Framework Agreements in Defense Procurement and Other February Changes

On February 1, the Cabinet of Ministers adopted Resolution No. 122, which significantly amended and supplemented the rules of defense procurement during martial law. In particular, Resolution No.1275 was supplemented with a possibility to create framework agreements with limited public information and a description of the algorithm for their implementation. A practice of providing 24 hours to eliminate inconsistencies was extended to simplified procurement. The grounds for concluding direct contracts and the possibilities to change them were reviewed. The remaining resolutions adopted on the same day—No. 106 and No. 107—covered the procurement of unmanned systems, electronic warfare systems and their parts, as well as the development of ammunition production in Ukraine. Officials promise that defense procurement will be conducted transparently, competitively, and considering security requirements. In this material, we try to understand how realistic these promises are.

Who will conclude these framework agreements and how?

Previously, defense procurement for above-threshold amounts could be conducted in three competitive ways: open bidding with features, simplified procurement, and request for proposals in the electronic catalog. As a result of the changes, a framework agreement was added to the permitted options. But it can only be used by the state enterprise State Rear Operator of the Ministry of Defense and the Support Department of the State Service of Special Communication and Information Protection of Ukraine.

The process starts with the qualification selection in the Prozorro system, according to which a procuring entity includes at least three candidates in the framework agreement. Within the agreement, the procuring entity may announce requests for quotations addressed to the participants of the framework agreement, or hold open bidding with features (hereinafter referred to as OB with features) among them.

• Qualification selection to a framework agreement

First of all, the public procuring entity publishes an announcement in the Prozorro system on the qualification selection of candidates for the framework agreement and tender documentation. They contain:

• information on the procuring entity;
• procurement item (its details may be different: the name with the code according to the Unified Procurement Dictionary (UPD) and the name/specific list, or the name of the category of the procurement item with the code according to the UPD, with the names of the relevant classifiers). If the procuring entity indicates a specific list, then the technical and qualitative characteristics, the method of their confirmation, and the draft contract shall be included in the tender documentation. The draft contract must contain all the essential conditions, except for those that cannot be determined at the time of the announcement;
• estimated quantity/volume of goods, works, services, which are calculated approximately and do not require justification;
• location (administrative and territorial unit) of delivery/provision/performance;
• estimated terms and/or schedules of delivery/provision/performance;
• estimated expected value of the procurement item;
• validity period of the framework agreement is not less than 1 year, and the deadline for submitting applications for inclusion in it, which must be at least 15 days. The feature of these framework agreements is that the application for accession can be submitted during the entire period of validity of the framework agreement, except for the last 30 days of its validity;
• guide on preparing applications for participation in the qualification selection;
• one or more qualification criteria, grounds for refusal to participate in a procurement transaction, method of confirmation of candidates’ compliance with the established criteria and requirements;
• other information (contact details of the procuring entity, language to be used when developing documentation, etc.).

In addition, there may be requirements in the tender documentation to secure the future procurement contract.

To participate in the qualification selection, candidates submit applications through the Prozorro system with the relevant information and documents. The number of candidates is unlimited.

The procuring entity shall review the applications for their compliance with the requirements within 10, maximum 15 working days. As in a regular procurement transaction, the procuring entity may seek confirmation of information from other organizations.

As a result, the procuring entity may reject the application or include the candidate in the framework agreement. The procuring entity draws up a protocol of the qualification selection of candidates for the framework agreement based on the results of considering each application.

The grounds for rejecting the application are generally similar to the classic cases: the candidate’s non-compliance with the qualification criteria, unreliable information from him/her, links with Russia/Belarus, non-compliance with the terms of the technical specification and other requirements for the procurement item (if the customer established them), non-compliance with other requirements (Article 22, part 3, paragraph 1 of the Law), non-compliance of the language used in the application.

An interesting feature of the selection is that the rejection of the application to participate in the qualification selection does not deprive the candidate of the right to re-submit it. Since it is possible to apply almost the entire period of the framework agreement, the participant has an unlimited number of attempts. A framework agreement is valid for 1 to 2 years.

• Open bidding with features or request for proposals to the participants of the framework agreement

The next stage of the framework agreement with limited public information is the actual procurement transaction  To conduct it, at least 3 candidates must be included in the agreement. You can proceed to this stage only if all applications in the qualification selection have been considered.

