EU procurement: Calculating contract value

It is necessary to estimate the contract value before the start of the procurement process.

The detailed provisions of the Procurement Directive apply to public contracts above certain thresholds. These bigger contracts are considered to be the ones most important for the functioning of the internal market.

Rules are therefore needed to define the total (aggregate) value of contracts as a whole or over time. One aim is to prevent the artificial splitting of contracts in order to evade the application of the Procurement Directive.

In addition, only certain elements of contract values can be calculated, while others have to be estimated. The ‘correct’ answer cannot be known with certainty in advance, so the Procurement Directive offers the contracting authorities certain general rules. Different kinds of public contracts need individual basic rules of presumption to arrive at harmonised procedures in the EU member states.


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Article 9

The EC (EU) Procurement Directive 2004/18/EC presents the rules for calculating the values of different types of public contracts:

Article 9
Methods for calculating the estimated value of public contracts, framework agreements and dynamic purchasing systems

1. The calculation of the estimated value of a public contract shall be based on the total amount payable, net of VAT, as estimated by the contracting authority. This calculation shall take account of the estimated total amount, including any form of option and any renewals of the contract.

Where the contracting authority provides for prizes or payments to candidates or tenderers it shall take them into account when calculating the estimated value of the contract.

2. This estimate must be valid at the moment at which the contract notice is sent, as provided for in Article 35(2), or, in cases where such notice is not required, at the moment at which the contracting authority commences the contract awarding procedure.

3. No works project or proposed purchase of a certain quantity of supplies and/or services may be subdivided to prevent its coming within the scope of this Directive.

4. With regard to public works contracts, calculation of the estimated value shall take account of both the cost of the works and the total estimated value of the supplies necessary for executing the works and placed at the contractor's disposal by the contracting authorities.

5. (a) Where a proposed work or purchase of services may result in contracts being awarded at the same time in the form of separate lots, account shall be taken of the total estimated value of all such lots.

Where the aggregate value of the lots is equal to or exceeds the threshold laid down in Article 7, this Directive shall apply to the awarding of each lot.

However, the contracting authorities may waive such application in respect of lots the estimated value of which net of VAT is less than EUR 80 000 for services or EUR 1 million for works, provided that the aggregate value of those lots does not exceed 20 % of the aggregate value of the lots as a whole.

(b) Where a proposal for the acquisition of similar supplies may result in contracts being awarded at the same time in the form of separate lots, account shall be taken of the total estimated value of all such lots when applying Article 7(a) and (b).

Where the aggregate value of the lots is equal to or exceeds the threshold laid down in Article 7, this Directive shall apply to the awarding of each lot.

However, the contracting authorities may waive such application in respect of lots, the estimated value of which, net of VAT, is less than EUR 80 000, provided that the aggregate cost of those lots does not exceed 20 % of the aggregate value of the lots as a whole.

6. With regard to public supply contracts relating to the leasing, hire, rental or hire purchase of products, the value to be taken as a basis for calculating the estimated contract value shall be as follows:

(a) in the case of fixed-term public contracts, if that term is less than or equal to 12 months, the total estimated value for the term of the contract or, if the term of the contract is greater than 12 months, the total value including the estimated residual value;

(b) in the case of public contracts without a fixed term or the term of which cannot be defined, the monthly value multiplied by 48.

7. In the case of public supply or service contracts which are regular in nature or which are intended to be renewed within a given period, the calculation of the estimated contract value shall be based on the following:

(a) either the total actual value of the successive contracts of the same type awarded during the preceding 12 months or financial year adjusted, if possible, to take account of the changes in quantity or value which would occur in the course of the 12 months following the initial contract;

(b) or the total estimated value of the successive contracts awarded during the 12 months following the first delivery, or during the financial year if that is longer than 12 months.

The choice of method used to calculate the estimated value of a public contract may not be made with the intention of excluding it from the scope of this Directive.

8. With regard to public service contracts, the value to be taken as a basis for calculating the estimated contract value shall, where appropriate, be the following:

(a) for the following types of services:

(i) insurance services: the premium payable and other forms of remuneration;

(ii) banking and other financial services: the fees, commissions, interest and other forms of remuneration;

(iii) design contracts: fees, commission payable and other forms of remuneration;

(b) for service contracts which do not indicate a total price:

(i) in the case of fixed-term contracts, if that term is less than or equal to 48 months: the total value for their full term;

(ii) in the case of contracts without a fixed term or with a term greater than 48 months: the monthly value multiplied by 48.

9. With regard to framework agreements and dynamic purchasing systems, the value to be taken into consideration shall be the maximum estimated value net of VAT of all the contracts envisaged for the total term of the framework agreement or the dynamic purchasing system.


