The different types of public contract

Last Updated on Thursday, 27 January, 2022 at 11:09 am by Andre Camilleri

Luca Amato is a senior associate within the Commercial and Corporate Law department of Fenech & Fenech Advocates

Many businesses in Malta count the government as one of their clients. For some, it is their main client. This is understandable when one considers that the government is an entity that runs a country of half a million people. Such day-to-day governance requires the procurement of many services, works and supplies from third parties, as it is not practical for all this to be internally resourced via the public sector itself.

Public procurement legislation goes to great lengths to regulate a fair environment for the procurement of works, services and supplies for the public sector. At the heart of such regulation is the public contract – the fundamental document that will govern the relationship between the public body and the (private) economic operator. Indeed, “procurement” is defined in the law as the acquisition “by means of a public contract” of works, supplies or services from economic operators, whether or not such are intended for a public purpose – the latter statement implying that public procurement is also sometimes required for internal purposes (for example, the procurement of stationery items for public sector offices).

A crucial component of the public contract is that it must be for pecuniary interest. In other words, the contract must necessarily entail some form of financial remuneration for the economic operator.

There are three main types of public contract:

  • public works contracts, where the object is the execution, or both design and execution, of building or civil engineering works and certain other ancillary works. Such contracts would fall under the category of locatio operis contracts, also known as kuntratti ta’ appalt;
  • public supply contracts, where the object is the provision of products or supply of goods, equipment and materials, whether by way of sale, lease, rental, hire purchase or a combination of such;
  • public service contracts, where the object is the provision of services, to the extent that such do not fall within the definition of public works contracts.

Mixed contracts combining two or more of the above in a single document are also allowed. In such cases, the general rule is that the procurement regime pertaining to the main subject of the contract (whether works, services or supplies) would be applied.

Contracts may also be divided into separate lots, meaning a single contract may be split into different parts. Indeed, this is the default rule for contracts exceeding €139,000 in value, although contracting authorities may derogate from this rule by providing a justification for such. Contracting authorities also need to indicate whether a bidder may submit tenders for one, for several or for all of the lots included in a public tender.

Almost all public contracts follow the same format. The full document is generally composed of the contract agreement; special conditions that are tailored on a case-by-case basis; general conditions that apply to all public contracts; a technical specifications/terms of reference/design documentation schedule; the technical and financial offers submitted by the operator at bidding stage; the tenderer’s declarations as included in the tender response document; any other documents that may be relevant on a case-by-case basis. These documents are updated from time to time by the Department of Contracts. Additionally, most contracts will also include the requirement of a performance guarantee, whereby the economic operator will be required to procure a bond from its banker (typically 4% or 10% of the contract value, depending on the contract) which guarantees the performance of the operator’s obligations, failing which the bond will be drawn down.

Public contracts are entered into by contracting authorities, namely the public bodies that are governed by public law. Exactly which contracting authority will draw up, administer and enter into the documents will depend on, among other things, the contract value and the subject matter of the contract. Contracting authorities may also procure jointly via: (i) central purchasing bodies (currently the Department of Contracts and the Malta Information Technology Agency), which bodies are mandated to procure on behalf of other contracting authorities; (ii) framework agreements, which are agreements between one or more contracting authorities and one or more economic operators, the purpose of which is to establish the terms governing contracts to be awarded during a given period, in particular with regard to price and quality; and (iii) dynamic purchasing systems, which are akin to framework agreements but are run fully electronically and allow new economic operators to join the system at any time. Occasional joint procurement between two or more contracting authorities is also allowed, subject to the Director of Contracts’ approval.

Finally, an additional type of contract is the concession contract, which is also a public contract of sorts. There are two types of concession contract under Maltese law – works concessions and services concessions – both of which are also for pecuniary interest. The contracts envisage the execution of works or provision of services, the consideration for which consists either in the right to exploit the works/services that are the subject of the contract or in that same right together with an additional payment from the contracting authority in question. Consider the building of a road network or operation of a public port. The concessionaire might be solely remunerated from the users of the network/port or from such users together with a fee from the contracting authority. In any event, the aim of such contracts is to transfer the operating risk to the concessionaire, such that they may or may not recoup their investment depending on market conditions. It is for this reason that such contracts are generally reserved for projects of a substantial magnitude.

This article is Part II of a series of articles on public procurement in Malta.

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