Variations under the new Government Decision 1/2018 – works not designed by the Contractor

For the approval of the public procurement contracts to be used for works financed from public funds

CAPITALIZED TERMS used as per GD 1/2018

Starting with 11 January 2018 the Government Decision 1/2018 (“GD 1/2018”) entered into force.

GD 1/2018 shall apply to all investment objectives which are: (i) financed from public funds, (ii) valued at or over RON 23,227,215.00 (approx. EUR 5,050,000.00), and (iii) tendered after the 11 January 2018. The public entities may, however, opt for these contracts for the investments which are valued below the threshold of RON 23,227,215.00.

With the enactment of 11 January 2018, the Romanian Government produced two (2) contract templates, one (1) to be used for works designed by the Employer and executed by the Contractor and the other to be used for the works designed and built by the Contractor.

Briefly perusing the contract templates of GD 1/2018, one may easily note that such are heavily inspired by the FIDIC RED and YELLOW Books. Although it is generally considered a good idea to get inspiration from valuable sources, the harmonization may in the end prove to be cumbersome for the investment projects managed under the provisions of the new contract templates.

The FIDIC Suite of contracts have been around for many years and are used successfully all around the world for various infrastructure projects, especially ones which entail a high level of complexity. Therefore, they have shown in practice their value and capability of managing the relationship between the Employer and Contractor with the end objective of completing the projects.

In Romania, the FIDIC contracts are used extensively. However, note should be made that the successful completion of a complex project does not always reside on how a contract is drafted, but on how the project has been prepared by the Employer.

Therefore, it might prove that the new templates introduced with GD 1/2018 will bring little or no help to ensuring a smooth completion of a respective project, if the pre-tender preparation is not urgently improved.

It is therefore useless to provide Variations procedure and clearer definitions (the GD 1/20018 templated use the term Modifications) if such Variations appear during the execution of the project and the parties will be prevented to push on with the additional works because such are substantial.

A complex project, where the pre-tender activities are not duly and exhaustively completed, will for certain entail additional works, most likely substantial. In this probable scenario, it is unclear what will the Employer and Contractor do, because the former shall have to retender the project. Hence, it is envisaged that major difficulties will be faced, for which there is no clear solution.

In my opinion, instead of preparing contract templates which are inspired from already used contracts, maybe a clearer procedure on how to prepare the pre-tender stage activities is more urgent. Here is where a uniform template – depending on the type of project, should be created by the Romanian authorities. As an example, for lump sum turn-key contracts, the bidders should be able to analyse the contract documents, site and perform complex investigations for a long period of time to ensure that the price and time for completion are relevant.

Modifications under GD 1/2018

Sub-Clause 37.1 clarifies from the beginning that the direct application of the provisions of the Contractual Conditions or of the Specifications – as established upon the conclusion of the Contract, do not represent Modifications (or Variations as defined under the FIDIC suite of contracts).

The provision stems from the opinion letter DG MARKT/C3/EP/kr (2012) issued to the Romanian authorities on 21 May 2012, whereby the latter inquired the European Commission on the conditions the Employer may authorize variation orders on public contracts which are measurable – the contract price is determinable and not a lump sum one.

The European Commission concluded that – if certain conditions are cumulatively met (here are the conditions), the variations between the final price and the estimated one are not deemed as Modifications. Hence, there is no need to conclude addenda to the initial contract nor to retender the initial contract.

For the sake of interpretation, GD 1/2018 provides that Modifications are only those which undergo the procedure listed in Sub-Clauses 37.4 or 37.11 [Proposal to Modify initiated by the Contractor]. Moreover, the Modifications must be non-substantial in the interpretation of the Public Procurement Law to be implemented. If such Modifications are substantial, then the contract must be retendered, as the templates only allow non-substantial Modifications to be implemented (here are the conditions).

The Modifications under GD 1/2018 may be approved by the Supervisor (or Engineer as defined under the FIDIC suite of contracts) at any time prior to the Reception at the Completion of Works. Nevertheless, the Employer’s approval of the Modification is needed before the Supervisor may issue its final approval. A notable difference from the FIDIC suite of contract, whereby the Engineer was able to instruct or request a proposal from the Contractor prior to the Reception at the Completion of Works. Now the templates speak of approval/s and not directly an instruction. Such approval will be issued based on an Administrative Order or Addendum to the Contract.

The approval of a Modification by the Supervisor is the moment when such becomes mandatory for the Contractor. Until a modification is approved, it must undergo the procedure listed under Clause 37 [Modifications].

Initiation of the Modification

The initiation of a Modification may be done by the Supervisor or by the Contractor.

When initiated by the Supervisor, the latter shall notify the Contractor regarding the nature and the form of the considered Modification. Upon receipt of the notification and within the term specified therein, the Contractor shall submit to the Supervisor a written proposal containing:

(a) a description of the activities to be implemented or the measures to be taken and the related execution program;

(b) any necessary adjustment to the Execution Time or any Contractor’s obligations resulting from this Contract; and

(c) any adjustment to the Contract Value under the rules set out in this clause.