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Estimating works contracts

The Commission’s Guide to the Community rules on public works contracts is based on the old Directive 93/37/EEC, so the monetary values mentioned are obsolete, but the principles are worth reading (page 16 to 17):


2.2 Estimation of contract value

2.2.1 Rules

In general terms, the value to be taken into account in determining whether a public works contract reaches the threshold is the estimated value excluding VAT of the contract which the contracting authority intends to award. The estimation should therefore include all the services, materials, etc. to be covered by the contract. For example, where a contracting authority chooses to award a development contract, the estimated contract value should include not only activities covered by Class 50 of the NACE nomenclature, but also all other tasks to be entrusted to the contractor under that contract.

Alongside the above general rule, which flows from the way in which public works contracts are defined, the Directive lays down rules for estimating the contract value in three specific cases.

Where the contracting authority itself makes available to the contractor supplies needed to carry out the works, the contract value must include the estimated value of those supplies as well as the value of the works.

Supplies should be understood here as referring not only to materials to be incorporated in the building or structure, but also to the plant or equipment necessary for the works: a contracting authority could, for example, provide the contractor with a crane or lorries. In the case of plant and equipment, the value to be taken into account will of course not always be the purchase price, but instead the price normally charged on the market for hiring it. Which of the two prices is taken into account will depend on the average life of the equipment and the length of time it is made available by the contracting authority: if an item of equipment is designed to have a useful life that is longer than the time it is made available (for example, the equipment is made to last for five years and the contractor can use it for one year), the value to be taken into account will be the hire price. If, on the other hand, the equipment is made available for longer than its average life, the contracting authority will have to include its purchase price in the estimate of the contract value.

Where a work is subdivided into several lots, each one the subject of a contract, the aggregate value of all the lots must be taken into account in determining whether or not the threshold has been reached. If that is the case, the Directive is to be applied to the award of each contract, irrespective of the value of the lot to which it relates. Nevertheless, contracting authorities are allowed to award freely lots whose estimated value excluding VAT is less than ECU 1 million. Permission to depart from the Directive is, however, limited: the aggregate value of lots awarded freely may not exceed 20% of the total estimated value of all lots.

Let us take an example: a contract for building works is divided into three lots, estimated at ECU 3 million, ECU 1 200 000 and ECU 900 000. The aggregate estimated value is therefore ECU 5 100 000, which clearly exceeds the threshold for application of the Directive. However, the derogation may be used for the lot estimated at ECU 900 000, since its individual value is less than ECU 1 million and does not exceed 20% of the total value of all the lots. The Directive does not apply to this lot, which need not be advertised, but it does apply to the other two.

Where a contracting authority intends “subsequently” to award, by negotiated procedure, further works consisting of the repetition of similar works to the successful tenderer for the contract that is being put up for tender, it must include in the calculation of the value of the first contract the estimated total cost of the subsequent works and, where appropriate, the estimated value of all the necessary supplies that it will make available to the contractor.

2.2.2 Splitting of contracts

Lastly, no work or contract may be split up with a view to avoiding application of the Directive. This blanket prohibition catches any splitting which is not justified on objective grounds and is thus solely designed to circumvent the rules laid down in the Directive.


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Estimating supply contracts

The Commission’s Guide to the Community rules on public supply contracts (based on the old Directive 93/36/EEC) explains how to estimate the value of supply contracts (page 14 to 15):



2.2 Estimation of contract value

2.2.1 Methods

In establishing whether or not the relevant threshold is reached, the way in which the value of a contract is calculated is obviously crucial. To ensure that identical calculation methods are used throughout the Community and to prevent evasion of the procurement rules by artificially low valuations, the Directive lays down specific rules.

Where the contract is to be concluded in the form of a lease, rental or hire–purchase agreement, the calculation method varies according to the contract’s duration.

The estimated value is to be calculated on the basis of:

• where its term is 12 months or less, the total value for the contract’s duration;

• where its term exceeds 12 months, the total value for the contract’s duration, including the estimated residual value of the products;

• where the contract is concluded for an indefinite period or where its term cannot be defined, the monthly value multiplied by 48.

Where contracts are of a regular nature or are to be renewed over a given period, the following must be taken into account:

• either the actual aggregate value of similar successive contracts awarded over the previous 12 months or accounting period, adjusted where possible for anticipated changes in quantity or value over the subsequent 12 months;

• or the estimated aggregate value of the successive contracts concluded during the 12 months following the initial delivery or accounting period, where this exceeds 12 months.

In any event, the choice between these two valuation methods must not be made with the intention of keeping contracts outside the scope of the Directive.

If a proposed procurement of supplies of the same type may lead to contracts being awarded at the same time in separate lots, the estimated value of all the lots must be taken into account. If it reaches the relevant threshold, all the lots must be awarded in compliance with the Directive. The same rules apply when estimating the value of leasing, rental or hire–purchase contracts.

