A crucial determination to be made prior to submitting a bid in a public tender is the available resources of the contractor concerned. This will require a precise examination of the contractor’s capacity to perform the tender contract properly, in view of their organizational and technical resources. In practice, a contractor will often discover that it needs to outsource to fulfill all of the requirements specified in the tender description. This is a common problem, while under the current Public Procurement Law (PPL), contractors have the option of using subcontractors to perform tender contracts, and this in turn means that an important element of the contractor’s strategy is to approach selection of subcontractors thoughtfully and rationally so as to ensure that the public contract is discharged in full, in line with the contracting authority’s expectations.

In this article, we discuss the main subcontracting issues that a contractor needs to consider when submitting a bid.

Definition of a subcontractor in a public tender

There is no definition of a subcontractor in the PPL of 2019, while a definition of a subcontracting agreement is given in article 7(27) of the PPL. This is “a written agreement envisaging payment, concluded between a contractor and a subcontractor, and in the case of a construction work contract not relating to defense or security, also between a subcontractor and further subcontractor/s, in which the subcontractor and/or further subcontractor, as the case may be, undertake to perform some elements of the tender contract“. For this reason, for a particular agreement to be considered a subcontracting agreement, it has to regulate performance of an element of the tender contract, i.e. the contractor’s obligations laid down in the public tender agreement. Agreements that do not concern obligations laid down in the tender documentation cannot be treated as subcontracting agreements. This will apply for example to administrative tasks or tasks that facilitate performance of the tender contract but are not specifically obligations of the contractor. At this point, a contractor submitting a bid for a supply tender needs to exercise particular care. It is a firmly established view that in the meaning of the PPL[1] a manufacturer is not a subcontractor, but may become one by providing, for example, services under guarantee or maintenance services to a contracting body directly.

Options regarding subcontracting elements of a tender contract

When submitting a bid for a tender, a contractor must bear in mind that in general the PPL does not allow contracting authorities to place restrictions on or forbid subcontracting. This is stated in art. 462(1) of the PPL, under which a contractor may use subcontractors to perform elements of a tender contract. At the same time, legal instruments are available to a contracting authority to influence the scope of services subcontracted.

Requirement to identify subcontractors in a bid

Under art. 462(2) of the PPL, contracting authorities may require a contractor to specify in a bid the elements of the tender contract that are to be outsourced, and name the possible subcontractors, if known at that stage. This power is usually exercised by requiring the filling in of a table or relevant form, and these will be an integral part of the bid submission form or an appendix to the Tender Terms of Reference (TToR).

Art. 462(2) relates to a contractor’s plans or intentions, and therefore the information provided in a bid does not have to correspond to the scope of elements subcontracted when the agreement is being performed. For this reason, the scope of elements subcontracted can be reduced or increased in relation to that stated in the bid, and the contractor may outsource elements of the tender contract to providers other than those named in the bid.

The stipulation that a contractor must perform crucial tasks itself

Sometimes, the contracting authority decides to stipulate that the contractor must perform crucial tasks by itself (art. 60 and 121 of the PPL). The relevant provisions addressing this issue can be found in various places within the PPL. Under art. 60, where contractors are bidding as a consortium, contracting authorities can require that one contractor alone within that consortium perform crucial tasks, relating to:

  • contracts for construction work, or for services, or
  • work relating to positioning and installation, in the case of supply contracts.

Art. 121 of the PPL extends this power to cover contractors who bid for a contract alone. If this stipulation is made, it will not be possible for those elements of the deliverable specified by the contracting authority to be performed using a subcontractor or third party providing resources.

If a contractor is bidding for a contract but does not have the relevant resources to perform some elements itself, it needs to check whether the contracting authority has placed restrictions on subcontracting, as possible under the law. This restriction should be imposed in special circumstances and apply to crucial elements of the tender contract, which means services which are highly specialized, complex, or require particular credentials or know-how which by their nature cannot be transferred[2]. Examples include a requirement to be registered to perform a regulated activity or to hold a license to conduct a certain type of activity. For this reason, for a contracting authority to specify certain elements of the tender contract as being crucial, these cannot be elements merely relating to the main element (scope) of the deliverable[3], or merely be elements of strategic importance for the overall contract[4]. For certain elements to be considered crucial, providing them has to require involvement of a specific contractor due to their personal attributes, knowledge, or special resources required to perform the contract.

Contractors also need to bear in mind that where a contracting authority specifies a requirement described in art. 60 of the PPL or 121 of the PPL, the declaration described in art. 462(2) of the PPL becomes a substantive element of the contractor’s bid, and is examined in terms of the bid’s fulfillment of the tender requirements[5].

