The Law of Public Procurement

N. Müller

1Introduction

The law of public procurement (Vergaberecht) regulates the terms and conditions under which public authorities award orders, that is to say, under which they are allowed to enter into remunerated contracts for goods and services.

The law of public procurement currently in force in Germany is characterized by a dualism between traditional German budgetary law and the laws of the European Union, which is in the process of assimilating.

Understanding the system is complicated by the fact that the regulations of the European Union have not completely replaced the old national regulations, but have merely supplemented or modified certain sections of them. Hence, EU directives that have been adapted by national law are only applicable when certain budgetary thresholds have been exceeded in potential order volumes, and even then there are several exceptional cases in which the traditional German law of public procurement is applicable after all.

2The Legal System of Public Procurement

2.1Traditional German Public Procurement

2.1.1Budgetary Approach

Traditionally, the German law of public procurement was a part of the law of public budgets (budgetary law). The law of public procurement was devised to provide a regulated administrative process for the issuing of orders in an attempt to avoid wasting budgetary resources. It was dominated by the principles that prevailed in budgetary law: those of austerity, economy and secured procurement. Austerity and economy were served by searching for the cheapest and best offer among the bidders and thereby, fueling competition among them.

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2.2.2Applicable Regulations

The legal principles of public procurement are contained according to their ranking in the Budgetary Principles Act (Haushaltsgrundsätzegesetz, Section 30 HGrG) and in Section 55 of both the Federal Budgetary Regulations (Bundeshaushaltsordnung, BHO) and the State Budgetary Regulations (Landeshaushaltsordnung, LHO). Local authorities added their own stamp to those guiding principles in creating their budgetary regulations. Questions concerning the details of public procurement can be answered by resorting to special sections of the so-called standard official contracting terms (Verdingungsordnungen). There are currently two sets of standard official contracting terms for procurements based on budgetary law:

●Standard building contract terms (Vertragsund Vergabeordnung für Bauleistungen, VOB)

●Standard contracting terms (Verdingungsordnung für Leistung, VOL)

As the name indicates, the standard building contract terms (VOB) contain regulations for contracting services in the building sector. On the other hand, the standard contracting terms (VOL), regulate all other types of contracts.

Section A of the VOB and the VOL contain the terms of procurement (VOB/A, VOL/A), whereas their B sections contain contractual regulations (VOB/B, VOL/B) that come into play when placing the order with the best bidder. Furthermore, the VOB contains a section C, which is comprised of technical regulations pertaining to the manner in which each of the performance tasks of the project is to be carried out. In addition, section C contains regulations concerning the manner in which the work has to be assessed and invoiced.

However, only the A sections of the VOB and VOL will be dealt with here, as only they are directly concerned with the law of public procurement.

The above-mentioned regulations are currently only applied in their standardized form in public procurement processes when the project budget is below a certain limit, that is, whenever the standard EU terms of public procurement are not applicable.

2.2Standard EU Terms of Public Procurement

2.2.1EU Directives on Public Procurement

Today the German public procurement laws that are applicable to the majority of public orders are characterized to a very large extent by the assimilation of the following EU directives by national law:

●Directive 2004/18/EC of the European Parliament and of the Council of 31 March 2004 on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts

●Directive 2004/17/EC of the European Parliament and of the Council of 31 March 2004 coordinating the procurement procedures of entities operating in the water, energy, transport and postal services sectors

●Directive 89/665/EEC on the coordination of the laws, regulations and administrative provisions relating to the application of review procedures to the award of public supply and public works contracts, and

●Directive 92/13/EEC coordinating the laws, regulations and administrative provisions relating to the application of Community rules on the procurement procedures of entities operating in the water, energy, transport and telecommunications sectors

2.2.2Functional Definition of the Public Authority

Whereas the classical German law of public procurement presents a formal definition of a public authority, EU law views the public authority in a functional way. From the latter point of view, the legal form assumed by the public authority is of no importance. It is only the function the public authority is fulfilling at the time that is taken into consideration. Hence, pertinent to Section 98 of the Act Prohibiting Restrictions of Competition (GWB) public authorities include, among others:

