Regulation 6 – Methods for calculating the estimated value of procurement

Commentary

Regulation 6 offers a number of different ways to calculate the price of a procurement, which in consequence means they determine the applicable law. The rules under this Regulation follow extremely closely those of Article 5 Directive 2014/24/EU, with some minor drafting changes and a renumbering and consolidation of subsections that provides some improvements.

The first 5-6 paragraphs are straightforward and will be relevant for most cases, most of the time, they do not generate particular difficulties. Their overall approach is to ensure contracting authorities do not game the system by sub-dividing contracts or exclude VAT to avoid applying Part 2.

Paragraph (7) introduces the only difference in drafting that is worth emphasizing in this comment. This concerns the timing of the calculation of the estimated value of the procurement. While art 5(4) of Directive 2014/24/EU indicates that the “estimated value shall be valid at the moment at which the call for competition is sent …” (emphasis added), Regulation 6(7) indicates that the “estimated value shall be calculated as at the moment at which the call for competition is sent …” (emphasis added).

The consequences of this divergence depend on how literally the rules are interpreted. Under a strict literal interpretation, Regulation 6(7) seems more limiting for contracting authorities, as it imposes a positive obligation to calculate the estimated value at a specific time (ie dispatch of the relevant notice or start of the procurement), whereas Article 5(4) Directive 2014/24/EU requires a check of (a previous?) calculation at that time. However, it seems clear that contracting authorities need to actually check the estimated value at the same point in time either under Regulation 6(7) or Article 5(4), which makes the drafting rather irrelevant in practical terms.

Trainwrecks waiting to happen

Our biggest concerns regarding Regulation 6 come from paragraphs ((8) and (9), where the Regulation tries to determine the procurement value for procurement “things” which are not contracts and are hard to measure: framework agreements and innovation partnerships.

Framework agreements provide a case for deep consideration of how it can be gamed and abused by contracting authorities to avoid applying Part 2 or Part 3 of the Regulations. Below thresholds contracts are now more regulated than in the past but framework agreements are not subject to the same transparency requirements. This creates a perverse incentive for contracting authorities to establish framework agreements with procurement values below thresholds to avoid any sort of transparency. Now let’s marry this idea with a short initial term of the framework (say, one year) which coincidently justifies a below-threshold calculation value and that the framework then gets extended to the maximum 4 year period afterwards. On the other hand, this loophole may be covered by the anti-circumvention prohibition in Article 5(3) Directive 2014/24/EU and Regulation 6(5) and 6(6) PCR2015, which clearly set out that “The choice of the method used to calculate the estimated value of a procurement shall not be made with the intention of excluding it from the scope of this Directive [Part]. A procurement shall not be subdivided with the effect of preventing it from falling within the scope of this Directive [Part], unless justified by objective reasons.

The methods for calculating the value of innovation partnerships are not much better though as if the purpose is really to generate innovation, then establishing so early in advance R&D and final procurement costs is impossible due too the number of variables. Perhaps it would have been better to not have them and just subject all innovation partnerships to Part 2. We suspect that when contracting authorities really want to use the innovation partnership they will just assume a contract value above-thresholds and apply the appropriate rules.

 

Lots, lots everywhere

Another potential issue with the transposition arises from paragraph 14 of Regulation 6, where with reference to lots the drafting keeps references to values in Euro when it comes to exempt the award of contracts for individual lots. This creates a significant problem of a financial moving target as it forces every single contracting authority to check those values manually in each procedure with lots. Furthermore, for really close calls it is not clear what is the clear proper approach to determine the exchange rate applicable: is it the mid-market rate? The end of day one?

Given that the European Commission has been including the corresponding values in currencies other than Euro for the €80,000 and €1,000,000 thresholds in its previous communications for these purposes, it would have been much more preferable for the Regulation 6 to follow the legislative technique used in relation to the thresholds covered by Regulation 5.

Indeed, they should have extend the rule under Regulation 5(4), whereby “The value in pounds sterling of any amount expressed in euro in any of the provisions of the Public Contracts Directive shall be taken to be the value for the time being determined by the Commission for the purpose of that provision and published from time to time in the Official Journal in accordance with Article 6 of the Public Contracts Directive”. This would have avoided significant legal uncertainty and would have reduced the administrative costs to contracting authorities willing to benefit from this derogation to compliance with the rules of Directive 2014/24/EU in the award of “low-value” lots.

Regulation 5(4), however, restricts the field of its own application to the values “mentioned in this regulation” and not “in these Regulations.” Therefore, it seems we may have a gap in the law that will have to be filled in via interpretation. We can probably assume that the Commission will have identical power as this would be the harmonising interpretation and the overall sense of these threshold provisions, but this could have been easily avoided with some more care. As I we said at the start, some more time to consider the transposition would have been preferable as this inconsistency is easy to solve. In the meanwhile, I we can picture creative contracting authorities using small lots and/or exchange rates fluctuations to exclude procurements from Part 2.