On the basis of the framework agreement, it is possible to conduct OB with features or announce a request for proposals among its participants (if the announcement contained a specific list of goods, works, or services). There may be several such procurement transactions: the candidate included in the framework agreement may apply for one or more of them. At this stage, the procuring entity no longer establishes qualification criteria.

If the procuring entity conducts OP with features, it involves publishing a regular bidding announcement, but information about the place and time of delivery/provision/performance will be hidden from public access.

If the procuring entity announces a request for proposals, such a request is sent to the candidates included in the framework agreement through the Prozorro system. In the request, the procuring entity indicates information about the procurement item, the conditions for its provision, the list of documents of the winner and other information. Candidates have the opportunity to submit proposals on request for at least 3 days.

The request for proposals is carried out with an electronic auction, but if only one participant submitted a relevant request for proposals, the participant will be awarded. The winner must provide documents confirming that there are no grounds for refusal to participate in the procurement transaction. The proposal may be rejected if the participant has not provided these documents, has provided more than one proposal per one request, or has refused to sign the contract in accordance with the requirements of the request/proposal, as well as if the contract has not been concluded within 10 days from the date of awarding.

• Procurement contract under the framework agreement

As a result of OB with features, the contract may be concluded no earlier than 5 and no later than 15 days from the date of the decision on the intention to conclude it, and as a result of the request for proposals—no later than 10 days from the date of awarding. For these contracts, the same safeguards for changing the essential conditions apply as for conventional OB with features and this requires notification of changes through the Prozorro system.

What about the appeal?

At the first stage—in the qualification process—candidates have no other ways to protect their rights and legitimate interests, except for the judicial one. The same situation is observed in the second stage if the procuring entity chooses the request for proposals as a procurement method.

Instead, if at the second stage the procuring entity chooses OB with features, the participant can appeal the tender documentation, actions, or omission of the procuring entity in the manner that functions now for ordinary OB with features—through the Antimonopoly Committee of Ukraine.

What information will be in the public domain and what information will not?

At all stages of the framework agreement, specific rules for the disclosure of information apply. This is done in order to strike a balance between the interests of security, the interests of transparency, and the interests of protecting the rights of participants. Let’s look at what information gets published and what is restricted for public access in framework agreements at all the stages.

• Throughout the process, it is allowed to indicate only the name of the locality instead of the exact location of the procuring entity, supplier (executor, provider) and the place of delivery (performance, provision) if the disclosure of this information poses a threat to the security of the parties.
• Access to the announcement and tender documentation on the qualification selection (Stage I) is free.
• The following access restrictions apply during the qualification selection and subsequent OB with features or requests for proposals announced on the basis of the framework agreement: information on applications/proposals/tender proposals, in particular identifying data on candidates/participants (except for the name/full name and identification code), documents provided by candidates/participants as part of applications/proposals/tender proposals are not published in Prozorro for public access. Instead, this information will be available to the procuring entity, the Antimonopoly Committee, the State Audit Service, and its interregional territorial bodies. Moreover, SE Prozorro will provide this information at the request of law enforcement agencies.
• Applications for qualification are disclosed to the procuring entity, both submitted during the selection and after it.
• The protocol of the qualification selection of candidates to the framework agreement neither gets published, except in certain cases (apparently referring to the AMCU, the State Audit Service).
• At the second stage, if the procuring entity has chosen OB with features, they have to fill out the announcement form in Prozorro, but the system will close information on the place and time of delivery (provision, performance). Similarly, the request for proposals is published in Prozorro, except for information on the place and time of delivery/provision/performance.
• On the other hand, personalized data about the participants, information about their proposals and documents uploaded by the winner of the request for proposals are not published, neither is the information about the intention to conclude a contract as a result of the request for proposals. But the winner of the request and other participants are sent a message with the name and location of the winner.
• At the stage of concluding a contract based on the results of a tender or request for proposals, the procuring entity uploads such an agreement to the Prozorro system together with annexes to it, the name of the item, information on the price per unit, but the contract with annexes will be open after the end of martial law.
• Based on the results of the procurement transaction, the Prozorro system generates a report for general access, which immediately opens information about the procuring entity, the procurement item, its type and evaluation criteria, key dates, reasons for not concluding the contract (if so), grounds for refusal to participate, as well as the name of the procurement item or a specific list of what was purchased, and information on unit prices.
• However, the report will not indicate information on the quantity and place of delivery/provision/performance, the number of participants, the name and location of the winner and subcontractors, bid prices, the total amount under the contract, the date of announcement with information on the concluded framework agreement, as well as confirmation of qualification requirements; all this will be available after the end of martial law.
• If changes are made to the contract, the procuring entity shall place a notice of them and the changes themselves in Prozorro. But they are not published now but only after the end of martial law. Currently, only the unit price is published (if it has been changed).