1.Territorial bodies (e.g. federation, states, etc.) as well as their separate properties

2.Other legal entities under public or private law which were created in order to fulfill non-profit tasks in the public interest and which are financed, essentially controlled or supervised by public offices

3.Associations whose members are categorized under either (1) or (2) above

4.Companies in the field of drinking water or energy supply or in the transportation or telecommunication sector, whenever they operate on the basis of exclusive or extraordinary governmental rights or are controlled by public authorities who fall into one of the categories from (1) to (3)

5.Companies whose construction work as defined by law is financed to more than 50% by public authorities who fall into one of the categories from (1) to (3).

6.Item 5 is also applicable when the companies mentioned are not compensated for their work in cash, but rather with the right to use the building facilities

2.2.3Basic Principles of the EU Law of Public Procurement

The budgetary approach of the traditional German law of public procurement has essentially been superseded by the above directives. The prevailing principles of the European approach, in addition to economy, are competition, transparency and non-discrimination.

Competition and Economy

These principles are not to be considered as existing separate from one another, but rather as existing in close interdependency. That is to say, the EU competition principle derives from the notion that competition among several bidders leads to

real market prices and conditions, which in turn in the majority of cases guarantees the public authorities that they are conforming with the principle of economic budgeting.

Transparency

The principle of transparency also serves the above purpose. Transparent processes are meant to ensure that all procurements by public authorities can be reviewed in order to make sure that they conform with the regulations prohibiting discrimination. This principle goes hand in hand with the principle of competition, as only processes that are transparent can enable true competition and make distortions so apparent as to virtually prevent them. The transparency principle gives way to regulations such as those governing the publication of a tender notice and the public notification of the results.

Non-Discrimination

The principle of non-discrimination is also tightly interwoven with the principle of competition. It calls for equality in the treatment of all of the bidders – and this independent of whether or not they are domestic bidders or bidders from other Member States of the European Union. The latter are to have the same rights as domestic companies to offer, and ultimately to provide their services. All of the bidders are to be treated equally throughout all of the phases of the procurement process, thereby ensuring equal chances for all of them.

Special Support for Small and Mid-Sized Independent Businesses

The German assimilation of European law presents a certain exception to the principle of equal treatment in the procurement process by its application of the principle of special support for small and mid-sized independent businesses, which consists of breaking down large orders into various “specific and partial lots”. That offers bidders a chance to compete who would otherwise not be able to do so, not being in a position to cover the whole range of services necessary to fulfill the order and/or not having the financial backing to do so. This special support principle allows them to compete for orders for services limited to the special kind they provide (Fachlose) and for only a share of the entire project (Teillose).

The explicit special support for the small and mid-sized independent businesses is a particular German version of the assimilation of EU law into national law, as EU law itself does not directly provide for such. With the institution of this principle, the German legislature gave due recognition to the large contribution small and mid-sized companies make to the overall economy of Germany.

2.2.4Applicable Regulations

The central regulation for EU public procurement law that has been assimilated by German law is Part IV of the Act Prohibiting Restrictions of Competition. The Public Procurement Regulation (Vergabeordnung, VgV) was enacted on the basis of it. It calls for the application of the standard official contracting terms already mentioned above (VOB and VOL) for regulating contractual details, terms which had previously been applicable only in conjunction with the requirements of budgetary law. Furthermore, it determines that certain procurements have to be made on the basis of yet another set of standard official contracting terms, namely the standard official contracting terms for professional services carried out by “liberal professions” (Verdingungsverordnung für freiberufliche Leistungen, VOF).

