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Who can be regarded as a subcontractor? When to specify? Is there a chance to modify?


Who can be regarded as a subcontractor? When to specify? Is there a chance to modify?
Summary of the Hungarian regulations on public procurement concerning the involvement of subcontractors

When performing contracts concluded as the result of public procurement procedures, the subject of subcontractors to be involved into the performance is a critical issue, this is what we intend to walk around in the following, including major daily problems.

Pursuant to Section 2 of Article 3 of the PPA, a subcontractor is an economic operator who (which) participates directly in the performance of the contract concluded in a procurement procedure involved by the tenderer, except for economic operators who (which) pursue their activity on the basis of an exclusive right, manufacturers, distributors and sellers of parts and basic materials intended to be employed for the performance of the contract, or sellers of building material, in case of public works.

 The issue of involving a subcontractor appears in three, relevantly separate points of time during the process of the public procurement procedure (including the period of the performance of the contract):

  1. in the tender / request to participate

In this regard, Section 6 of Article 66 of the PPA is relevant that says: The contracting authority may prescribe in the notice launching the procurement procedure that the following information shall be indicated in the tender or, in the case of a procedure consisting of more than one stage in the request to participate

  1. a) those part (parts) of the public procurement for the performance of which the tenderer (candidate) intends to employ a subcontractor,
  2. b) the subcontractors intended to be employed in those parts, if they are already known at the time of the submission of the tender or the request to participate.

Regarding this statutory provision, it shall be highlighted that the term “may prescribe” refers to the fact that the tenderer shall not request for this declaration, nevertheless, the majority of public procurement procedures obviously shows that tenderers request for this declaration.

When viewing this provision from the perspective of the tenderer, one may ascertain that the beginning of a long public procurement procedure (at the time of the request or the tendering) does not necessarily render real the expectation that the applicant and the tenderer may declare in an exact manner and with responsibility that in case the public procurement procedure will be won by them after several months, what kind of economic operators they will intend to cooperate with as a subcontractor, and regarding which of the tasks to be performed. Of course, this typically business decision will be influenced by the tenderer’s workload at the conclusion of the contract, its competitive interaction, etc., therefore, tenderers often face a dilemma regarding the actual severity of this declaration at the period of the actual performance.

This issue was addressed by the Public Procurement Committee in its guide of 19 May 2017 on certain issues concerning the amendment and performance of contracts concluded as a result of public procurement procedures, as follows:

“The circumstance of a tenderer declaring in the tender per Article 66 Section 6 of the PPA that the public procurement has no part for which it would use a subcontractor, does not prevent using a subcontractor during the performance of the contract.”

Per the above, in case the tenderer declared in its tender not to involve any subcontractor, it may sort of “revise” such a declaration during the performance.

However, as regards negative declaration by the subcontractor, it shall be highlighted that the tenderer shall submit its declaration on not involving for the performance of the contract a subcontractor covered by grounds for exclusion prescribed by the procedure as long as it declared having no intention to involve any subcontractor during the performance.

The same applies to the case when the contracting authority incidentally failed to prescribe in its procedure the submission of the declaration per Section 6 of Article 66 of the PPA.

  1. at the conclusion of the contract

Pursuant to Section 3 of Article 138 of the PPA, the winning tenderer shall be obliged to report all subcontractors who will participate in the performance of the contract, and he shall declare regarding them as far as grounds for exclusion provided for in the procedure concern them.

At this moment, the raw tenderer may be much more expected to make a grounded declaration concerning its subcontractors, for on the one hand, it is a fact that it won the public procurement procedure, on the other hand, after the conclusion of the contract, it shall start performing, so by then, the ideas on how its contractual obligations will be performed.

  1. after the performance of the contract

Despite the above, it may happen that the tenderer gets to the decision to modify the method of the involvement of subcontractors – which may mean the modification of the scope of tasks, the change of the subcontractors, the involvement of either new or not yet specified into the performance – after the conclusion of the contract.

In such case, the tenderer shall pay very close attention to that these new subcontractors shall be announced beforehand, i.e. before their actual involvement, and at the same time, it shall also be declared that they are not subject to the grounds for exclusion either. This latter declaration may come from the tenderer, but the declaration regarding the grounds for exclusion prescribed in the procedure, proceeding from the subcontractor concerned shall also be accepted.

Care shall be exercised in this regard, for it may happen (typically for contracts with a longer delivery period) that at the moment of the involvement of a new subcontractor, the grounds for exclusion are presented in statutory provisions completely different from those that were applied at the time of the public procurement procedure preceding the contract. During the performance of the contract, the tenderer shall make a declaration on the new subcontractors concerning the grounds for exclusion prescribed in the procedure.

