Performance of Contractor Agreements: Practical Issues

1. Performance of Contractor Agreements: Practical Issues Kyiv, September 2012 Kristina ARTEMENKO EU Project "Harmonisation of Competition and Public Procurement Systems in Ukraine to EU Standards"

2. 1. Contractor agreements in Ukraine: legal framework (1) • Civil Code of Ukraine • Commercial Code of Ukraine • Regulation of the Cabinet of Ministers of Ukraine No. 668 dd. August 01, 2005 "On Approval of General Terms and Conditions for Conclusion and Performance of Contractor Agreements in Capital Construction" • Order of the Ministry of Construction, Architecture, Housing and Utilities of Ukraine № 3 dd. October 27, 2005 "On Approval of Standard Contractor Agreement in Capital Construction“

3. 2. Contractor agreements in Ukraine: legal framework (2) Contractor agreements to be concluded upon the results of the procurement with public funds: + Law of Ukraine "On Public Procurement" (hereinafter, PPL)

4. 3. Contractor agreement (contract) Essential terms and conditions of a contractor agreement (Regulation of the Cabinet of Ministers No. 668 dd. August 01, 2005 "On Approval of General Terms and Conditions for Conclusion and Performance of Contractor Agreements in Capital Construction"): parties’ names and details; place and date of the contractor agreement; subject matter of the contractor agreement; contractual price; dates of commencement and completion of works (construction); rights and obligations of the parties; procedure for enforcement of contractual obligations under the contractor agreement; terms and conditions of insurance against the risk of accidental destruction or damage to the construction project; procedure for provision of design specifications, resources and services for the project; subcontracting procedures; requirements to organization of work; procedure for procuring entity’s control over the quality of resources; terms and conditions of designer and technical supervision over the work; sources and procedure for financing of work (construction); payment methods for the work completed; procedure for acceptance/delivery of work (construction); warranty period for the quality of work completed (operation of the construction project); procedure for curing deficiencies; parties’ liability for a breach of the contractor agreement; dispute settlement procedure; procedure for making changes to the contractor agreement and termination procedure

5. 4. Procurement contract Procurement Contract is a contract to be concluded by and between a procuring entity and a bidder upon the results of the procurement procedure to ensure provision of services, performance of works, or acquisition of title to goods with public funds(PPL, Art. 1) Essential conditions of a procurement contract

6. 5. Conclusion of a contractor agreement upon the results of the procurement procedure 1. Subject to requirements of bidding documents and the accepted bid 2. Timeframe for contracting: • public bidding, two-stage bidding, competitive bidding upon pre-qualification: no later than 30 days upon bid acceptance but not earlier than 14 days upon the date of publication of the bid acceptance notice in the Public Procurement Newsletter • request for price quotations (this procedure may be applied when maintenance services are to be procured for no more than UAH 200,000): not earlier than five business days upon publication of a price quotation acceptance notice in the Public Procurement Newsletter, but no later than 14 days after the day when the winner is determined • single-source procurement: not earlier than 14 days (5 business days whenever reasons listed in PPL, Art. 39, Part II, paragraph 3, apply to the procurement procedure) upon the date of publication of the notice of bid acceptance upon the results of a single-source procurement procedure in the Public Procurement Newsletter • Electronic reverse auction: in accordance with art. 39-10 of PPL

7. 6. Requirements to the contractor agreement made upon the procurement procedure results (1) Basic requirements to the procurement contract(PPL, Art. 40) 1. To be made in writing (in case of e-reverse auction – in form of electronic document) pursuant to the Civil Code of Ukraine and Commercial Code of Ukraine. Law of Ukraine “On electronic digital signature”, “On electronic documents” with due consideration of requirements set forth by PPL 2. Tender winner is obliged to provide all necessary authorizations and licenses if such authorizations and licenses are required by legislation.

