading. Companies that provide references will in fact have to be the subcontractors in any order.
  • No junk contracts. Ordering parties will have to require the contractors to prove that those people involved in the execution of an order are employed on the basis of an employment contract. So far, ordering parties have had such an option but have not used it. This regulation actually does not result from an EU directive, but from the insistence of trade unions.
  • Playing to the crowd of small and medium companies. The ordering party cannot demand that the contractor’s annual revenue is higher than double the value of the order. Furthermore, the ordering party will have to divide tenders into smaller ones. Therefore companies smaller than has been feasible up to now will be able to participate in tenders.
  • Changes to the National Chamber of Appeals’ process. The National Chamber of Appeals will be able to discontinue proceedings if the ordering party accepts some of the objections and the plaintiff withdraws the others. Some proceedings will certainly be shortened as a result and a reduction in the number of cases filed is expected.

Justyna Tomkowska

spokesperson of the National Chamber of Appeals

Highly individual approach required

Quality criteria seem more difficult to describe than those for prices. Will their increased introduction not result in a higher number of appeals to the National Chamber of Appeals?

It is difficult to give a clear answer to this question at this time. The number of appeals has been similar over the last few years. However, it is now evident that the number of appeals related to the description of non-price offer criteria by the ordering party has increased as well as the number of appeals in which contractors question the method of assessment of their offer as part of the established quality criteria.

Isn’t this increase worrying?

It is certainly the case that each amendment causes an increase in the number of litigations to the chamber at its initial stage. Because parties involved in the procedures for awarding public contracts as well as the chamber have to work out an approach that will bring about measurable benefits in the form of purchasing top quality goods or services and to make it possible to adequately assess the subject matter of the order.

Does the problem not lie in the nature of the criteria themselves? Aren’t these quality criteria too hard to measure or define in order to eliminate the discretionary nature of tender settlements?

We often come across tenders in which the non-price criteria are really well defined. There are also cases in which the planned method of assessment requires the ordering party to refine some aspects. Those concerning the aesthetics, methodology or quality are often evaluative, and this is why such cases end up with the chamber. The settlement of such problems usually requires a highly individual approach to the case.

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