Procurement agreement & Subcontract in Italy

Private Procurement and Public Procurement

 

The procurement contract is governed in Italy by articles 1655 and following of the Civil Code, it is defined:

 

- the contract by which a party,

- by organizing the necessary means and

- with management at its own risk,

- engages the completion of a work or service

- towards a cash consideration.

 

This general definition, indicated above, is valid in the context of civil law, but there is also a notion of "contract" specific to the public contract sector: that is, referring to the cases in which the role of the client in the contract is assumed by a public entity.

 

In such cases, EU legislation applies, which provides for a wider range of contractual cases applicable to any type of contractual relationship between a public entity and a private entity in which the public party must bear costs in order to benefit of a consideration which may concern:

 

- delivery of goods (supply contract);

- the execution of a service (service contract) or

- the execution of a work (works contract).

 

Therefore, the notion of contract referred to in art. 1655 c.c. is not the same of "public contract", since only some public contracts can be qualified as a contract pursuant to art. 1655 c.c. and, in any case, only some provisions of the civil code are applicable to procurement contracts entered into by the public entities.

 

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EU and national (Italian) regulatory sources

 

In 2004 the European Union issued directive 2004/18/EC, then replaced by directive 2014/24 /EU which brings together the procedures for the award of contracts in the three sectors of:

 

- works,

- services,

- supplies

with the aim of simplifying and streamlining the procedures.

 

In January 2014, the European Union issued the new directive 2014/24 /EU implemented in Italy with Legislative Decree 18 April 2016, n. 50 (Nuovo Codice degli Appalti, see hereunder); the changes contained in the new directive concern:

 

- guarantee of a better price-quality ratio;

- new rules in the field of subcontracting;

- new rules on "abnormally low" offers;

- pre-eminence of the most economically advantageous offer compared to the criterion of the maximum discount.

 

With Legislative Decree 163/2006, the so-called "Code of public contracts for works, services, supplies", European directives were transposed into Italian law; in order of time, the New Procurement Code (Legislative Decree 18 April 2016, n.50) has been further updated with the changes, most recently, introduced by Legislative Decree October 26, 2019, n. 124, converted with modifications by the L. 19 December 2019, n. 157.

 

The Procurement Code has made a complete revision of the regulatory framework on public works and incorporates the previous rules, it regulates the matter of contracts for works, public services and, in general, the matter of public works, although it is in continuous evolution, it constitutes the procedural reference for any type of public contract for works, services and supplies.

 

 

Definition and types of contract

 

Article. 3 of the Procurement Code contains definitions useful to describe the figure of the public contract and the different types of contract; the definition of public procurement provides that:

 

- the public contract is the contract for consideration;

- stipulated in writing between a contracting authority or a contracting entity and one or more economic operators;

- having as its object the execution of works, the supply of products, the provision of services as defined by the Procurement Code;

 

The contract is part of the "passive contracts" for the administration: they are contracts in which the public part bears a cost (generally by providing a sum of money) in order to acquire a performance.

 

Further, they are equivalent to public bodies: publicly owned companies, public concessionaires, private individuals who have benefited from the issue of a building permit in which urbanization works are planned.

 

Article. 3 of the Procurement Code defines three different types of public procurement:

 

1) in paragraph 7: public works contracts which have as their object:

 

- execution or, jointly, executive planning and execution, or,

- the executive planning and execution, in relation to works, after a final project or,

- the execution, by any means, of a work that meets the needs specified by the contracting authority on the basis of the preliminary or definitive project based on the tender;

 

to understand what falls within the notion of works contract, it is necessary to refer to the attachments referred to in paragraph 7;

 

2) in paragraph 9: it then describes the supply contract specifying that they have as their object: the purchase, the financial lease, the lease or the redemption purchase, with or without the option to purchase, of products.

 

3) in paragraph 10: public service contracts have as their object the provision of the services referred to in Annex II.

