Session “Best Practice for Procurement of Services”

Award of service contracts – introduction and general considerations

Manfred EssletzbichlerEBRD-Consultant, WOLF THEISS

Kiev, November 2012

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Agenda

Definition of service contracts Boundary between services, supplies and works Priority vs. non-priority services Intellectual services

Estimated contract value Choice of procurement procedure

Open/restricted procedure vs. negotiated procedure Choice of award criteria

Lowest price vs. “best offer”

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Definition of service contracts (1)

Service contracts = a contract other than a public works or supply contract having as

their objective the provision of services referred to in Annex II (EU-PPD) „Catch-all“ provision ! Priority and non-priority services according to annex II A/B EU-PPD

Draft of new PPD abolishes this distinction Service concessions

Same as service contract except consideration for the provision of services consists solely in the right to exploit the service (with payment) Not covered by EU-PPD (only general principles)

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Definition of service contracts (2)

Priority services according to annex II A EU-PPD Maintenance and repair services (Cat 1) Land transport services, including armoured car services, and courier

services, except transport of mail (Cat 2) Air transport services of passengers and freight, except transport of

mail (Cat 3) Transport of mail by land and by air (Cat 4) Telecommunications servies (Cat 5) Financial services (Cat 6)

(a) Insurance services(b) Banking and investment services

Computer and related servies (Cat 7) Research and development services (Cat 8)

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Definition of service contracts (3)

Priority services according to annex II A EU-PPD (2) Accounting, auditing and bookkeeping services (Cat 9) Market research and public opinion polling services (Cat 10) Management consulting services and related services (Cat 11) Architectural services; engineering services and integrated

engineering services; urban planning and landscape engineering services; related scientific and technical consulting services; technical testing and analysis services (Cat 12)

Advertising services (Cat 13) Building-cleaning services and property management services (Cat

14) Publishing and printing services on a fee or contract basis (Cat 15) Sewage and refuse disposal services; sanitation and similar

services (Cat 16) 51.3.2012

Definition of service contracts (4)

Non-priority services according to annex II B EU-PPD Hotel and restaurant services (Cat 17) Rail transport services (Cat 18) Water transport services (Cat 19) Supporting and auxiliary transport services (Cat 20) Legal services (Cat 21) Personnel placement and supply services (Cat 22) Investigation and security services, except armoured car services (Cat 23) Education and vocational education services (Cat 24) Health and social services (Cat 25) Recreational, cultural and sporting services (Cat 26) Other services (Cat 27)

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Types of service contracts (1)

Fixed-price contract (lump sum) the exact remuneration for the services is predetermined (i.e. fixed)

regardless of actual cost or time expended frequently used for accounting services eg. Annual financial statement

Hourly rates (man power) frequently used for legal, consulting or tax important to apply presumed quantities for bid evaluation (e.g. price for 250h)

Variable fee remuneration is percentage of manufacturing costs frequently used for architects/engineers services in construction projects)

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Types of service contracts (2)

Pay per use payment only for actual use of service frequently used for rental services (eg complex medical equipment)

Retainer fees is a fixed amount of money that a client agrees to pay, in advance, to

secure the services of a consultant fee is typically not associated with the success of a project or based on achieving particular results.

frequently used for corporate communications and press support Cost-plus contract

CA reimburses contractor for every expanse plus an additional (incentive) fee to allow for a profit

especially for large research and development contracts (e.g. aircraft for military)

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Mixed Contracts (1)

contract contains different subject matters E.g. supply, implementation and maintenance of electronic hardware

Contract can only be classified as either service, works, or supply contract “Mixed contracts” do not exist in public procurement law !

Classification important to determine applicable provisions (e.g. threshold, eligible types of procedures)

Boundary between supply and services Main-Value test: which value is higher (supplies or services) ?

Boundary between works and services Main purpose test: what is the principal object of the contract ?

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Mixed Contracts (2)

Boundary between supply and services Main-Value test: which value is higher (supplies or services) ?

