Tales from the National Appeal Chamber: Amounts for basic and optional procurement should be clearly defined
Sometimes, before opening the bids, the contracting authority already knows the amount it will allocate for both the basic contract and the optional contract. How should it indicate these amounts for finalising the procedure? When can the procedure be cancelled under Art. 255(3) of the Public Procurement Law if the contract provides for the right of an option? In a recent ruling, the National Appeal Chamber answered these and other questions.
Which amount is binding?
In case no. KIO 713/23, two contractors bid for a public contract in Poland. After one of the bids was rejected as a result of an appeal and a ruling by the National Appeal Chamber, the contracting authority cancelled the procurement procedure pursuant to Art. 255(3) of the Public Procurement Law, finding that the price of the second bid exceeded the amount it intended to allocate to finalise the contract.
The second bidder appealed the decision to the National Appeal Chamber. In the contractor’s opinion, the contracting authority incorrectly regarded the price of the second bid as exceeding the budget, since the price offered for the basic scope of the procurement was lower than the amount the contracting authority intended to allocate for execution of the contract, and exercise of an option right was uncertain. The appellant also pointed out that exercise of the option depends on the financial capacities of the contracting authority: it might not exercise the option at all, or limit the scope of the option. Furthermore, before opening the bids, the contracting authority quoted only one amount it intended to allocate for execution of the contract (PLN 1,976,989). Therefore, the amount bid for execution of the basic contract by the contractor (PLN 1,547,009) should be entirely sufficient to execute the contract.
The contracting authority disagreed. In its view, when examining whether the grounds for cancellation under Art. 255(3) arose in the procedure, it was necessary to take into account the bid price, which, according to the procurement documents, consisted of the total price for the basic contract and the optional contract. The contracting authority argued that it was the total price—for the basic contract and the option combined—that it was comparing when evaluating the bid criteria. The contracting authority claimed that even assuming that only the price for the basic contract is taken into account when examining the applicability of Art. 255(3), the contracting authority should compare this price with the amount allocated to finalise only the basic contract. Otherwise, it could not exercise its option to the full extent. If it allocated the funds provided for execution of the optional contract to the basic contract, it would not have sufficient funds to exercise the option later.
What is an option right for a public contract?
Neither the Polish Public Procurement Law nor the EU procurement directives provide a definition of an option right in procurement, but, as the National Appeal Chamber stated, it is recognised in the legal literature and the case law that an option is a unilateral right of the contracting authority to frame the subject of the contract, with the possibility of extending the basic contract to include certain services, construction works or supplies which might become necessary at the stage of contract performance.
Exercising the option is an entitlement of the contracting authority. In the contract documents, the contracting authority informs contractors of the possibility of exercising the option, but it will decide to extend the contract to cover the optional area only at the stage of contract performance.
The amount allocated for execution is not the estimated value of the contract
The National Appeal Chamber held that the amount quoted before the opening of bids does not have to reflect the amount in the estimate. The chamber pointed to the different purposes of the preliminary estimate of the value of the contract and the contracting authority’s release of information on the amount it intends to allocate to execute the contract.
Primarily, estimating the value of the contract determines which procedure should be followed for awarding the contract and helps properly prepare the proceeding. It is also based on the estimated value of the contract that the contracting authority examines whether a price is abnormally low.
But the amount allocated for execution of the contract is a declaration by the contracting authority that it will select the most advantageous bid, provided that the proposed price does not exceed the amount it has earmarked for the contract.
For these reasons, the chamber unequivocally found that the amount allocated to finalise the contract refers only to the funds the contracting authority intends to allocate to the basic contract.
Listing of amounts must be unambiguous
The chamber held that in the information on the amount allocated to execution of the contract, the contracting authority may specify the amount allocated to both the basic contract and the optional contract. But if it does, the breakdown must be unambiguous, as the contracting authority is bound by the amount allocated to finalise the basic contract—it is obliged to award the basic contract in full, while the option is contingent and unpredictable. At the stage of performance, it may turn out that the contracting authority must exercise the option to the maximum extent of 50%, even if at the time of quoting the amounts for finalising the contract it assumed only 30%. Therefore, if the contracting authority quotes two amounts before the opening of bids, only the amount for the basic contract is binding.
Thus if the contract includes an option right, the contracting authority is entitled to take into account the amount it quoted before the opening of bids, which determines the funds allocated to finalise the basic part of the contract. This applies to the amount allocated for execution of the guaranteed contract, regardless of whether the optional part of the contract is implemented. However, when the contracting authority quotes a single amount without distinguishing between the basic scope of the contract and the option, it should be assumed that this amount refers only to the basic part of the contract. In such a case, in accordance with Art. 255(3), the grounds for cancellation of the proceeding should be evaluated only with respect to this amount.
In this case, the National Appeal Chamber found that the contracting authority had acted incorrectly, as it only quoted one amount and assumed that on that basis it could cancel the procedure. Meanwhile, the appellant offered an amount for the basic contract that entirely fit within the amount specified by the contracting authority for performance of the contract—presumed to cover the basic contract, excluding the option. If the contracting authority wanted the amount it quoted to cover both the basic scope and the optional scope, it should explicitly include such details in the information provided to contractors.
Beware of manipulation
According to the National Appeal Chamber, the documentation clearly showed what amount the contracting authority intended to allocate to finance the contract. The contracting authority was not right to claim that when analysing the grounds for cancellation of the proceedings, the total price of the appellant’s bid including the costs of performing both the basic contract and the optional contract should be taken into account. The amount quoted by the contracting authority before the opening of bids referred exclusively to the basic contract, and only to this extent was it bound by the quoted amount. Thus the contracting authority should consider only the price for execution of the basic contract before cancelling the procedure. Otherwise, it would be comparing amounts that are not comparable.
Moreover, the catalogue of grounds for cancellation of the procedure is fixed and subject to strict interpretation. The National Appeal Chamber found that in this case, the contracting authority was de facto attempting to reduce the amount it intended to allocate for execution of the contract, and to rectify the mistake it made in determining the amount allocated to finalise the contract. Reducing this amount after the opening of bids could lead to arbitrary expansion of the actual reasons for cancelling the procedure. The contracting authority was bound by the amount it had stated in the information on the funds earmarked to finalise the contract.
Gabriela Kobyłecka, Infrastructure, Transport, Public Procurement & PPP Practice, Wardyński & Partners