 

 

Procurement Contract and Concession

 

Paragraph 11 of art. 3 of the Procurement Code, provides that the concession of public works are contracts:

 

- which provide for consideration (they are not for free);

- concluded in writing;

- which concern: execution; or the executive planning and execution; or the definitive planning, the executive planning and the execution of public works and works structurally and directly connected to them; as well as their functional and economic management;

- have the same characteristics as a public works contract, with the exception that the consideration for the works consists solely of the right to manage the work, eventually paying a price.

 

Paragraph 12 provides that the concession of services is a contract that has the same characteristics as a public service contract, with the exception that the consideration for the provision of services consists solely of the right to manage the services eventually by paying a price.

 

 

Stages of the award procedure

 

The public procurement discipline is characterized by:

 

- the obligation for the public entity not to discriminate or doing favoritism in favor of particular subjects;

- the public party can only select the private contractor following a complex administrative procedure.

 

The administrative procedure of a contract is divided into a diversified series of phases which vary in consideration:

 

- of the object and

- the value of the contract, since for the awarding of contracts of a higher amount, stricter procedural rules apply.

 

The main steps of the process can be summarized as follows:

 

- decision to enter into a contract;

- preparation and publication of the contract notice (the bando di gara di appalto), or of the invitation letter (if only competitors invited by the public administration can participate in the procedure);

- examination of the requests to participate and comparison of the offers presented;

- award of the contract after verification of the anomaly of the offer;

- stipulation of the contract.

 

Any dispute concerning the legitimacy of the contractor selection procedure is attributed to the jurisdiction of the administrative judge; while, disputes relating to the execution of the contract fall within the jurisdiction of the ordinary judge.

 

 

Principles governing public procurement rules

 

A series of principles regulate the discipline of public procurement, they derive from administrative jurisprudence, but also from the Procurement Code:

 

- the public party must inform its behavior to the principles of economy, effectiveness, timeliness and fairness;

- the principles of free competition, equal treatment, non-discrimination, transparency, proportionality must be respected;

- the award procedures and other administrative activities relating to public contracts are carried out in compliance with the law of 7 August 1990, n. 241, and subsequent amendments and additions, which provide for the possibility of requesting public administration access to documents and the obligation of transparency by the public administration towards citizens.

 

 

Subcontracting in public procurement

 

Subcontracting is the contract by which the contractor entrusts third parties with the execution of part of the services or working covered by the main contract (art. 105 paragraph 2 of the Procurement Code).

 

Article. 105, paragraph 4 indicates among the necessary conditions for subcontracting the prior authorization of the contracting station and the indication in the tender offer by the competitor (aspiring contractor) of the works, services, supplies or parts of them that he intend to subcontract.

 

The New Procurement Code 2019 provides for the prohibition of subcontracting design tasks, construction supervision, execution management, safety coordination during execution, testing, as well as the tasks that the contracting authority deems indispensable.

 

The contractor can, however, make use of subcontracting for: geological, geotechnical and seismic surveys, surveys, measurements and stakeouts, preparation of specialized and detailed documents (with the sole exclusion of geological reports, for which, therefore, it remains the prohibition of subcontracting) and for the graphic drafting of the project documents only.

 

Among the causes of exclusion of a contractor there is also the serious breach of the subcontractor, if recognized by a final judgment.

 

It is legitimate to exclude a contractor from a tender due to the lack of requirements of a subcontractor.

 

The non-payment of subcontractors is the cause of exclusion of a contractor from a tender.

 

The conversion law n. 55/2019 of the Law Decree n. 32/2019 introduced a suspension of the Provisional Procurement Code (until 31 December 2020), of some rules on subcontracting; for which, the general rule of the Procurement Code that provides for the limit of 30% of the reliable services in subcontracting, the suspension of the rule provides that until December 31st, 2020 the limit has become 40% of the overall value of the contract, leaving at the contracting stations the choice of the exact percentage.

 

Until December 31st, 2020, the following are also suspended:

 

- the obligation to indicate the triad of subcontractors in the tender and for cases of concessions;

- the checks during the tender referred to the subcontractor, who is no longer indicated before the execution phase.