The VOF regulates the contracting of professional services (höhere Dienstleistungen) from members of the “liberal professions” (“freie Berufe”). What all of the members of the so-called “liberal professions” have in common are their academic or highly specialized education and qualifications and/or their creative talent, which enables them to render the highest level of professional service in person, on their own account and independently, e.g. consulting services. Members of the liberal professions include, for example, lawyers, architects and journalists. However, the VOF is applicable only when the service to be contracted cannot be precisely defined in advance in terms of its scope and duration, which is the case, for example, in need analyses. In all other cases the VOL is applicable, provided they are not concerned with building contracts.

The VOB and VOL for contracts exceeding certain proscribed price thresholds have been supplemented by so-called “a” and “b” paragraphs. The VOL, for example, assumed the following structure:

●First section: Basic paragraphs, procurements under budgetary law

●Second section: “a” paragraphs, procurements under EU law

●Third section: “b” paragraphs, procurements under EU law for certain sectors

The regulations contained in the “a” paragraphs are based on Directive 2004/18/EC of the European Parliament and of the Council of 31 March 2004 on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts.

The regulations contained in the “b” paragraphs are based on Directive 2004/17/ EC of the European Parliament and of the Council of 31 March 2004 coordinating the procurement procedures of entities operating in the water, energy, transport and postal services sectors. The purpose of this is to make sure that contractors whose services involve the fulfillment of certain basic utility needs of the general public and who are permitted to render those services on the basis of certain exclusive privileges do indeed work efficiently, and do not disadvantage consumers by demanding prices that are too high or use their strong market position to pressurize and exploit their suppliers.

2.2.5Threshold Amounts

The determination of whether or not the above-mentioned EU directives are applicable in the first place or whether the traditional German law of public procurement is to be applied is regulated by Section 100 of the Act Against Restraint of Competition (GWB), in conjunction with Section 2 of the Public Procurement Regulation (VgV). The first step in the procedure is the determination of whether the planned order exceeds certain threshold amounts. These amounts will be updated by the EU-Commission every two years. From January 1, 2008, the following amounts shall be valid:

●€ 5,150,000 for building contracts

●€ 412,000 for service contracts and purchase orders in the potable water, energy and transportation sectors

●€ 133,000 for service contracts and purchase orders issued by the highest ranking departments of the federal government with the exception of certain orders issued in the defense sector

●€ 206,000 for all other service contracts and purchase orders

There are also special regulations that come into play whenever service or building contracts are broken down into various lots. In the case of service contracts that exceed a total volume of more than € 206,000, any single lots in excess of € 80,000 are subject to the regulations of the “a” or “b” paragraphs, depending on the sector in question. If they are below that threshold, this regulation applies only if the composite sum of the remaining lots does not exceed 80% of the overall value of all of the lots. In the cases of construction work with a composite monetary value of more than € 5,150,000, any single lots in excess of € 1,000,000 are subject to the “a” or “b” paragraphs, as the case may be. When they fall short of that threshold, the regulation applies only if the composite sum of the remaining lots does not exceed 80% of the overall value of all of the lots.

2.2.6Exceptions to the Application of the Above Regulations

(GWB and VgV) Despite Surpassing of the Threshold Amounts

As already mentioned, whenever the threshold amounts listed above are surpassed, the Act Against Restraint of Competition (GWB), the Public Procurement Regulation (VgV) and the applicable set of the official standard contracting terms together with their “a” and “b” paragraphs come into play. Section 100 of the GWB also contains a catalogue of exceptional cases, to which regular budgetary law and the basic paragraphs of the VOL and VOB apply, even though the threshold amounts have been surpassed. The exceptional cases are of various nature. The following itemization presents typical examples:

●Section 100 d GWB: Orders that are declared secret under German law or whose manifestation requires special security measures or whenever the protection of essential security interests of the state demand such secrecy

●Section 100 h GWB: Orders for the procurement of, for the rental of or for the acquisition of rights to land, existing buildings or other immobile assets regardless of how such is financed

●Section 100 n GWB: Orders for research and development services, unless the results of such work shall become the sole property of the purchaser for his use in the performance of his duties and the work shall be entirely remunerated by the purchaser

3Public Procurement Procedures

3.1The Most Important Types of Procedures

Both German and EU public procurement law foresee essentially four different ways to place orders for contracted construction work and services and for purchase orders – the open procedure, the restricted procedure, the negotiated procedure and, since 2005, the competitive dialogue. Somewhat different terminology is used in the case of procurement under the threshold values, which are carried out in accordance with the basic paragraphs of the VOB and VOL, but the three traditional procedures are nonetheless virtually identical. The open procedure is equal to the public call for bids, the restricted procedure is the equivalent of the restricted call for bids and the negotiated procedure is the same as single tender action.