The PPA prescribes no formalities of the declaration of the subcontractors and the grounds for exclusion, though, one may ascertain from the PPA that the notification and the declaration on the grounds for exclusion shall be written, unambiguous, immediate and properly documented[see resolution No. D.911/53/2015 of the Public Procurement Arbitration Tribunal and sentence No. 14.K.27.111/2016/36 of the Administrative and Labour Court of Székesfehérvár]

In case of a newly involved subcontractor, very close attention shall be paid to that if this subcontractor gets involved instead ofa formerly specified subcontractor that was alsoan organization certifying suitability in the public procurement procedure, it shall be examined as regards the newly involved subcontractor whether it meets the competence requirements (occasionally certified together with the tenderer) that the tenderer has met along with the forgone subcontractor.

This examination by the contracting authority shall be carried out beforehand in all cases, i.e. it cannot be carried out subsequently, considering that an infringement cannot be legitimised subsequently. [see resolution No. D.156/14/2011 of the Public Procurement Arbitration Tribunal and sentence No. 13.K.32.029/2011/19 of the Administrative and Labour Court of Székesfehérvár]

As regards the involvement of a new subcontractor during the performance it shall be highlighted that the PPA itself disposes of “announcement” and not “approval” in this regard, so if a new subcontractor is involved during the performance that does not affect the certification of the suitability of the tenderer (i.e. it is not about the tenderer replacing an organisation engaged in the certification of suitability in the procedure as well asconsidered as a subcontractor), the new subcontractor shall be involved in the form of a unilateral legal act, and in principle, the tenderer shall not request for the consent of the contracting authority.

A direct consequence of the above is that the involvement of the new subcontractor pursuant Section 3 of Article 138 of the PPA shall not be considered as a contractual amendment.

I.e. pursuant to Article 6:191 (1) of the Civil Code, the contract shall be amended by the mutual agreement of the parties, in contrast, the involvement of a new subcontractor pursuant to Article 138 (3) shall be carried out by a unilateral legal act of the tenderer.

Restrictions on the involvement of a subcontractor pursuant to Article 65 (10) of the PPA

It may be ascertained that, based on the amendment of the PPA of 28 November 2018, in no public procurement procedures launched as of 29 November 2018 the extent of the involvement of a subcontractor is restricted for any procurement matter, nevertheless, the PPA includes a provision that, under certain circumstances, still provides an opportunity for contracting authorities to restrict the involvement of subcontractors– in the end of our blog entry, we intend to point out its rules and possible pitfalls.

Section 10 of Article 65 of the PPAprovides that:

In the case of works contracts, service contracts and siting or installation operations in the context of a supply contract, contracting authorities may require that certain critical tasks be performed directly by the tenderer itself or, in the case of joint tenders, by one of the joint tenderers. In such cases, in relation to those tasks, for the purposes of certification of suitability according to paragraph 9 tenderers or candidates may not rely on the capacity of another entity and, contrary to the provision set out in paragraph 7, those tasks may not be delegated to a subcontractor in the course of the execution of the contract.

As regards the above-mentioned provision it shall be highlighted that this prescription by the contracting authority may only concern tasks of actually fundamental importance – critical, as the phrasing of Article 63 Section (2) of the Directive formulates it –, and its application may not lead to the groundless restriction of the competition.

Should the contracting authorities wish to make use of this opportunity, they shall specify in the notice and the public procurement documents these tasks qualified as of fundamental importance per Article 65 Section 10 of the PPA. It is recommended, however, to includein the documents of the procedure during the preparation of the procedure, by all means, an internal document (rationale) concerning the viewpoints that led to the contracting authority indicate the marked tasks as tasks of fundamental importance– this certificate may be highly needed, e.g. for answering a preliminary settlement request that challenges this provision, or, where applicable, during the review procedures initiated due to this.

Contracting authorities see this provision particularly “attractive” lately because thereby they are able not only to restrict the tenderer in outsourcing the tasks specified in the public procurement procedure even in their entirety, but at the same time, if the competence requirements concerning these tasks have been prescribed (e.g. reference or specialist), the tenderer may not involve anybody in order to certify these competence requirements, its accomplishment shall be certified by the tenderer. 

So, the application of Section 10 of Article 65 may not only result in the restriction of the involvement of subcontractors by the contracting authority, but also in the restriction of the involvement of the organisation of the organisation that would certify competence, therefore, we only recommend its prudent and grounded application, since the risk of dispute resolution and legal remedy is rather high.

Regarding this provision viewed from the perspective of the contracting authority, we can ascertain that if the contracting authority specified tasks of fundamental importance pursuant to Section 10 of Article 65 of the PPA and the tenderer would have intended to be executed by the subcontractor originally, the tenderer is required to withdraw the capacity of tenderer of that subcontractor, i.e. it shall act as two joint tenderers in the public procurement procedure.

Formally, this may mean an actual solution, but attention shall be drawn to the fact that if the volume of these tasks of fundamental importance is not significant compared to entirety of the procurement, it is dubious whether the affected economic operator will be also willing to participate as joint tenderer, assuming thereby the concomitant universal responsibility…