Revision of prices in government contracts resulting from the war in Ukraine

Introduction

The Temporary Suspension of Certain Provisions Relating to Public Procurement Regulations (the “Regulations”) published on 15 July 2022 allows contractors party to Government contracts to request compensation for price increases of commodities used in the execution of public contracts (the “Request for Compensation”).

The general rule in government contracts is that contractors are prohibited from claiming revision of prices of commodities, unless expressly provided for in the original contract terms. The temporary suspension of this prohibition was premised on the breakout of the war in Ukraine on 24 February 2022, and provided that the contract is still in force after the said date.

Regulations

The Regulations provided a methodology for contractor to request for compensation for increase in prices where:

• The public contract was signed on or before 24 February 2022
• The public contract was still in force and binding as of 24 February 2022
• The subject-matter of the public contract is recognised as one which is subject to price increase according to policies that may be issued by the Department of Contracts, Malta’s central purchasing body.

Where supplies, works and, or services have already been delivered or rendered prior to the 24 February, 2022, no requests for compensation can be made.

These requests for compensation will be made with the respective contracting authority and then passed on for the Department of Contracts’ decision, if the contracting authority finds the request to be applicable, fair and reasonable. The Regulations provide that the Department of Contracts’ decision will be final.

The effect of these Regulations shall cease on 15 January 2023 (i.e. within 6 months from 15 July 2022) and any requests for compensation shall be made within this time window.

Although the Regulations provided a methodology for lodging such a claim, no policies had been published by the Department of Contracts to identify what revisions can be claimed. Two policy documents have now been published via Circular N° 15 and Circular N° 16 on 19 September 2022 and 22 September 2022 respectively.

Circular N° 15/2022: General Information

This circular sets out the terminology to be used when formulating a Request for Compensation which must:

1. contain valid and substantiated justifications for claiming a price increase of the commodities involved; and
2. must identify the commodity items listed in the compensation scheme policy (the “Policy”) issued by the Director of Contracts on a per applicable industry basis.

Circular N° 16/2022: The Compensation Scheme for Public Works (Construction) Contracts

By means of this follow-up circular, the Director of Contracts published a Compensation Scheme Policy for the construction industry.

The following works are included within the scope of this policy:

• construction
• road pavements and pipe works
• structural steelwork
• finishes (internal and external)
• glazed external apertures
• electrical and plumbing
• HVAC
• lifts

The Policy also provided a template Request for Compensation to streamline claims. The template is expected to be followed, and this will facilitate the processing of the requests by both the contracting authority and subsequently by the Department of Contracts. Supporting documentation must be attached to the Request for Compensation, including but not limited to detailed bills of quantities. Additional documentation / clarifications may be posted by the contracting authority or the Department of Contracts itself.

Timeframes

The Policy establishes a stricter timeframe (the “First Timeframe”) for lodging Requests for Compensation than previously thought: only those works which were executed from 15 March 2022 till 15 January 2023 are eligible for such compensation. Contracting authorities have till 15 March 2023 to approve and forward claims to the Department of Contracts or otherwise.

Furthermore, the Policy introduces the notion of a second timeframe (the “Second Timeframe”), this time set by the respective contracting authority. Works contractors must keep a lookout for this second timeframe for the right to submit a Request for Compensation expires upon the lapse of this second timeframe.

Compensation Percentages

Circular N° 16 also sets out the maximum compensation which contractors are entitled to claim. These thresholds take the form of percentage increases relative to a number of works categories, which are being reproduced hereunder for ease of reference:

Construction Works Category – Percentage Increase

• Construction – 10%
• Road pavement and pipe works – 19%
• Structural steelwork – 17%
• Finishes (Internal and External) – 11%
• Glazed External Apertures – 21%
• Electrical and Plumbing – 13%
• HVAC – 10%
• Lifts – 9%

Page 2 Table of the Compensation Scheme Policy

The percentages are calculated on the basis of the total category value (inclusive of any modifications) as indicated in the contract between the works contractor and the contracting authority.

Procedure for Contracting Authorities

The Policy also sets out the procedure to be followed by contracting authorities once they receive a claim from their contractors. First of all, the contracting authority must assess the Request for Compensation on the criteria of fairness and reasonableness.

1. A number of obligations are also imposed on the project supervisor of a particular works contract who must:
   substantiate the approval of a claim;
2. certify that the works have been carried out within the applicable timeframe; and
3. certify that the market price increases correspond to the works categories and percentage increases in the above table.

If approved by the Department of Contracts, the Request for Compensation is then formalised by means of an addendum to the public contract which is to be signed by the parties to the contract.