As a general rule, the public authority is committed to selecting the open procedure, unless special reasons permit the use of the non-open, the negotiated procedure or even the competitive dialogue. Here, German public procurement law deviates somewhat from the EU directive, according to which only the choice of the negotiated procedure or the competitive dialogue requires a special reason and leaves the choice between the open and restricted procedures up to the decision of the public authority.

As opposed to services pursuant to VOB and VOL, services pursuant to VOF are always contracted by way of the negotiated procedure. Calls for participation in the competition are publicized at regular interviews in advance – a way of proceeding that can be dispensed with only in exceptional cases.

3.2Open Procedure

In an open procedure, any company interested in participating has the opportunity to submit a proposal. The proposal must conform with the requirements of the administrative department that issued the call. No alterations of the standard application documents, e.g. of the legal terms and conditions contained in them are permissible, as that would make it very difficult if not impossible to compare the offers. The terms of contract are thus laid out exclusively by the office calling for the bids. Any violation of this principle by a bidder automatically disqualifies him and his submission is rejected.

In parity with these restrictions, the public call for bids must also mention all of the things that are necessary for a bidder to submit a proper and complete proposal. This often presents a major challenge to the public authorities, particularly when they are dealing with highly technical subject matter. In such cases, the bidders are allowed to ask questions during the submission phase of the process in order to clarify the content of the call for proposals. The answers to these questions are shared with all of the bidders so as to conform with the principles of non-discrimination and transparency.

The forbiddance of any modification of the terms and conditions of the call for bids is particularly worthy of notice with respect to the general terms of business and standard contract forms that are preferentially used by U.S. companies. Such standardized forms cannot be successfully submitted in an open procedure in Germany.

In the event that a bidder cannot or does not want to fulfill all the requirements of a call for proposals, the most he can do is submit a so-called “auxiliary bid” (Nebenangebot). Whether or not auxiliary bids are even permissible or whether or not they are only permissible in the context of a main tender can be derived from the public announcement of the call for bids.

Outside of the submission of a auxiliary bid, the only possible way to influence the terms and conditions of the offer is to file an official administrative complaint and initiate review proceedings (see Sect. 4.2). However, this is only possible when there has been some violation of public procurement law, and allegations to that effect seldom hold up under close legal scrutiny. On the other hand, a violation of public law can indeed exist if the announcement of the call for bids made it impossible to submit a clear offer because it failed to make certain essential statements or because it contained contradictory statements.

It is also important to note that in an open procedure, the bidder who receives the contract is the one who has submitted the most economical offer. With the announcement of the winner, the order is automatically placed and a legally binding contract for the services as described comes into being. This also means that no further negotiation of the conditions of contract are permissible after the fact.

It is also not permissible to modify any proposals once the submission deadline has been surpassed, which thwarts any late and unfair attempts to underbid the other competitors.

3.3Restricted Procedure

In a restricted procedure, only certain companies are requested to submit a proposal. They are companies that have been selected in a preliminary participation contest, the request for participation in contracts. On the other hand, the request for participation is open to all companies and any of them can submit proposals for participation. In the request for participation, they are required to make statements

in regard to their special know-how, performance capability and reliability that can be used to judge their eligibility for the second round. The required submission materials can include such things as certificates and references or even clearance certificates issued by the local branch of the Federal Tax Office (Unbedenklichkeitsbescheinigungen des zuständigen Finanzamts) and similar documents.

