The Council of Ministers of the Republic of Bulgaria is proposing amendments and additions to the Methodology for Adjusting the Price of a Public Procurement Contract Due to Inflation, adopted in 2022 pursuant to Article 117a of the Public Procurement Act. The proposed changes are motivated by accumulated experience in applying the methodology and aim to address its ambiguous interpretation, particularly in construction contracts and framework agreements.

The methodology was introduced as a mechanism to compensate public procurement contractors in the event of a significant increase in the prices of construction materials, raw materials, energy, and services due to inflationary processes. Its practical application, however, has given rise to a number of disputes between contracting authorities and contractors regarding the method of calculating the indexation, the period to which the indices should apply, as well as the scope of costs that may be compensated.

One of the main changes in the draft relates to the criterion for determining the applicable index for indexation. Until now, in practice, the date of acceptance of the completed construction and installation works was often used as the basis for determining the applicable index. According to the draft’s motives, this has led to differing approaches and a distortion of the actual economic relations between the contracting parties, as the acceptance of the work may occur significantly later than the actual performance of the activities.

The proposed amendments introduce a new approach whereby, for indexation purposes, the index for the quarter during which the activities were actually performed will be applied. The aim is for indexation to have a genuine compensatory nature and to reflect the actual increase in costs at the time of performance of the work, rather than at the time of its administrative acceptance.

Additionally, rules are provided for cases in which the contractor is in default for reasons for which they are responsible. In such cases, the indexation will not be automatically determined based on the later and potentially higher index as of the date of performance, but rather the lower of the index as of the due date of the obligation and the index as of the actual date of performance will apply. This aims to limit the contractor’s ability to derive additional financial benefit as a result of its own delay.

Another significant change is the removal of the option to include advance payments in the indexation of the contract price. The explanatory memorandum to the draft states that, by their legal nature, advance payments constitute funds provided in advance to commence performance, and at the time of their payment, the parties have already agreed on a price that should reflect current market conditions and inflation levels. According to the draft’s motives, including the advance payment in the indexation mechanism does not align with the objectives of the methodology and leads to an unjustified increase in compensation.

From a practical standpoint, the amendments will have a direct impact on businesses, primarily construction companies, engineering firms, suppliers, and other contractors in public procurement. A stricter and more precise regime for calculating indexation is envisaged, which limits the scope for differing interpretations and the use of more favourable periods when determining the indices.

At the same time, the changes are likely to result in a reduction in the amount of indexation in certain cases, particularly in contracts involving large advance payments or delayed performance. For some businesses, this may have an impact on liquidity and financial planning, especially in long-term infrastructure and construction projects.

Contractors and contracting authorities are also expected to adapt their internal procedures, reporting mechanisms, and contract documentation to the new rules. The practical application of the methodology is also likely to raise new questions regarding the proof of the actual date of performance of activities and the method of documenting the individual stages of contract performance.

The draft does not foresee any additional impact on the state budget and, according to it, the latter represents a technical and methodological improvement of the existing regulatory framework. It remains to be seen what the final version of the methodology will be.

This article has been prepared for and is part of the Legal Digest issued by Penkov, Markov & Partners. The publications therein do not constitute legal advice and are not binding. Penkov, Markov & Partners reserves all rights to this material, and any distribution thereof is subject to the prior written consent of the law firm.