In case the Modifications are initiated by the Contractor, apart from the elements provided above, the Contractor must include as a minimum, the following details:

(a) the extent to which the proposal complies with the provisions of the Contract;

(b) the extent to which the proposal does or does not comply with the provisions of the environmental regulatory act;

(c) the extent to which the proposal corresponds to or not with the building permit (if any). (Any document issued by the Contractor, other than resulting (1) from an Approved Modification, or (2) from the Supervisor’s Instruction or Decision and which, if implemented, would result in a Modification to the provisions of the Contract be considered as a proposal issued in accordance with the provisions of this Sub-clause. Any proposal that would constitute a Substantial Modification within the meaning of the Public Procurement Law will be dismissed.

The Contractor will be fully responsible for any proposal made under this Sub-clause, including the periods necessary for the preparation, review and/or approval of the proposal and, where appropriate, obtaining a new or revised environmental regulatory act and a new or revised building permit. The Contractor shall not be entitled to any extension of the Execution Time or to the payment of additional costs.

If a proposal approved by the Supervisor will include a modification of the design of part of the Works designed by the Employer and unless otherwise agreed by the Parties, then:

(a) the Contractor shall be responsible, through the Designer, for the design of this part of the Works;

(b) the provisions of Sub-Clause 19.1 [Mode of Execution and Design of Provisional Works] on the Supervisor’s Analysis and Consent shall be applied accordingly.

Note should be made that the Contractor may submit requests for Modifications if such are deemed to (i) expedite the completion of the Works, (ii) reduce the cost of the execution, maintenance and operation of the Works, (iii) improve the effectiveness or value of the completed work, or (iv) for other reasons, will benefit the Employer.

Hence, the Contractor will be able to propose Modifications only if such carry the characteristics of Value Engineering – as known in the FIDIC suite of contracts. Since the Contractor must support the costs for such proposals and the uncertainty of the Modifications approval, it is expected to see this kind of initiation very rarely applied in practice. Maybe a bonus/malus procedure under the contract would have been appropriate in this case to encourage the Contractors.

Approval/Implementation of the Modification

In the process of drafting the Administrative Order and its related Decisions, the Supervisor will consider the price elements and breakdowns listed in the Contract, as well as the Proposal submitted by the Contractor further to the initiation of the Modification but will have no obligation in relation to them.

The Supervisor will consult with the Employer on the Modification project and to classify the Modification as non-substantial within the meaning of the Public Procurement Law. The Supervisor will also consult with the Employer on the impact of the Modification project on the building permit.

For all the Modifications, the Supervisor shall determine the prices based on the following principles:

(a) when the work considered is similar and executed under similar conditions as a work evaluated in the Quantity List, it will be valued at the prices included in it, with the appropriate adjustments;

(b) when the work is not similar or is not executed under similar conditions, the new price will be assessed in relation to the reasonable cost of the work to which a reasonable profit will be added and the relevant market prices (if any);

(c) if the nature or quantities of a Modification are such that its assessment in accordance with paragraph (a) above is unreasonable, the provisions of paragraph (b) above are to be used.

When an Administrative Order for Modification is received by the Contractor, the latter shall implement the Modification without delay. Nevertheless, the Contractor shall have the right to issue a dissatisfaction notice on the Supervisor’s Decision in accordance with the Contract.

The Contractor will not execute any work without a valid building permit (including, if applicable, a new building permit for Modified works) obtained in accordance with the provisions of the Contract.

This requirement is very important and must be regarded always as a leverage by the Contractor. Although included in the applicable legal norms, whereby both the Employers and Contractors alike are liable in the case works are performed without a valid building permit in place, due to urgencies and requests from the Employers, the Contractors were forced to proceed with the works until the building permits were obtained.

With the new provisions, the Contractors, apart from the legal sanctions which they may face, will find it almost impossible to recover the value of the additional works. Usually, the need of a building permit for additional works will signal that the Modifications required are substantial. Should this be the case, the envisaged Modifications may not be implemented under the templates introduced by GD 1/2018.

Any Modification will be approved by an Administrative Order or by an Addendum to the Contract. Any Modification of the Terms of the Contract shall be approved only by an Addendum to the Contract. Only non-substantial Modifications within the meaning of the Public Procurement Law may be approved by an Administrative Order. The Contractor will not make any changes to the Permanent Works or Provisional Works designed by the Employer before the appropriate Modification is approved and, if the case, before a building permit has been duly obtained.

Conclusions

The contract templates introduced by GD 1/2018 require due consideration by the Employers and Contractors alike, because by themselves, such templates may raise great difficulties in relation to the execution of the works.

Mainly, Contractors may face excessive difficulties in advancing with the execution of a project should significant changes are needed to be implemented.

Furthermore, it is important to note that if it is necessary to conclude an Addendum to the Contract whose sole purpose is to increase the Contract Price so that the related payments can be made, the Employer shall submit to the Contractor the Addendum and the Contractor shall return it, signed, to the Employer within 10 days of sending.

Although signing the Addendum shall not prejudice the rights of the Contractor, if the Contractor does not return such an Addendum signed within 10 days of submission by the Employer, the Contractor shall be deprived of the right to any additional payment that the direct application of the provisions of the Terms of the Contract or Specifications or the approval of the non-substantial Modification within the meaning of the Law on Public Procurement could have generated.

Apart from the Sub-clauses regarding the Modifications, the templates introduced by GD 1/2018 bring significant changes to the dispute resolution mechanisms – removal of the DAB and, also, stricter deadlines in relation to the Contractor’s claims which, if not properly maintained and raised, may cause the Contractor to lose sought entitlement.

Robert Ernest CRUCERU