In the case of procurements under the threshold amounts, the law does not absolutely require that an open request for participation be held preliminary to a restricted call for bids. If the administrative office issuing the call has sufficient knowledge of the market, it can do away with the request for participation.

In this procedure as well, just as was the case in the open procedure, an application for a contract has to be submitted precisely the way indicated by the administrative office issuing the call, which is to say that there can be no modifications of the standardized submission forms and the bidders are not allowed to attach their own general terms of business of standard contracts. Subsequent corrections or negotiations of the proposals are likewise impermissible.

3.4Negotiated Procedure

The Act Against Restraint of Competition views this procedure as an exception that comes into play only when the important reasons mentioned by the standard official terms of contract permit it. For example, this is the case when no economic results can be expected from an open or a non-open procedure, when such a procedure has already been conducted without producing any economically feasible results, when there is only one particular company that is capable of providing the required service, or when there is time pressure due to the occurrence of unforeseen events and it is no longer possible to carry out any other procedure. Depending on the reason for initiation of the negotiated procedure, a preliminary participation contest may or may not be required.

3.5Competitive Dialogue

This new procedure shall be used for very complex projects only, where the public authority is not able to give a detailed specification for the requested performances.

Therefore, the public authority has to select a number of companies which shall create such a specification in dialogue with the public authority and each other. Afterwards the public authority chooses again some or all of these companies for a kind of a restricted procedure, where the corresponding companies each may submit a detailed tender according to the developed specification.

Automatic Disqualification

The first tenders to be weeded out are those that do not comply with the obligatory rules and regulations (e.g. missing signature).

Discretionary Disqualification

Not all rules and regulations absolutely require compliance and automatically disqualify any tenders that do not comply. In some cases, non-compliance can result in disqualification though not necessarily. The next step involves the evaluation of cases of such non-compliance and the decision of whether to disqualify them or not.

Rejection of Bidders Not Qualified for the Job

In the next round, the tenders are examined with the intention of determining whether or not the bidders create the impression of being qualified to properly render the services offered. That is done mainly by examining the attached documents and the statements made in regard to technical know-how, performance capability and capacity as well as reliability. This evaluation corresponds to the evaluation process that is followed in preliminary contests for participation. The tenders of any bidders which do not meet these criteria are added to the rejection pile.

3.5.4Content Evaluation

Only the remaining tenders are evaluated in terms of their content. Here the service offered and the price that is asked for it are the most important evaluation criteria. The evaluation criteria have to have been uniformly selected. Some government offices offer assistance to public authorities in the determination of the uniform criteria to be used in evaluating tenders. The Federal Department of Interior, for example, issues a publication entitled “Document for the Call for Proposals and Evaluation of IT Services” (Unterlage für die Ausschreibung und Bewertung von IT-Leistungen, “UfAB”).

Insofar as certain items contained in the tender require further explanation, the administrative office issuing the call for bids can ask the bidders questions and communicate with them solely for the purpose of removing any doubts. It is, however, impermissible to make any modifications to the tenders during or as a result of such exchange. The most economical tender is then selected on the basis of the criteria previously selected.

3.5.5Preliminary Notification of the Intent to Award the Contract

Once the selection of the bidder to whom the contract is to be awarded has been made, the other unsuccessful bidders are notified as to who the winner is (Section 13 VgV). Beginning with the date of that notification, the unsuccessful bidders have 2-weeks time to contest the decision and, as the case may be, initiate a formal review procedure. If the contract is awarded before the 2-week deadline has elapsed, the award is void. This regulation is intended to grant the bidders ample opportunity to initiate legal protection measures.

4Remedial Rights

The possibilities of legal protection in public procurement procedures that exceed the threshold amount are essentially different from the ones that exist in procedures for procurements below the threshold, or, in other words, in procedures that pursuant to Section100 Section 2 GWB do not fall under the regulations of the Act Against Restraint of Competition and the VgV.

