Bulgaria: New provision allowing price indexation in public procurement contracts

On 5 August 2022, an amendment to the Bulgarian Public Procurement Act (“PPA”) came into force, allowing for price indexation of public procurement contracts in the event of inflation. The amendment aims to address the effects of industrial inflation caused by the COVID-19 pandemic and amplified by the war in Ukraine. Although the new provision applies to public procurement contracts in all industries, the need for price indexation is most pressing in relation to construction contracts.

Background

Companies that entered into public procurement contracts, especially for construction projects, before the drastic changes in material and commodity prices, are currently finding it difficult to fulfil their contracts, with some having even ceased all construction activity. As regulations in Bulgaria did not explicitly provide for price changes in case of inflation, the risk that many public procurement projects in the field of construction would not be completed was a big concern.

To address these issues, the new indexation provision allows for prices in public procurement contracts to be amended when there is a significant increase in the price of the goods and materials needed to execute the contract.

Price adjustment modalities

While the new provision generally allows for a price adjustment in case of significant material price increases, it does not specify how such indexation is to be calculated. Instead, it refers to a calculation methodology to be adopted by the government.

The draft version of the methodology currently published by the government envisages the following conditions:

• Only works certified/invoiced or carried out after 30 June 2021 are subject to price adjustments;
• The total amount of the increase may not exceed 15% of the contract value;
• Contracts already completed before the new rules take effect are not subject to indexation;
• Indexation can only be carried out if funding has been secured and if the indexation is feasible for the contracting authority.

Potential concerns and outlook

While price indexation is currently much needed in the area of public procurement, the adopted amendment reveals a number of issues. The new provision and the draft methodology have been criticized for imposing a 15% ceiling on price indexation and for not taking account of increases in service and energy prices. A further concern relates to the far-reaching discretion of contracting authorities that allows them to refuse indexation on the grounds of “lack of funding and possibility”. It is now up to the government to adjust some of these aspects prior to adopting the methodology.

Pending the adoption of the final methodology by the government, it remains to be seen whether the introduced mechanism will prove effective in resolving existing financial difficulties and in incentivising the completion of ongoing public procurement projects.