Eg.: value of services exceeds supplies service contract Case studies

Operation of a heating plant is supply contract because the supply of combustible material is almost double the cost as for operation and maintenance

Supply and installation of software is supply contract; but supply and installation of customized software is service contract because of the specific individual amendments

The lease of washing machines is a service contract because the leasing service is main part and also the part of higher value compared to the supply

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Mixed Contracts (3)

Boundary between works and service contract Main-purpose test: what is the principal object of the contract ? ECJ: a mixed contract is to be classified by its main purpose; the

relative value of the works/services is just one factor in determining the contract’s main purpose

Case studies Remediation of contaminated sites is service contract because the

transport and disposal exceed the value of the works (excavation, rebuilding)

The tender for the construction of certain parts of a sewage treatment system and its operation is a service contract because the “treatment service” is the main purpose

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Priority and non-priority services

Priority and non-priority services according to annex II A/B EU-PPD Reason for distinction is cross-boarder interest

Priority services (“Part A services”) are fully covered by PPD E.g.: maintenance of vehicles, refuse collection, freight and land

transport, advertising and market research, facility services, professional services such as accountancy, IT or architectural services and consultancy.

Non-priority services (“Part B services”) are subject only to basic principles and certain provisions of PPD

E.g.: legal services, educational service health services, personal placement

Proposals for the amendment of EU-PPD envisage the abolition of division in A/B-services !

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Intellectual services

“Intellectual services” The nature of the services to be provided is such that contract

specifications cannot be established with sufficient precision to permit the award of the contract Services with (mostly) a creative or innovative element Functional description (only the goal is described)

Open or restricted procedure is not permitted for intellectual services Negotiations are necessary for the sake of comparability of bids

Examples Design of works (i.e. architectural services), advertising concept, etc

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Estimated contract value (1)

Examples for the calculation of the estimated contract value insurance services: the premium payable and other forms of

remuneration banking and other financial services: the fees, commissions, interest

and other forms of remuneration design contracts: fees, commission payable and other forms of

remuneration for service contracts which do not indicate a total price

fixed‑term contracts: if the term is less than or equal to 48 months - the total value for the full term

contracts without a fixed term or with a term greater than 48 months: the monthly value multiplied by 48

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Estimated contract value (2)

ECJ C-574/10 Commission/Germany “Autalhalle” Architectural/planning services for the refurbishment of a municipal sports

and event arena in three phases (one per year, 2008-2010) according to urgency of renovations (budgetary issues)

Municipality awards three contracts to the same architect office and claims contract values do not have to be aggregated

ECJ: Homogenous services with same (scope of) content – conception and

planning of works for same construction project Irrelevant that services are carried out in different phases Also irrelevant that phases concern different building parts (bearing

structure of building, roof, lighting) Aggregation as long as services serve the same economic and technical

function - functional approach (same as for works contracts) The splitting of the contract was not in compliance with PPL !

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Choice of procedure (1)

Kind of procedures Open procedure Restricted procedure Negotiated procedure Where possible, open or restricted procedures should constitute the norm

General Considerations Characteristics of demanded services Market environment Timeframe

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Choice of procedure (2)

Open procedure Every interested service provider may submit offer Pro: One stage; wide range of competition due to (possible) large

number of providers participating Con: possible high number of bids; inflexibility since negotiations

are prohibited Considerations for open procedure

Standardized services – no negotiations necessary Contracting authority knows exactly what to buy – no technical

input from bidders necessary Manageable amount of bidders/providers on the market

Examples Topographical services, repair, maintenance and associated

services related to railways and other equipment, event services17

Open Procedure: Sequence (according to EU-PPD)

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Contract Notice

Bid Opening

Award Decision

Contract Award

52 days: Deadline for bid submission

Bid Evaluation

10 days Standstill Period

10 days

Choice of procedure (3)

Restricted procedure Pro: possibility to pre-select providers before inviting them to submit

bid; reduction to a few bids Con: Complexity due to two stages; danger of reducing competition

when reducing number of invited bidders; danger of not pre-qualifying potential best provider; no negotiations possible

Considerations for restricted procedure Standardized services – no negotiations necessary Contracting authority knows exactly what to buy Possible large pool of bidders on the market – time consumingbid

evaluation Examples

Legal services; quantity surveying services (for construction); planting and maintenance services for green areas; security/guarding services

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Restricted Procedure: Sequence (according to EU-PPD)

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Contract Notice

Deadline RTP

Selection of Candidates

Contract Award

37 days

40 days

10 days

10 days

Invitation to submit bids

- 10 days

Bid Evaluation10 days Standstill Period

Award DecisionDeadline/ Bid Opening

Choice of procedure (4)

Negotiated procedure Pro: possibility to pre-select providers before inviting them to submit

bid; reduction to a few bids; negotiations possible ! Con: Complexity due to two stages; danger of reducing competition

when reducing number of invited bidders; danger of not pre-qualifying potential best provider; time-consuming and complex negotiations

Considerations for negotiated procedure Need for individual solutions – negotiations necessary To get to know potential provider – Establishing solid relationship of

trust Examples

architectural, construction, engineering and inspection services, air traffic control systems, software consultancy services or software development

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Negotiated Procedure: Sequence (according to EU-PPD)

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Contract Notice

Deadline RTP

Selection of Candidates

Contract award

37 days

Deadline bid sumbission ?