4.1Remedial Rights in Cases Where the GWB is Applicable, Particularly in Orders that Surpass the Threshold Amounts

Section 97 Section 7 GWB explicitly states that bidders have the right to insist on conformance with the official standard terms for public procurements.

4.1.1Administrative Complaints in Regard to Public Procurements

The first step in filing administrative complaints in regard to public procurement is a preliminary procedure of sorts, and is defined by law as the issuing of a complaint to the public authority outlining the reasons for it as precisely as possible. The complaint must be issued immediately upon becoming aware of the violation of the procurement regulations. If a violation occurs in an announcement, for example, the complaint must be issued without delay immediately following the publication of the announcement. If that does not occur, the bidder loses his remedial rights in regard to that particular procedural violation. German courts are very strict in their interpretation of the words “without delay”. Obvious violations have to be challenged within just a few days. The absolute deadline for complicated complaints is 2 weeks. Many remedial rights proceedings end in failure due to this prerequisite. Especially in the submission phase, the bidders are concentrated more closely on writing good proposals than they are on the filing of complaints. A further barrier

that causes bidders to refrain from issuing complaints is the fear that they will suffer disadvantages in the selection process if they have done anything to make themselves unpopular with the public purchasers.

4.1.2Review Procedure

Provided that the bidder has issued a complaint challenging the behavior of a public authority without delay and the public authority has failed to correct his behavior, the bidder has the right to initiate a formal review procedure. Procedures of this nature are presided over by federal or state procurement chambers. The federal chamber of public procurement resides in the Federal Cartel Office; the procurement chambers of the states can frequently be found in the office of the president of the state administration (Regierungspräsident) or in the superior finance directorate (Oberfinanzdirektion).

There is no specific deadline for the initiation of review proceedings, except for the fact that no petition can be filed after the contract has been awarded. Pursuant to Section 114 Section 1 GWB, no contract that has been officially awarded can be rescinded.

Once a petition for a review procedure has been received by the chamber of public Procurement and forwarded to the public authority, the latter normally has to wait until the chamber has reached a decision in the matter and is not permitted to award the contract until 2 weeks have elapsed following the decision. If he goes ahead and does so anyway, the premature contract is void.

The decision of the chamber of public procurement is an administrative act pursuant to Section 114 GWB.

4.1.3Immediate Complaint

The party on either side of a complaint has the right to challenge the decision of the chamber of public procurement if it does so immediately. The deadline is 2 weeks. The complaint must be issued to the Regional Court of Appeals (Oberlandesgericht) with jurisdiction for the region in which the chamber of public procurement has its seat. If the immediate complaint is filed in a timely manner, the timeframe in which the public authority is restrained from awarding the contract is extended by another 2 weeks. However, the public authority does have the right to petition the chamber of public procurements and the court for permission to award the contract before the 2 weeks are over.

4.1.4Damage Claims

Once the contract has been awarded and provided it has not been declared void, it cannot be rescinded. Bidders who would have had a very good chance of winning the contract but who have lost the bid due to wrongful doing on the part of the

creation as it stands right now is anything but transparent and easy to interpret, which almost always makes it necessary to rely on the help of lawyers. It contains such a potential for misinterpretation or mistakes that the number of official complaints and review procedures has steadily been climbing over the last few years.

Unfortunately, the German legislature missed the chance to use the European reenactment of the relevant directives in 2004 to completely overhaul its current version of public procurement law, slimming it down and simplifying it.

In 2007, the Council and the European Parliament adopted the Commission’s proposal for a directive reviewing EU rules on remedies in the area of public procurement. The new directive amends the old Council Directives 89/665/EEC and 92/13/EEC. The directive improves the national review procedures that businesses can use when they consider that a public authority has awarded a contract unfairly. The Commission proposed the directive in May of 2006. An agreement at first reading between Commission, Council and the European Parliament was reached in June of 2007.

The revision has yet to be assimilated by German law, although some of the new regulations are already stated in German law today. If the German legislature has not done so by November 15, 2009, the new directive will apply directly, in nonconverted form.