Public procurements from before war now too expensive for businesses

Construction in Tallinn. Photo is illustrative.
Construction in Tallinn. Photo is illustrative. Source: Ken Mürk/ERR

As a result of sharp price increases, businesses are finding that they aren't capable of fulfilling contracts concluded prior to Russia attacking Ukraine a month ago at contract price. In the case of public procurements, public authorities may be able to pick up the difference.

Russia's attack on Ukraine has increased the price of several materials as well as disrupted supply chains, as a result of which the fulfilling of contracts concluded prior to February 24 has gotten more expensive than expected.

"From the increase in fuel prices to all kinds of materials — metals, steel, aluminum, bitumen, granite rubble, lumber and apparently even some other materials have gotten several dozen percent more expensive, some even severalfold," explained Sven Pertens, chairman of the board at TREV-2, a major civil engineering construction company. "Businesses definitely won't be able to cover this kind of price hike from their own funds."

According to Pertens, there are two possible solutions — the customer can pay the additional costs to the company, or prices can be changed in reference to changes in indexes.

"Comparing all materials on a monthly basis will generate quite a significant amount of additional administrative burden," he warned. "This situation is changing on a monthly, weekly, sometimes even daily basis."

For example, March construction or consumer price indexes are compared with February figures, which are taken into account on work done in March, Pertens explained.

Price increases are typically a business risk that businesses have to account for. Should a business overestimate its capacity and be unable to complete its order on time, the customer can seek a contractual penalty.

As the war could not be accounted for prior to February 24, however, the law provides for exceptions in the current situation.

"The first thing that should be done is to contact the other party as soon as possible and explain your problems as precisely as possible — so that the customer understands what the issue is," said Ministry of Finance adviser Evelin Karindi-Kask. "Simply referring to the war in Ukraine is clearly insufficient."

The customer, for example a public authority such as the Transport Administration, is nonetheless not required to make changes to its contract. The new price may be higher than permitted by the budget.

Karindi-Kask noted that when it comes to new procurements, businesses themselves will be responsible for taking the new situation into account. In order to do so, customers should include clear rules in writing.

"Local governments, public agencies and so on should let everyone know that anyone participating in subsequent procurements or fulfilling existing contracts should know how they will be treated in the months to come," Pertens said.

Should no clarity be achieved, businesses will just begin including a bigger buffer for potential price increases in their initial tenders, he added.


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Editor: Aili Vahtla

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