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Organisational requirements under procurement law

03/01/2019 - Reading time: 5 minutes


The 2018 Federal Procurement Act (Bundesvergabegesetz 2018, BVergG 2018) entered into force on 21 August 2018. In the new Act, also the grounds for the exclusion of bidders were partly recast. As a general rule, the exclusion of bidders from the procurement procedure is mandatory if a conflict of interest exists which cannot be avoided by less stringent measures or if bidders performed prior contracts unsatisfactorily, which caused their early termination or claims for damages or other comparable sanctions being raised by the contracting entity.

Due to the statutory requirements for the prevention of conflicts of interest and given the exclusion grounds, contracting entities and bidders should adapt their procurement organisations.

Mandatory exclusion on the grounds of conflicts of interest and unsatisfactory performance of contracts

Section 26 of the 2018 Federal Procurement Act obligates contracting entities to implement preventive measures in their organisational structure in order to effectively avert, detect and/or eliminate conflicts of interest (and section 199 of that Act imposes the same obligation on entities awarding contracts for utilities). The Act defines a conflict of interest to exist in any case if employees of the contracting entity or of the awarding unit have a financial, economic or other personal interest that could compromise, or at least appear to compromise, their independence or impartiality. This means any employees who implement the procedure or are able to influence the outcome of the procedure.

The legal consequence of the existence of a conflict of interest is the mandatory exclusion of the bidder from the procurement procedure unless a conflict of interest can be averted by less intrusive measures (section 78 (1)(7) and, for entities awarding contracts for utilities, section 249 (2)(6) BVergG 2018).

Section 78 (1)(9) of the 2018 Federal Procurement Act (and, for entities awarding contracts for utilities, section 249 (2)(8) of that Act) stipulate the same legal consequence, i.e., mandatory exclusion of the bidder, to apply where the bidder has shown significant or persistent deficiencies in the performance of prior contracts which led to a sanction (early termination, damages or other comparable sanctions, such as substitute performance, invoice reductions etc). The only restriction applying to the exclusion from the procurement procedure due to deficient performance consists in the condition that the bidder must have violated a “substantive requirement” of the prior contract. For the constituent elements to be met, it is also sufficient, for example, if penalties are imposed; thus bidders must be aware of the potentially severe effects of occasionally accepting minor penalties.

Procurement organisation requirements for contracting entities

Mandatory exclusion of a bidder as a consequence of certain grounds also means new challenges for the procurement organisations of contracting entities. With a view to avoiding conflicts of interest, preventive measures shall be provided for in order to avert, detect and/or eliminate conflicts of interest. Which measures are sufficient to qualify as “suitable” measures on the part of the contracting entity so that no bidder needs to be excluded because of an infringement of section 26 of the 2018 Federal Procurement Act has to be determined on a case-by-case basis. Apart from information campaigns, suitable measures include setting up compliance management systems, reporting systems and/or internal audit and control systems.

The procurement organisation of contracting entities should be designed appropriately also with respect to the exclusion ground of unsatisfactory performance of prior contracts. In the course of the eligibility assessment, also the processing of contracts with the respective bidders has to be taken into consideration, and an appropriate contract management system should be provided for. Only if the documentation of violations of contract is ensured sufficiently, the relevant information can be provided to the employees performing the eligibility assessment who have to judge whether it might be necessary to exclude a bidder. And as only justified sanctions may constitute the basis for an exclusion, the contracting entity will have to assess (e.g. by obtaining statements from experts) whether a “substantive requirement” of a prior contract was violated.

Future case law will have to show to what extent unsatisfactory performance of contracts awarded by other contracting entities must cause exclusion from a procurement procedure. The wording of the Act does not specify that contracting entities would have to consider only the unsatisfactory performance of prior contracts awarded by themselves. Both contracting entities and bidders can only hope that a differentiation will be made in this respect with a view to practice.

Bidders’ measures for avoiding exclusion

Also for bidders, the exclusion grounds of conflict of interest and unsatisfactory performance of contracts mean new challenges for the procurement and contract management systems.

Bidders will have to document the processing of contracts just as accurately in order to be able to assess whether, for instance, they will have to take legal action against any (partial) termination of contracts because, as a matter of principle, an exclusion cannot be based on lawsuits pending before courts. Furthermore it will have to be ensured that penalties are not accepted without an appropriate assessment of the substantiveness of the violated requirements for the contracting entity in order to avoid the risk of being banned from contracts for a period of up to three years. Against this backdrop, it is recommended to scrutinize any exclusion decisions issued by contracting entities and carefully consider contesting them.

If the professional reliability of the bidder is impaired because such constituent elements of exclusion were met, bidders should take appropriate “self-cleansing” measures to substantiate that their professional reliability was not lost. To do so, the bidder has to prove to have taken technical, personnel, organisational or other measures in order to ensure that transgressions will not happen again. Besides actively cooperating with investigation authorities and providing redress or compensation, the bidder also has to take effective measures like, for instance, establishing a reporting and control system or internal audit bodies.

Summary and conclusion

The 2018 Federal Procurement Act introduces new constituent elements of exclusion and, consequently, new requirements concerning the procurement organisation of both contracting entities and bidders. Exclusion of the bidder may (ultimately) be mandatory both because of certain conflicts of interests of employees of the contracting entity or of the awarding unit and because of prior unsatisfactory performance of contracts by a bidder and the ensuing sanctions, such as, early termination of the contract and payment of damages.

In order to avert, detect and/or eliminate conflicts of interest, the Act requires active measures on the part of the contracting entity, which may include, for example:

  • Implementation of information campaigns
  • Introduction of compliance management systems, internal audit and control systems

Contracting entities will also have to adapt their procurement organisation with a view to the unsatisfactory performance of prior contracts so that an appropriate response in the course of the eligibility assessment is made possible by accurate documentation of the processing of contracts and transfer of information to the awarding unit. As a precondition for exclusion, contracting entities will have to assess whether the infringed requirement was “substantive” within the meaning of the law and the sanction imposed was lawful – and this assessment will not always be easy.

Against the backdrop of a potential exclusion from procurement procedures and a ban from contracts being imposed for up to three years on account of this, bidders will certainly also have to thoroughly examine consequences concerning contracts and exclusion decisions issued by contracting entities in the procurement procedure. In cases of doubt, appropriate “self-cleansing” measures have to be taken to avert being banned from contracts. To substantiate their reliability, bidders have to prove to have taken, above all, the following measures:

  • Redress or undertaking to compensate for damage
  • Active cooperation with investigation authorities
  • Introduction of reporting and control systems, setting up an internal audit body, introduction of internal rules governing liability and damages