Inflation and Global Increase in Raw Material Prices Affect Public Procurement Procedures

When there is a significant disruption in raw material prices in an industry, the increase typically flows into the price of the product. When two companies enter into a contract, there is a protective clause that allows for the correction of the contract value.

However, when inflation and the global increase in raw material prices spill over into public procurement procedures, the situation becomes more complicated. Bidders are currently in a difficult position as they cannot incorporate drastic global increases in material prices into existing contracts they have signed with clients, and if they were to include today’s prices in bids for new tenders, they would be absolutely uncompetitive.

Therefore, among entrepreneurs who collaborate with the government, local communities, or work on European projects, a certain rebellion arises as they do not want to bear the risk of price increases alone. They believe that the government, in cooperation with entrepreneurs, should make a political decision regarding the evenly distributed risk. Namely, The Public Procurement Act provides for situations in which prices can be corrected, and this is called 'sliding scale'. The problem is that clients circumvent this possibility in their documentation, and then, when inflation knocks at the door, everyone is in trouble.

That is why construction entrepreneurs, or contractors, have initiated a new association initiative in agglomerations to protect their rights and interests. The main goal is for clients to include annexes in their contracts that will contain price indexation.

In the current situation, it is more profitable for entrepreneurs to terminate existing contracts than to bear the entire burden of price increases. They will pay a penalty of ten percent of the price, while the difference in material prices, for example, is 40 percent, so the calculation is quite clear.

Such situations are certainly not in the interest of the state or any other client because, in addition to non-fulfillment of contracts and agreed work, the costs of termination and re-announcing tenders also increase, and all the difference is paid by taxpayers. Bidders are well aware of this, so in such situations, they increasingly simply inform clients that their prices have changed, regardless of the contract, and clients try to save the situation through various imaginative annexes. Alternatively, they write bids for very short terms, and in some cases, they are only valid for one day. In other words, the bidder presents one price today but does not guarantee that it will be valid tomorrow.

In any case, considering all possible consequences of inflation, entrepreneurs believe that at such times, clients should show greater flexibility and that jobs could perhaps be realized through a different execution. Because if the burden of rising prices is to be borne only by entrepreneurs, the question is how long they will be able to cover the cost of inflation from their own capital. They will be forced to pass the price increase onto their bids, and in that case, it is possible that investments will halt because clients will not be able to pay for them.

Read more about the consequences of inflation on public procurement procedures and the experiences of entrepreneurs and clients in the new printed and digital edition of Lider.

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