10 days

10 days

Invitation to submit bids

- 7 / 3 days

Bid Evaluation + Negotiations10 days Standstill Period

Award DecisionDeadline/ Bid Opening

Choice of award criteria

Lowest price vs best offer Lowest price

Price is only award criterion Often used for the procurement of standardized services

Best offer (Most economically advantageous offer) Additional criteria besides price Aesthetic and functional characteristics, technical merit, after sales

service technical assistance Obligatory in case of intellectual services !

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Award of additional services (1)

Service contracts (Art 31 para 2 EU ‘classic’ directive) (1) additional works or services not included in the project initially

considered or in the original contract which have, through unforeseen circumstances, become necessary

for the performance of the works or services described therein, on condition that the award is made to the economic operator

performing such works or services when such additional works or services cannot be technically or

economically separated from the original contract without major inconvenience to the CA, or

when such works or services, although separable from the performance of the original contract, are strictly necessary for its completion

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Award of additional services (2)

Service contracts (Art 31 para 2 EU ‘classic’ directive) (2) Restrictive interpretation of exemptions! Unforeseen circumstances:

Objective: could a diligent, orderly CA have foreseen the event ? Technical or economic reasons

Technical incompatibilities: adjustment of different technical systems is not possible (or only possible with disproportionate efforts)

Mere inconveniences e.g. invoicing or problems with the co-operation with other contractors (exploitation of synergies) do not constitute a “major” inconvenience

Strictly necessary for completion Services necessary for the completion of the original contract Not in case CA changes its “demand” !

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Award of additonal services (3)

ECJ 30.12.2006, C-454/06 pressetext: „material“ amendments to a public contract during its term are inadmissible; an amendment is material

when it introduces conditions which, had they been part of the initial award procedure, would have allowed for the admission of tenderers other than those initially admitted or would have allowed for the acceptance of a tender other than the one initially accepted (change in potential participants)

when it extends the scope of the contract considerably to encompass services not initially covered

when it changes the economic balance of the contract in favor of the contractor in a manner which was not provided for in the terms of the initial contract

A derivative contract amendment (express authority to amend contract under the terms of the initial contract along with the exact modalities of the execution of the amendment) is generally immaterial and therefore permissible (ECJ Succhi di frutta)

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Award of additional services (4)

European Commission proposal to amend current PP-Directives Negotiations still at beginning; envisaged deadline for transposition is 2014 Includes provision regarding post-tender contract amendments Article 72 Proposal for Classic Directive /Art 82 Sector/Art 42 Concessions

Directive – ”Modification of contracts during their term” Substantial modification is to be regarded as new award – therefore

requires new tender procedure Substantial when (cf pressetext) change in potential participants

changes the economic balance of the contract in favor of the contractor

considerable extension to supplies, services or works not initially covered

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Award of additional services (5)

Replacement of contract partner is substantial except for the cases of succession or restructuring (cf pressetext)

If value of amendment can be expressed in monetary terms, modification is not substantial when

Value does not exceed the [EU-PPD] thresholds and is below 5 % of the price of the initial contract, provided that the modification does not alter the overall nature of the contract

Where several successive modifications are made, the value shall be assessed on the basis of the cumulative value of the successive modifications

Contract modifications shall not be considered substantial where they have been provided for in the procurement documents in clear, precise and unequivocal review clauses or options (derivative amendment)

Such clauses shall state the scope and nature of possible modifications or options as well as the conditions under which they may be used. They shall not provide for modifications or options that would alter the overall nature of the contract

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Contact

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Mag. Manfred EssletzbichlerTel: + 43 / 1 / 51510 – 5350Fax: +43 / 1 / 51510 – 665350E-Mail: manfred.essletzbichler@wolftheiss.com

WOLF THEISS Attorneys-at-LawSchubertring 61010 ViennaAustria