As we can see, the provisions of the resolution provided for three types of information accessibility: open to the public, limited access (open to the procuring entity, relevant public authorities), and temporarily limited access (because there is a direct order that the information will be opened within 30 days after the end of martial law).

24 hours in simplified procurement, ban to buy in Russia/Belarus, clear exceptions for direct contracts

In addition to the introduction of a framework with limited public information for two procuring entities, the changes affected simplified defense procurement transactions. All of them, announced starting from February 7, must provide participants with 24 hours to correct inconsistencies. What to consider as inconsistencies, the grounds for rejection related to non-compliance with the “24 hours” requirement, or a change in the procurement item— all this was determined similarly to OB with features by Resolution No.1178.

For defense procurement, an identical ban on procurement from persons associated with Russia and Belarus, as well as goods originating from these countries, which is valid for ordinary public procurement, was added. Applications submitted by such persons will be rejected.

In addition, the government has revised the grounds for concluding direct defense procurement contracts for above-threshold amounts. Previously, it was permissible to conclude a direct contract under one of the conditions: either the price implies a profit of up to 25% of the cost price and the contractor is a manufacturer or the aggregate profit of all business entities in the supply chain is up to 25% of the initial cost price.

Instead, with the adoption of the amendments, the list of exceptions in force for ordinary OB with features that is set out in clause 13 of the Features approved by Resolution No.1178 was extended to defense procurement. A direct contract can be concluded if no participant took part in a simplified procurement transaction. Using these grounds to conclude a direct contract, you cannot change the procurement item, its technical and qualitative characteristics, requirements to the participant and exceed the expected cost of a simplified procurement transaction. There is no requirement here to leave the draft contract unchanged if the procuring entity published it. The resolution added a safeguard to changes in the essential terms of direct contracts; permissible cases were determined by referring to clause 19 of the Features.

Changes to drone procurement and facilitation of ammunition production

Resolution No. 106, which was included in the package of resolutions on February 1, amended the rules for the procurement of unmanned systems and electronic warfare equipment of domestic production. The changes relate to compliance with the limit of 25% of the supplier’s (contractor’s) profit in contracts.

If the term of final delivery of such goods (in particular in batches) exceeds two months from the date of conclusion of the contract, domestic contractors shall clarify the calculation of the price, including the amount of profit, based on actual costs.

Final settlements under the state contract (agreement) are carried out after the contractor provides an updated price calculation.

• If the contractor’s profit exceeds 25%, the parties make changes to the contract to reduce the total cost (price) or—in agreement with the procuring entity—increase the quantity of goods.
• If the contractor’s profit as part of the price does not exceed the allowed one, the final settlements shall be made at the prices established by the contract.

The relevant cases supplemented the list of situations when it is possible to change the essential terms of such contracts.

Conclusions

Summarizing the review of changes in defense procurement, we can note positive trends:

• Confident coverage of defense procurement by competitive methods, which should prevent abuses and overpricing. Perhaps it would be possible to provide for an accelerated appeal to the AMCU regarding OB with features for defense procurement, abandoning simplified procurement.
• Introduction of the 24-hour rule in simplified defense procurement. This allows procuring entities not to refuse the cheapest bid, but to give the participant a chance to correct the shortcomings in the documents. It may be appropriate to extend the 24-hour rule to the qualification assessment to a framework agreement as well.
• Filling the gap regarding the ban on procurement from persons associated with Russia and Belarus, as well as goods originating from these countries, which is in force for ordinary public procurement.
• The extension of exceptions for the conclusion of direct contracts to defense procurement, which are in force for ordinary public procurement, is a positive decision, since such transactions must be conditioned by certain objective circumstances. This contributes to the unification of the legal field.

The effectiveness of a framework agreement can only be assessed within the practice of its application. In conditions of war, we understand that defense procurement is important information for the enemy. Therefore, restricting access to certain categories of information seems justified. At the same time, it is not yet obvious how this will work in practice. Based on the existing provisions, even after the end of martial law, not all categories of information will be open. Therefore, we will monitor the practice of such procurement transactions, and especially the practice of their judicial appeal.

This publication was prepared with the financial support of the European Union. Its content is the sole responsibility of Transparency International Ukraine and does not necessarily reflect the views of the European Union.