 

What about the rest?

The remaining paragraphs of Regulation 6, however detailed, do not offer so much scope for comment. Lots get some attention and detail as they should do to the Directive preference for division into lots (which will be very welcome in cartelised markets…) and for the most part we agree with the provisions.

Last modified: July 4, 2016 by Pedro Telles

General rules

6.—(1) The calculation of the estimated value of a procurement shall be based on the total amount payable, net of VAT, as estimated by the contracting authority, including any form of option and any renewals of the contracts as explicitly set out in the procurement documents.

(2) Where the contracting authority provides for prizes or payments to candidates or tenderers it shall take them into account when calculating the estimated value of the procurement.

(3) Where a contracting authority is comprised of separate operational units, account shall be taken of the total estimated value for all those units.

(4) But where a separate operational unit is independently responsible for its procurement, or certain categories of its procurement, the values may be estimated at the level of the unit in question.

(5) The choice of the method used to calculate the estimated value of a procurement shall not be made with the intention of excluding it from the scope of this Part.

(6) A procurement shall not be subdivided with the effect of preventing it from falling within the scope of this Part, unless justified by objective reasons.

(7) The estimated value shall be calculated as at the moment at which the call for competition is sent or, in cases where a call for competition is not foreseen, at the moment at which the contracting authority commences the procurement procedure (for example, where appropriate, by contacting economic operators in relation to the procurement).

(8) In the case of framework agreements and dynamic purchasing systems, the value to be taken into consideration shall be the maximum estimated value, net of VAT, of all the contracts envisaged for the total term of the framework agreement or the dynamic purchasing system.

(9) In the case of innovation partnerships, the value to be taken into consideration shall be the maximum estimated value, net of VAT, of the research and development activities to take place during all stages of the envisaged partnership as well as of the supplies, services or works to be developed and procured at the end of the envisaged partnership.

(10) In the case of public works contracts, the calculation of the estimated value shall take account of both the cost of the works and the total estimated value of the supplies and services that are made available to the contractor by the contracting authority provided that they are necessary for executing the works.

Treatment of lots

(11) Where a proposed work or a proposed provision of services may result in contracts being awarded in the form of separate lots, account shall be taken of the total estimated value of all such lots.

(12) Where a proposal for the acquisition of similar supplies may result in contracts being awarded in the form of separate lots, account shall be taken of the total estimated value of all such lots when applying regulation 5(1)(b) and (c) (read with regulation 5(2)).

(13) For the purposes of paragraphs (11) and (12), where the aggregate value of the lots is equal to or greater than the relevant threshold mentioned in regulation 5, this Part applies to the awarding of each lot.

(14) Despite paragraphs (11) to (13), contracting authorities may, subject to paragraph (15), award contracts for individual lots without applying the procedures provided for by this Part, but only if the estimated value, net of VAT, of the lot concerned is less than—

(a)80,000 euro for supplies or services, or

(b)1 million euro for works.

(15) The aggregate value of the lots awarded in reliance on paragraph (14) shall not exceed 20% of the aggregate value of all the lots into which the proposed work, the proposed acquisition of similar supplies, or the proposed provision of services, has been divided.

Other specific rules

(16) In the case of public supply or service contracts which are regular in nature or which are intended to be renewed within a given period, the calculation of the estimated contract value shall be based on either of the following:—

(a)the total actual value of the successive contracts of the same type awarded during the preceding 12 months or financial year adjusted, where possible, to take account of the changes in quantity or value which would occur in the course of the 12 months following the initial contract;

(b)the total estimated value of the successive contracts awarded during the 12 months following the first delivery, or during the financial year where that is longer than 12 months.

(17) In the case of public supply contracts relating to the leasing, hire, rental or hire purchase of products, the value to be taken as a basis for calculating the estimated contract value shall be as follows:—

(a)in the case of fixed-term public contracts, where that term is less than or equal to 12 months, the total estimated value for the term of the contract or, where the term of the contract is greater than 12 months, the total value including the estimated residual value;

(b)in the case of public contracts without a fixed term, or public contracts the term of which cannot be defined, the monthly value multiplied by 48.

(18) In the case of public service contracts, the basis for calculating the estimated contract value shall, where relevant be the following:—

(a)in the case of insurance services, the premium payable and other forms of remuneration;

(b)in the case of banking and other financial services, the fees, commissions payable, interest and other forms of remuneration;

(c)in the case of design contracts, the fees, commissions payable and other forms of remuneration.

(19) In the case of public service contracts which do not indicate a total price, the basis for calculating the estimated contract value shall be the following:—

(a)in the case of fixed-term contracts where that term is less than or equal to 48 months, the total value for their full term;

(b)in the case of contracts without a fixed term or with a term greater than 48 months, the monthly value multiplied by 48.