 

 

Private procurement contract

 

The procurement contract is a contract whereby one party (client) assigns another (contractor) to carry out a work or service, upon payment of an agreed price.

 

The work (for example: set up a house, a building, etc.) that the contractor will have to carry out will be carried out at his own risk and with his own means, so the contractor undertakes the entire work, arranging to organize both personal and materials means useful for the realization, in addition to the risk of failing in execution.

 

The client, therefore, will simply order the result that the contractor will have to achieve with his work, being able to contribute to providing the material means useful for the realization (wood, concrete, iron, marble, etc.).

 

According to the law, the material necessary to complete the work is provided by the contractor, unless otherwise agreed; in the latter case, the contractor is liable for defects in the work if he accepts the material without reservation, although it presents recognizable defects or discrepancies.

 

Therefore, the contractor who receives the material from the client is burdened by promptly reporting to him any defects that he is required to detect and if he does not, future defects of the work will be attributable to the contractor, although the used materials were not chosen by him.

 

If the used materials belongs to the contractor, however, there is no doubt that future defects are always attributable to him.

 

The contractor, having to carry out the work at his own risk, in addition to being equipped with the necessary means of execution (for example: trucks, excavators, employees, etc.), must normally be an entrepreneur; it is not an essential element of a procurement contract, however, the contractor is a commercial entrepreneur; it is not even necessary that it is a company, since the contractor can own eventually just a sole proprietorship.

 

The procurement contract can also be for services; in this case, the contractor does not undertake to do a job but to provide a service: for example, the supply of telematic services or the maintenance of industrial plants.

 

The contractor performs the work according to the indications provided by the client; since very often he does not have the technical skills to be able to direct the contractor, the client can use a construction manager who represents him and checks the progress of the work.

 

 

Obligations and rights of the Contractor

 

From the procurement contract arise obligations and rights for both contracting parties.

 

Obligations, the main ones are:

 

- the contractor must perform the work or service in accordance with what has been agreed, according to the rules of the art and professional diligence;

- the contractor is required to achieve the result promised to the client, so he is bound by a result obligation, he will have completed the commitment undertaken doing all the work or service provided, for example : if the client orders the contractor to build a house, only the construction of the house will release the contractor from his contractual obligation;

- the contractor has a duty to ensure that the work or service performed is free from defects.

 

Rights, the main ones are:

 

- the main right of the contractor is to have the payment of  the agreed price of his work paid at the end of the work or service;

- the contractor is entitled to a higher compensation in the case of changes ordered by the client.

 

 

Obligations and rights of the Client

 

The main obligation of the client is to pay the contractor after the work is done.

 

Rights:

 

- the client has the right to have the work or service carried out as agreed in the contract;

- the client has the right to make changes to the initially agreed project, provided that these changes do not completely distort the work or service initially commissioned;

- the client can withdraw from the contract at any time, however, if he does so, he must hold the contractor harmless of the costs incurred, the work performed and the loss of earnings.

 

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Subcontracting in private procurement

 

The civil code also provides for the further form of contract, defined as subcontracting, it is a contract by which the contractor, in charge of carrying out a work or service by the client, entrusts in turn to another subject the fulfillment of the same works; it is a kind of delegation for the execution of the works ordered by the client.

 

Subcontracting involves three subjects:

 

- the client;

- the contractor appointed by the client through a procurement contract;

- the subcontractor, appointed by the contractor.

 

The object of the subcontracting is the same as that of the contract: the execution of the work or the customer's service.

 

The civil code provides that, as a rule, subcontracting is prohibited, unless the client has given his consent, so the contractor cannot delegate the work to another contractor unless authorized by the client.

 

The prior authorization of the client can also be generic and not related to a specific subject.

 

Procurement and subcontracting, in any case, remain two separate contracts, this means that the client will not be able to act against the subcontractor, but only against the contractor.