Public procurement in the construction industry resembles a chessboard. General contractors, seeking to remain competitive and maintain operational flexibility, often base their business model on extensive collaboration with specialized subcontractors. From an economic and logistical perspective, this makes sense. A single company rarely has the full range of machinery and engineering staff needed to carry out every aspect of a massive infrastructure or building project. On the other side of the contract, we have
Public-sector contracting authorities—government agencies, state-owned companies, and road and rail authorities. Their primary goal is to minimize the risk of improper project execution. To protect their interests, these entities are increasingly turning to legal tools such as the legal institution known as “personal performance of key parts of the contract.”
In practice, this mechanism can sometimes, instead of safeguarding the quality of investments, become a tool that completely blocks smaller businesses from participating in a tender. What can be done in such a situation?
In-House Performance vs. Limitations on the Use of Subcontractors
To understand the essence of the problem, let’s examine the relationship between the provisions of the Act of September 11, 2019—Public Procurement Law (Journal of Laws of 2019, item 2019, as amended). The contracting authority’s combination of these provisions in the Terms of Reference (SWZ) may, in practice, deprive smaller contractors of the opportunity to win a public contract.
On the one hand, Article 118(1) of the Public Procurement Law allows contractors to “borrow” capabilities (experience, qualifications, or education) from third parties in order to meet the stringent requirements for participation in a procurement proceeding. An entity that makes its resources in the form of experience or qualifications available is legally obligated to physically perform the construction work or services to which those capabilities pertain.
Article 118. 1. In order to confirm compliance with the conditions for participation in the procurement procedure or the selection criteria, the contractor may, in appropriate situations and with respect to a specific contract or part thereof, rely on the technical or professional capabilities or the financial or economic standing of entities providing resources, regardless of the legal nature of the legal relationships between the contractor and such entities.
2. With regard to requirements concerning the contractor’s education, professional qualifications, or experience, contractors may rely on the capabilities of entities providing resources, provided that those entities perform the construction work or services for which such capabilities are required.
However, a few articles later, a restriction appears in Article 121 of the Public Procurement Law. This provision grants the contracting authority the right to stipulate that key tasks must be performed personally by the contractor itself. Such a provision automatically precludes the possibility of entrusting this work to subcontractors.
Article 121. The procuring entity may require that the contractor personally perform key tasks related to: 1) contracts for construction work or services, or 2) work related to the deployment and installation under a supply contract.
For construction companies, this provision could become a trap. Since a third party providing a reference must personally carry out a specific part of the project (as a subcontractor), and at the same time the Contracting Authority, pursuant to Article 121(1) of the Public Procurement Law, has categorically prohibited the participation of any entities other than the contractor itself in tasks deemed critical, it becomes legally impossible to use external references.
What exactly are “key tasks”? Where is the line drawn?
Many myths have arisen in the construction industry surrounding the concept of “key tasks.” Sometimes, certain contracting authorities use regulations to artificially narrow the pool of companies eligible to bid on a project. In the tender documentation (formerly IDW, now SWZ), provisions then appear that elevate entirely standard, repetitive tasks to the status of “key” tasks. Does an official have complete discretion in this matter? Well, no.
“Key components of the contract” is an undefined term; however, its scope has been delineated quite precisely by legal doctrine and case law. These cannot be works of an auxiliary, routine, or general nature.
Only those elements of the project that are characterized by exceptional:
- importance,
- technical characteristics,
- high degree of complexity, or
- strategic importance to the success of the entire project.
These are projects in which the general contractor’s personal expertise, reputation, and direct responsibility are objectively essential to minimizing the risk of a construction disaster or gross workmanship defects.
It sometimes happens that the Contracting Authority, either intentionally or without a thorough technical analysis, classifies simple earthwork or restoration work as “key” tasks. This constitutes a flagrant violation of the principles of fair competition and proportionality.
Landmark ruling by the National Appeal Chamber (KIO): personal performance vs. a paving project
How can construction contractors defend themselves against such practices by contracting authorities? An excellent example is the ruling of the National Appeal Chamber dated July 5, 2021 (case nos. KIO 1381/21, KIO 1388/21).
In the procurement procedure under review, the Contracting Authority included a strict provision in Section 6.5 of the Instructions for Bidders (IDW). It deemed pavement work (i.e., standard asphalt paving) to be a key component of the contract. Consequently, it prohibited the use of third-party resources to demonstrate compliance with the tender eligibility requirements in this regard.
