How to Award Construction Contracts?

Possibilities of Contracting Authorities in Implementing Construction Projects

The renovation of buildings, the development of public places and the construction of new premises represent only some examples of the projects municipalities and towns deal with irrespective of their size. In addition to dealing with “standard” logistic and organisational issues, self-administration must proceed in compliance with legal regulations on the disposal of public funds and in particular public procurement. With regard to the value of construction projects, in the past municipalities and towns were dependent in principle solely on the contract award procedures under the Public Procurement Act. However, with the adoption of a new act on concession contracts (Act No. 139/2006 Sb.) they have been given new possibilities to approach construction projects. In practice these projects, using so-called concessions, were under certain circumstances identified as PPP, that is, Public-Private Partnerships.

Public Contracts  – Definition

A public contract is the obtaining, in a classic and traditional manner, of a certain construction order by a contracting authority. The contracting authority is obliged to proceed according to the rules stipulated by the Public Procurement Act from the moment of the initiation of a factual intent (the preparation of award conditions) during the entire period when realising a particular contract award procedure up to the moment of concluding a contract with the selected supplier.

The following table offers an overview of the basic pros and cons of project implementation in the form of a public contract.

Concession Benefits

A concession contract is defined in Section 16 of the Concession Act as a contract under which a contracting authority undertakes to enable a private partner to obtain benefits arising from the provision of services or from using the work made, ultimately with the provision of a part of performance in money. In European interpretations the most important factor with respect to distinguishing between concessions and public contracts is whether in construction work the contractual partner of a contracting authority is entitled to use and operate the building.

The right to use an object of concession includes in particular the entitlement of the contractual partner (of the concessionary) to require fees or any other financial compensation for using the object of concession from the users of it for a certain period set in advance. The period for which the concession is granted is thus a significant element in determining the calculation of the concessionary’s total economic yields; the concessionary does not get financial compensation (remuneration) for the provided performance directly from the contracting authority, but from the users of the object of concession.

The essential indirect contribution of a concession is at least the partial transferring of rsponsibility (business – entrepreneurial risk) for the use and operation of an object of concession to the suppliers (concessionaries). Unlike public contracts where the economic success rate of a project already implemented (and paid by the contracting authority) depends solely on the public sector (or more precisely on the taxpayers), in concessions it is in the concessionary’s own interest to implement a project in a manner that it be viable. Therefore, the concessionary is the bearer of the standard risks but also the risks lying in the management of the other matters relating to the object of concession (such as the analysis of demand for the services which form the subject of the concession).

Concession contracts cannot be, without other requirements, considered a simple solution to construction projects for municipalities and towns. However, with correct preparation, settings and a contractual basis for the cooperation conditions in a manner that the essential risks of the contracting authorities are taken care of and that these conditions are actually reasonable and advantageous for all parties (the so called win-to-win model), they can constitute a tool for revival of the development of our regions and increasing the real and creative involvement of the private sector in this development.

Vilém Podešva

ROWAN LEGAL