8. 7. Requirements to the contractor agreement made upon the procurement procedure results (2) Basic requirements to the procurement contract(PPL, Art. 40) 3. Termsand conditions of the procurement contract may not vary from the contents of the bid submitted by the winner of the procurement procedure. The essential terms and conditions of the procurement contract may not be changed once it is signed by the parties until the parties perform their obligations in full unless: • the scope of the procurement is reduced, in particular, in terms of the actual funding of procuring entity’s expenses • the quality of a procurement object is improved provided such improvement would not increase the contractual value • the contract and obligations associated with assignment of goods, performance of works, provision of services are extended due to occurrence of documented circumstances requiring such extension, including force majeure events, delay in financing procuring entity’s expenses provided that such changes would not increase the contractual value • there are changes due to extension of the procurement contract for the period sufficient to complete the procurement procedure at the beginning of the next year for no more than 20 per cent of the value specified in the contract made in the previous year provided expenditures for such purpose were duly approved (When work is procured, this rule is not applied in practice)

9. 8. Requirements to the contractor agreement made pon the procurement procedure results (3) Basic requirements to the procurement contract(PPL, Art. 40) • 6) the agreed change of price towards of decreasing (without changing the amount (volume) and quality of goods, works and services) •  7) changes of price due to changes of tax rates and fees in proportion to changes in such rates •  8) changes (required under the legislation by state statistics) of the inflation rate, changes in foreign currency exchange rate in case when procurement contract has relevant provision, changes in regulated prices (tariffs) and the regulations that apply to the procurement contract the purchase of Right of procuring entity to stipulate in contract advance payment.

10. 9. Negotiated price of the contractor agreement (1) Negotiated price means an estimated cost of contractor’s work, for which the contractor appointed by the implementing party agrees to perform the order (DBN D.1.1-1-2000, Paragraph 3.3.1, Construction Cost Determination Rules) Negotiated price is an essential element of the contract Types of negotiated prices: • fixed price (unless otherwise set forth by the contract) • dynamic price (the negotiated price cannot be finalized since expenses are indefinite or there are any other circumstances) Funds to cover risks depending on the type of negotiated price

11. 10. Negotiated price of the contractor agreement (2) Clarification (adjustment) of a fixed negotiated price: The procedure and reasons for such clarification are set forth by DBN D.1.1-1-2000 Construction Cost Determination Rules) and Regulation of the Cabinet of Ministers of Ukraine No. 668 dd. August 01, 2005 “On Approval of General Terms and Conditions for Conclusion and Performance of Contractor Agreements in Capital Construction”. Negotiated price for a contractor agreement made upon results of the procurement procedure: The price may be changed when the volume of procurement is cut down (the volume and types of work are withdrawn ) – PPL, Art. 40.

12. 11. Performance of contractor agreements: practical issues (1) Insufficient financing of the construction project extension of the contract and performance of obligations under contract (PPL, Art. 40) Possible consequences:the contractor may incur extra expenditure

13. 12. Performance of contractor agreements: practical issues (2) Change in prices for resources to be supplied by the contractor and for third party services: PPL provides • neither for upward adjustment of the negotiated price (PPL, Art. 40) • nor for downward adjustment of the negotiated price (PPL, Art. 40)(!)

14. 13. Performance of contractor agreements: practical issues (3) Change in the recommended level of the average monthly salary: PPL does not provide for upward adjustment of the negotiated price (PPL, Art. 40).

15. 14. Performance of contractor agreements: practical issues (4) The need to change the scope and types of work: • PPL does not provide for withdrawal/addition with an increase in the total value of contractual work (PPL, Art. 40) • Withdrawal of volumes and types of work (volume of procurement) is possible (PPL, Art. 40)

16. 15. Performance of contractor agreements: practical issues (5) Additional work to be done while the contractor agreement is performed: • correction of design specifications and estimates, looking for the possibility to finance additional work and, where appropriate, re-approval of the contraction project • determination of the price for additional work • When the additional work is not expected to increase UAH 1 million, such work shall be included to the Annual Procurement Plan as an addendum; conclusion of an agreement • When the additional work is expected to be equal or increase UAH 1 million, such work shall be included to the Annual Procurement Plan and shall require a procurement procedure to be conducted pursuant to PPL (single-source procurement, PPL, Art. 39)

17. 16. Performance of contractor agreements: practical issues (6) The contractor may not complete the contract since the negotiated price may not be adjusted: • termination of the contract pursuant to the terms and conditions laid down therein • identification of the scope of the remaining work • planning and procurement procedure for the remaining work Termination of the contract and a new procurement procedure mean extra public expenditure (guard of a construction site, repeating of certain works due to suspended construction for the time required to prepare and conduct the procurement procedure etc.)

18. Thank you very much for your attention!