Background

In March 2014, three new EU Directives on public procurement law ("new Directives") entered into force, introducing significant adjustments to the current regime such as new procedures, new provisions on award criteria, and new exclusion grounds. At the same, a discussion has been unleashed in Austria placing the issue of wage dumping and social dumping in relation to public construction contracts. Experience has demonstrated that applying price-only criteria contributes to ruinous price wars and destructive competition in the construction industry. The key concern of the so-called "fair procurement" initiative is to preserve jobs and foster SMEs by establishing the mandatory application of the best quality/price ratio (instead of only the lowest price). Against this background, the Austrian government is currently in the process of discussing/preparing an amendment to the Federal Procurement Act that is intended to enter into force even before the implementation of the new Directives (April 2016). The amendment inter alia deals with:

  • the mandatory application the best price/quality ratio for awarding construction contracts,
  • stricter rules for the involvement of subcontractors, and
  • more precise rules on abnormally low bids.

1. Best price/quality ratio for awarding constructions contracts:

Under the Federal Procurement Act as it is currently in place, construction contracts above the threshold may be awarded based on the lowest price only in the event that the necessary quality standards are described with sufficient precision. Below the threshold and in the utilities sector in general, contracting authorities are free to choose between the (lowest) price-only criterion or the best price/quality ratio in making their procurement decisions. It follows from the above that the overwhelming majority of construction contracts in Austria are in practice awarded based solely on the lowest price.

According to the proposed amendment of the Federal Procurement Act, the best price/quality ratio shall become mandatory for construction contracts above EUR 1 million in order to fight wage dumping and foster the participation of SMEs. Moreover – in order to avoid "fig-leaf" quality criteria – the price and quality criteria must be weighed in a way that ensures a realistic influence of the quality criteria on the evaluation of the most economically advantageous tender ("MEAT"). This approach has been heavily criticized by contracting authorities and construction industry representatives, both of which claim that due to the high technical standardization in the construction business, the application of further (quality) criteria is not reasonable and causes significant additional workload and risks.

2. Subcontracting

Pursuant to the status quo, tenderers are rather flexible when it comes to subcontracting. The (only) restriction refers to the rule that tenderers shall not subcontract the complete contract and that they are required to nominate those subcontractors in their bid whose resources and capacities are required in order to fulfill the contract. However, the procurement law does not stipulate any rules on how to handle sub-subcontractors or so-called "subcontractor chains".

Since wage dumping and social dumping frequently takes place in the sphere of sub- and sub-subcontractors, the proposed amendments to the Federal Procurement Act stipulate considerably stricter rules in relation to the involvement and nomination of subcontractors than those currently in place: Contracting authorities must have full knowledge in relation to all subcontractors active on the construction site (and not only of certain important subcontractors in the "first row"). To that end, tenderers will be obliged to disclose all proposed subcontractors during the tender procedure. As stipulated in the new Directives, contracting authorities shall further be entitled to restrict tenderers when it comes to transfering certain tasks under the contract to subcontractors and may require tenderers to perform certain critical tasks (as defined in the tender documentation) directly. Assigning contractual services to sub-subcontractors shall only be allowed in extraordinary cases and upon the contracting authority’s explicit approval.

3. Abnormally low bids

One of the basic underlying principles of the Federal Procurement Act stipulates that the contract shall be awarded at reasonable prices. In order to execute that principle, contracting authorities are required to conduct an in-depth examination of the tender if the tender price appears to be abnormally low. Where the tenderer cannot provide a sufficient (plausible) explanation, the contracting authority is required to reject such a tender. In this context, uncertainty exists whether the tenderer price has to cover all costs or only certain aspects of the bid ("underpricing").

The proposed amendment is expected to provide more clarification on the question of which costs have to be covered by the bid price (such as any directly attributable expenditure) by stipulating additional and more precise rules, such as the prohibition on shifting directly attributable costs to other positions.

Conclusion

Aiming at fighting wage dumping and social dumping, the proposed adjustment is expected to determine stricter rules for awarding construction contracts by establishing the best price/quality ratio as the sole award criterion for construction contracts, applying rules on the involvement of subcontractors, and providing clarification on handling abnormally low tenders. Even if these adjustments seem reasonable, the timing of this amendment (expected in the spring 2015) is at least questionable, given that the Federal Procurement Act will in any event need to be completely revised over the course of the next 12 months due to the required implementation of the Directives -- thus resulting in two procurement law adjustments (!) being made within only 12 months.