A subcontractor vs. a third party providing resources

The question of whether a bid can be submitted in a procedure will often depend on whether a contractor confirms that admission requirements or selection criteria are fulfilled, and a contractor can do this in three ways[6]:

  1. by demonstrating that it will fulfill them by itself;
  2. by bidding for the contract in a consortium, and combining, for this purpose, jointly held resources in line with the rules specified in art. 58 and art. 117 of the PPL;
  3. by using the resources of third parties in line with the rules specified in art. 118–123 of the PPL;

If the last of these options is chosen, i.e. using third-party resources, it needs to be borne in mind that under art. 118 in fine of the PPL there are no restrictions as to the choice of the nature of the legal relationship between a contractor and third party providing resources, and thus, if the legal relationship between the contractor and that provider does not fulfill requirements under art. 7(27) of the PPL, the third party cannot be considered a subcontractor in a public tender. In such a case, that third party will only be responsible for in fact providing the relevant resources, but not for performing an element of the public tender contract. At the same time, there is an exception under art. 118(2) of the PPL. Under this article, where the skills relied upon are education, qualifications, or know-how, the element of the contract for which those skills are required must be performed by the provider. This applies to contracts for services, or to construction work. This is because those resources are treated as inextricably linked to the provider, and cannot be a stand-alone commodity. Thus a contractor that wishes to use the education, qualifications, or know-how of a third party has to involve them as a subcontractor in performance of the tender contract, or consortium member.

The agreement with a subcontractor

Before submitting a bid, a contractor also needs to determine whether the agreement proposed by the contracting authority contains special provisions on use of subcontractor services. Such situations will usually arise in the case of construction work tenders, as in this case, a contracting authority has a special obligation under art. 437 of the PPL to review agreements concluded with subcontractors. In such a situation, the proposed agreement with a subcontractor has to be approved by the contracting authority sufficiently in advance. In addition, under art. 447(1), if agreements for construction work are concluded for more than twelve months, the contractor is required to submit proof that remuneration has been paid to subcontractors.

Under art. 439 of the PPL, contracting authorities are required to observe the relevant regulations on indexation of payment to a contractor with regard to any type of tender contract, if the agreement is concluded for more than six months. In such a situation, the contractor has to adjust payment to its contractor for inflation, if the agreement (in this case a subcontracting agreement) is also concluded for six months or more. Failure to comply with this obligation could lead to contractual penalties.

Meanwhile, provisions requiring that the agreement stipulate contractual penalties for failing to pay subcontractors remuneration adjusted for inflation within the required time apply to agreements concluded for more than twelve months (art. 436(4)(a) of the PPL). For this reason, where agreements are concluded for between six and twelve months, a contractor may have an obligation to adjust a subcontractor’s remuneration for inflation, but this does not necessarily entail a penalty because the relevant contractual penalty has to be provided for by the contracting authority in the agreement. The law is therefore to some extent inconsistent – the requirement to adjust a subcontractor’s payment for inflation applies when an agreement for a public tender is concluded for more than six months, but the requirement to provide for a contractual penalty only applies to agreements concluded for more than twelve months. Also, the PPL provisions addressing this issue depart from the principle established under art. 483 of the Civil Code, that specifying contractual penalties is effective for failure to perform or incorrect performance of a pecuniary obligation. With regard to this issue, the PPL cannot be interpreted more broadly. At the same time, it is doubtful whether stipulating a contractual penalty for failure to pay a subcontractor on time in cases in which this is evidently not possible under the PPL would be effective.

However, this issue cannot be described thoroughly without mentioning the view of some scholars, that timely payment to subcontractors should be perceived as an obligation that is non-pecuniary (contractual obligation of timely performance) and is only indirectly linked to a deliverable in pecuniary form (obligation to pay a subcontractor remuneration). According to this viewpoint, provision for a contractual penalty for not paying a subcontractor on time may be effective, but this would be a penalty for not providing a deliverable correctly, and this is clearly not possible under the PPL.

Summary

A thoughtful approach to performance of a public tender contract means accounting for requirements concerning using subcontractors. It would be advisable to assess this issue even before submitting a bid, as this makes it possible to prevent or predict problems that may arise during performance of the contract, and this in turn increases the chances of ultimately performing the tender contract successfully.

[1] Judgment issued by the National Appeals Chamber of 8 October 2018, KIO 1905/18.

[2] Jaworska M., Grześkowiak- Strojek D., Jarnicka J., Matusiak A., the Public Procurement Law, a Commentary, editor M. Jaworska, 2023, fifth edition.

[3] Judgment issued by the National Appeals Chamber of 27 May 2019, KIO 867/19.

[4] Judgment issued by the National Appeals Chamber of 21 September 2017, KIO 1837/17.

[5] Judgment issued by the National Appeals Chamber of 8 March 2019, KIO 282/19.

[6] Jaworska M., Grześkowiak- Strojek D., Jarnicka J., Matusiak A., the Public Procurement Law, a Commentary, editor M. Jaworska, 2023,  fifth edition.