Cutting and Pasting Contracts

Contracting authorities are quite free to determine how they shape contracts. Contracts can be cut up into lots, or several contacts can be pasted to each other. However, it remains tricky to push the limits of what public procurement allows. This appears from Advice 705 of the Dutch Committee of Procurement Experts (Commissie van Aanbestedingsexperts) on an incorrect application of the lots scheme of Section 2.18 of the Dutch Public Procurement Act.

The freedom of contract principle allows contracting authorities to divide a public contract into several lots. It is the contracting authority that determines what contractual shape it gives to a contract. For example, the construction of an office building may be put on the market as one public contract for works, but a contracting authority may also choose to split the works into three parts: constructional, electrical and mechanical. For each part – referred to as “a lot” in procurement law – a contract for services can be concluded with an individual contractor. The office building will then be constructed by three (co-)contractors jointly, each doing its share.

A contracting authority may also choose to instruct one party to do the design and construction of that office building. This results in an integrated contract (design & build), rather than the traditional division into design to be done by an architect and execution by a contractor. This aggregation of different types of contracts is the mirror image of the division into lots. The Public Procurement Act allows different contractual structures from the field to be put on the market in the proper procurement-law way. However, for those who still doubted this, Section 1.10a Public Procurement Act dictates that the contracting authority “shall not design a public contract with the intention of evading the Public Procurement Act.”

If a contracting authority divides a public contract into several lots, it is not the value of each individual lot that determines whether it must be put out to tender. Section 2.18 (1) of the Public Procurement Act provides that the estimated value of all lots added together is the ground for the value. If this estimated value is above the threshold value, all lots (together making up a work, service or supply) have to be put out to tender.

There is one exception to this main rule, which is set out in the “lots scheme” of Section 2.18 (3) of the Public Procurement Act. If a lot of a work has an estimated value below €1,000,000, and the value of that lot is less than 20% of the aggregated value of all lots (of that work), that particular lot need not be put out to European tender. In the case of a service, this value must be below €80,000 for the lot that is excepted. If we take the example of the office building above, a separate lot might be created for the lifts, for example. If that lot has an estimated value of less than €1,000,000, and its value is also below the 20% of the total value of the construction of the office building, the contracting authority may contract directly with a contractor for lifts. Being able to award such lots directly may come in handy, for example if the contracting authority has several office buildings and wants to have the same lifts installed in all of them.

While the lots scheme is clear, something still went wrong recently. For the development of a school building, a contracting authority had signed a contract for design works and site management with an undertaking directly – without tendering – by relying on the lots scheme of Section 2.18 of the Public Procurement Act. The value of this public contract for services was estimated at approx. €980,000. The contracting authority reasoned as follows to defend this choice: design and execution can be aggregated into one contract. Together, the design and construction of the school is one work. It says so indeed in the definition of a public contract for works. The estimated value of the entire development was €22,760,380. So far, the reasoning was correct. But after that, the contracting authority missed the mark and was rightly criticized.

The contracting authority considered it permitted to cut loose the parts pasted together (design and execution) that make up one work, by relying on the lots scheme of Section 2.18 (3) of the Public Procurement Act. Having done that, the contracting authority awarded the lot ‘design’ (that had an estimated value of less than €1,000,000 and did not exceed the 20% limit either) privately. Creative as this action may be, it is blatantly wrong.

The Committee of Procurement Experts did not waste many words on this action: “the Committee considers this to be an artificial aggregation of contracts, and the contracting authority is acting in breach of Section 1.10a (1) of the Public Procurement Act 2012, which prohibits contracting authorities, inter alia, from designing a contract with the intention of evading the application of Part 2 of this Act.”

Procurement law allows for the aggregation of design works (a service) and execution (a work). Together, this is a work that can be performed by an undertaking. The definition of a work in Section 1.1 of the Public Procurement Act also offers this room. What is not possible, however, is to divide this aggregated contract into lots at once, and then award the lot ‘design’ directly by relying on the lots scheme. By undoing the aggregation, a design & build agreement (with a contractor) in fact ceases to exist. This is a clear example of artificial aggregation, followed by immediate splitting, with the intention of deliberately evading the application of the Public Procurement Act. Such pasting and cutting was rightly held to be impermissible.

This advice of the Committee of Procurement Experts is well worth a read.