“Supplies of the same type” are to be understood as products which are intended for identical or similar uses, e.g. supplies of a range of foods or of different items of office furniture.

Where provision is explicitly made for options, the basis for calculating the estimated contract value must be the highest possible total permitted for the purchase, lease, rental or hire purchase, options included.

2.2.2 Time of estimation

The value of the supplies which it is wanted to procure may vary depending on a number of factors. The time at which the value is estimated, therefore, may turn out to be crucial to determining whether the contract attains the threshold laid down in the Directive.

Accordingly, contracting authorities are obliged, regardless of any earlier estimate of the contract, to take account of the value which the supplies that are the subject of the contract will have when the award procedure is initiated by the dispatch of the notice for publication or by an invitation to negotiate.

2.2.3 Splitting of contracts

There is a blanket prohibition on the splitting of a procurement requirement with the intention of circumventing the rules on estimating the contract value and, more widely, on applying the Directive as a whole.

For example, where a contracting authority comprises several departments that are not decentralized from an administrative viewpoint and, consequently, cannot be regarded as contracting authorities in their own right with the power to award public supply contracts within the meaning of the Directive, it must take into account all the requirements of its constituent departments when estimating the value of a contract.


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Estimating service contracts

The Commission’s Guide to the Community rules on public procurement of services (based on the old Directive 92/50/EEC) offers the following guidance on estimating values of service contracts (page 15 to 17):

2.2 Calculation of the contract value

2.2.1 Methods

The general rule is that the contracting authority must take into account the estimated total remuneration for the service net of VAT. For certain types of service contracts, the Services Directive specifies certain items which constitute remuneration, notably:

- the premium payable, in the case of insurance services;

- fees, commissions and interest, in the case of banking and other financial services;

- fees or commissions, in the case of design contracts.

The Commission considers this list to be illustrative and does not limit, in any way, the general principle that the total remuneration received must be taken into account.

In the case of contracts which do not specify a total price, the basis for calculating the estimated contract value is:

- in the case of fixed-term contracts, where their term is 48 months or less, the total contract value for its duration;

- in the case of contracts of indefinite duration or with a term of more than 48 months, the monthly instalment multiplied by 48.

In the case of regular contracts or of contracts which are to be renewed within a given time, the contract value may be established on the basis of:

- either the actual aggregate cost of similar contracts for the same categories of services awarded over the previous fiscal year of twelve months, adjusted, where possible, for anticipated changes in quantity or value over the twelve months following the initial contract,

- or the estimated aggregate cost during the twelve months following the first service performed or during the term of the contract, where this is greater than twelve months.

Where a proposed contract provides for options, the basis for calculating the contract value shall be the maximum total possible assuming that all the options will be exercised.

In any event, selection of the valuation method may not be made with the intention of avoiding the application of the Services Directive.

2.2.2 Split contracts

The Services Directive prohibits any division of services with the intention of avoiding application of the value thresholds. This prohibition is directed at any division of a contract which is not justified by objective considerations and so is presumed to be designed to avoid application of the Directive.

2.2.3 Division of the contract into lots

Where the services are divided into several lots, each one the subject of a contract, the cumulative value of all the lots must be taken into account in determining whether the ECU 200,000 threshold has been reached. If the threshold is reached, the Services Directive must be applied to each contract, irrespective of the fact that its individual value may be less than ECU 200,000.

A contracting authority need not apply the provisions of the Services Directive to any lots which have an estimated individual value net of VAT of less than ECU 80,000, provided that the total value of such lots does not exceed 20% of the total value of all the lots. Exclusion of lots in this way does not prevent their value from being taken into account to determine whether the other lots must be awarded in accordance with the Services Directive.

Example:

A services contract for maintenance of buildings is divided into the following lots:

Lot 1 ECU 100,000
Lot 2 ECU 60,000
Lot 3 ECU 45,000
Lot 4 ECU 45,000
Total ECU 240,000

The cumulative value is ECU 240,000 so the value threshold for application of the Services Directive has clearly been reached. Each of the lots 2, 3 and 4 is less than ECU 80,000 but the derogation is permitted only up to 20% of the cumulative value, namely ECU 48,000. The contracting authority therefore has the option of excluding Lot 3 or Lot 4, but not both, from application of the Services Directive. The three lots not excluded must be awarded in accordance with the Directive because their total value including the excluded lot, is not less than ECU 200,000.

2.2.4 Intended repetition of similar services

It should be remembered that when a contracting authority intends to have recourse to the negotiated procedure without publication of a notice for the purposes of procuring new services as a repetition of similar services (see 3.3.2.6), it must aggregate the value of the original services and the intended subsequent services in determining whether the threshold has been achieved.



Ralf Grahn