Subcontracting in public procurement – practical issues
Subcontracting is currently a common form of business activity on the construction investment market. On the one hand, entrusting a part of a task to another company allows for relative reduction of the contractor’s (general contractor’s) own costs, as there is no need to maintain a large number of executive staff. On the other hand, it gives an opportunity to direct the work to people specialized in carrying out construction works and people with extensive experience and specialized equipment.
Subcontracting is also widely used in public procurement. In this sector of the market, it is particularly attractive because it allows contractors to use the experience and potential (both personal and technical) of entities other than the contractor himself to demonstrate compliance with the conditions for participation in a given procedure.
The provisions on subcontracting contained in the Civil Code show significant differences in relation to the provisions on subcontracting in the Public Procurement Law (PZP). The main differences and their significance for the contractor will be presented below.
Subcontracting in the Civil Code
Article 6471 § 1 of the Civil Code introduces joint and several liability of the general contractor and investor (equivalent to the contracting authority in PZP) for payment of the remuneration of subcontractors who perform construction works. A condition of joint and several liability is prior notification of the subcontract to the investor. The investor may object to the execution of the works by the subcontractor (within 30 days of notification). No notification is required when the scope of the subcontracted work and the specific subcontractor are specified in the main contract.
Joint and several liability consists in the fact that subcontractor may request payment of the entire amount of remuneration from any joint debtor. However, the debtor who has paid may demand from all joint debtors a refund in equal parts or according to shares specified in the contract.
In principle, the investor is jointly and severally liable only up to the amount of remuneration due to the general contractor for the works ordered to the subcontractor, which results from the main contract (article 6471 § 3 of the Civil Code). All of the rules regarding investor liability also apply to the liability of the general contractor for the remuneration of further subcontractors (i.e. subcontractors employed by the subcontractor).
The parties may not exclude or limit joint and several liability of the inwestor (article 6471 § 6 of the Civil Code). However, what is important, joint and several liability applies only to subcontracting of construction works. It does not include services or supplies of materials.
The second set of the Civil Code regulations related to subcontracting of construction works is art. 6491–6194. These provisions give the subcontractor the right to demand a payment guarantee from the general contractor for construction works at any stage of performance of the contract. The general contractor may not refrain from issuing the guarantee or withdraw from the contract due to a subcontractor requesting such a request. If he does not issue the guarantee within the prescribed period (min. 45 days), the subcontractor may withdraw from the contract through the fault of the general contractor.
As in the case of joint and several liability, the Parties may in no way limit the subcontractor’s right to request a payment guarantee (art. 6492 § 1 of the Civil Code).
Subcontracting in the Public Procurement Law
The provisions of the Civil Code shall apply to contracts concluded in the public procurement system, unless the PPL act regulates a given issue differently. In principle, the provisions of the Civil Code on joint and several liability and on payment guarantees also apply to subcontracting in public investments. In addition, however, the PPL act contains a number of provisions extending the rights of public procurers.
Unlike in the Civil Code, the contracting authority has the right not only to oppose the employment of a subcontractor, but also to object to the content of the contract, if, for example, it is inconsistent with the ToR (art. 134b, section 3, point 1 of the PPL). In practice, this gives him relatively broad powers to interfere in the content of the legal relationship between the general contractor and his subcontractor.
In accordance with art. 143b section 1 PPL, the general contractor must submit to the contracting authority the draft of subcontract for approval. Then, this contract must be presented to the contracting authority once it has been concluded. The contracting authority may object at both stages.
Public Procurement Law provides for the so-called direct payment to the subcontractors (excluding the general contractor). The contracting authority may exercise this right if the general contractor does not pay the subcontractor the remuneration due for the performance. Unlike in the Civil Code, the contracting authority may first conduct an explanatory procedure and decide whether the subcontractor’s remuneration is actually due (art. 143c sections 4-5). The need for multiple direct payments to a subcontractor or a further subcontractor or the need to make direct payments for an amount greater than 5% of the contract value may constitute the basis for the contracting authority to withdraw from the contract.
The most important regulations that introduce specific requirements for subcontracting in public contracts are: the obligation to submit subcontractors’ statements of the receipt of due remuneration (art. 143a section 1 point 1 PPL) and also the catalog of mandatory contractual penalties related to subcontracting (art. 143d section 1 point 7 PPL).
Subcontracting in the Civil Code vs. Public Procurement Law
- A subcontractor is any entity that performs part of the contractor’s work.
- Written agreement is required.
- Investor’s acceptance is required.
- The liability of the investor (contracting authority) does not exceed the general contractor’s remuneration for the work.
- Joint and several liability of the investor (contracting authority).
- Subcontractor’s right to payment guarantee.
In the Civil Code:
- the investor can only oppose the employment of a subcontractor
In the Public Procurement Law:
- the contracting authority can oppose the employment of a subcontractor and object to the content of the contract
- the contracting authority approves both the draft contract and the final contract
- catalog of mandatory contractual penalties
- mandatory statements of subcontractors
Joint and several liability vs. Direct payment
Joint and several liability under the art. 647¹ of the Civil Code:
- relates to remuneration without interest (judgment of the Supreme Court of September 5, 2012, IV CSK 91/12)
- only for construction work
- applies to all subcontractors carrying out the work
Direct Payment under the art. 143c of the Public Procurement Law :
- relates to remuneration without interest (art. 143c, section 3 of the PPL)
- for works, services or supplies
- the contractor’s right to submit explanations
- payment is not strictly mandatory – the assessment of the contractor’s and subcontractor’s explanations is decisive
- does not apply to subcontracts with a value <0.5% of the value of the main contract (or PLN 50,000).
Author: Krzysztof Obidziński, Senior Associate in Pydo i Wspólnicy law firm.