After a substantive review of the situation, the National Appeal Chamber upheld the contractor’s appeal (Case No. KIO 1388/21) and ordered that this provision be removed from the documentation. The Chamber did not question the legal mechanism itself arising from Article 121(1) of the Public Procurement Law. It confirmed that a valid and justified reservation regarding personal performance results in the requirement to fulfill the conditions independently. However, the KIO ruled that, in these specific circumstances, the Contracting Authority acted in an arbitrary and disproportionate manner.The laying of the road surface was neither unique nor so complex as to justify blocking subcontracting and the use of external resources.
Case Law – KIO Rulings Worth Knowing
The aforementioned ruling of July 5, 2021, is not an isolated case. In its reasoning, the Chamber explicitly referred to a well-established, long-standing line of case law. It cited four important rulings that every construction contractor should be familiar with.
- KIO ruling of October 2, 2020 (case no. KIO 2052/20): The authority to prohibit subcontracting constitutes an exception to the general principle of freedom to conduct business and to use subcontractors. In its ruling, the Chamber confirmed that the former Article 36a(2) of the Public Procurement Law (corresponding to the current Article 121(1) of the Public Procurement Law) must be applied by officials with extreme restraint.
- KIO Resolution of August 11, 2015 (Case No. KIO/KD 43/15): the need for a rigorous, strict interpretation of the concept of “a key part of the contract.” The Chamber applied the classic Roman legal principle of “exceptiones non sunt extendendae” (exceptions should not be interpreted broadly), which means that the contracting authority may not extend the concept of “key” to standard work.
- KIO ruling of May 27, 2019 (case no. KIO 867/19): This ruling provides one of the best definitions of “key components.” The Chamber indicated that these are works of such importance and significance that the personal involvement of a specific contractor, selected through a tender, significantly increases the chances of the proper and timely performance of a specific element of the contract.
- KIO ruling of January 12, 2021 (Case No. KIO 3321/20): The contracting authority’s mere intuition regarding the need for “increased diligence” in a strategic contract is not sufficient to prohibit subcontracting. Such a restriction must be based on specific, objective, and measurable circumstances demonstrating that allowing a subcontractor to work on that section poses a real risk of construction defects.
You can—and should—appeal against the contracting authority’s unlawful practices!
Market practice shows that contracting authorities often intentionally draft the terms of the tender documents in such a way as to tailor the tender to a specific, large player. In doing so, they eliminate smaller but equally reliable medium-sized companies that have successfully carried out projects to date as part of consortia or with the help of partners.
Many contractors, upon seeing a specification worded in this way and a condition requiring personal performance, decide not to bid on the contract. They assume they won’t get the contract anyway. This is a mistake. Public procurement laws provide specific legal remedies. It is possible—and indeed necessary—to file appeals with the National Appeals Chamber against provisions in the tender documentation that are unlawful, arbitrary, or anti-competitive.
A swift response is crucial here, as the deadlines for challenging the SWZ are extremely short. In the appeal, it must be clearly demonstrated to the Chamber that the Contracting Authority lacks objective, technical grounds justifying the prohibition on subcontracting. As evidenced by the ruling in the case involving pavement work, the National Appeal Chamber (KIO) understands the essence of the problem. And it does not hesitate to remove any instances of bureaucratic overzealousness from the bidding documents.
How can LO:ME Law Firm support your construction business?
Issues related to the distinction between personal performance and the provision of resources are among the most complex in public procurement law. In these matters, mere knowledge of the regulations is not enough. Extensive litigation experience, familiarity with the technical realities of the construction site, and an understanding of the psychology and behind-the-scenes tactics of contracting authorities are of decisive importance.
The LO:ME law firm specializes in providing comprehensive legal services to entities in the construction industry, with a particular focus on the investment and industrial sectors. Our team has many years of experience representing general contractors and subcontractors at every stage of public contract execution.
Here’s how we help.
- We analyze tender documentation for any unjustified restrictions regarding key tasks.
- We prepare appeals against provisions of the Special Terms and Conditions (SWZ) and represent contractors during hearings before the National Appeals Chamber.
- We draft consortium agreements and subcontracting agreements (including agreements for the provision of resources) that precisely safeguard the contractor’s interests in light of Article 118 of the Public Procurement Law.
- We support companies during the project implementation phase when disputes arise regarding compensation adjustments, additional work, or contractual penalties.
Don’t let errors in your bid documents prevent your company from securing profitable public contracts. The LO:ME team will help you manage the entire process of bidding for such contracts. Contact us to find out how we can help secure your next project.
