In the current market situation, the existing valorization mechanisms have become completely ineffective. The valorization coefficients and, in particular, the applicable valorization limits have made it cease to fulfill its primary role, which (by design) was to compensate contractors for price increases in the market and, consequently, to increase the cost of contract performance.
Artificially limiting valorization with such rising inflation has meant that the compensation that contractors can count on from it does not even minimally cover the losses they incur.
During numerous meetings with clients, we have repeatedly heard that they estimate their losses from global price increases – depending on the scale of the project – at several to even hundreds of millions of zlotys on a single project (!). Nor were they supported by contractual valorization – as the funds they received from this accounted for a mere pittance of the losses they incurred.
To address these issues, we created a working group at DSK to develop:
- A solution that will streamline and make valorization mechanisms more realistic,
- An action strategy that will convince the contracting authority to accept it.
The joint work of our lawyers and engineers has resulted in the preparation of a unique economic and legal argumentation that makes it possible to demonstrate in a clear and concrete manner:
- How ineffective the current valorization mechanisms are and what real losses the contractor is incurring as a result – which required us to do a series of analyses of the contract’s performance to date and analyses for future action,
- How – in a way that is also safe for the contracting authority – to modify the contract or cover the loss that the Contractor has incurred or will incur in the course of the investment.
Once the concept was developed, it was time to develop a proper strategy for action. Taking into account the diversity of procurers and the need for a case-by-case approach, we found one mode to be optimal for achieving our goals.
We received the first opportunity to test the effectiveness of our concept from a contractor for one of the strategic energy projects in Poland. With an extremely demanding contracting authority on the other side, it was necessary to prepare comprehensively for the negotiations.
We began by filing a request for modification of the valorization provisions, with a very specific economic analysis, alternatively requesting payment of an amount giving back undue “lost” receivables, as a result of ineffective valorization.
The conclusions we presented clearly indicated that valorization is not fulfilling its contractual role, but the implementation of just a few of our proposed measures is enough to change this state of affairs.
The arguments we presented required detailed analysis by the investor, who initially had concerns about the scope and feasibility of implementing the postulated proposals through a contract amendment.
Having had a number of experiences, we know that when dealing with procurers, the key is to ensure that they are first and foremost formally secure in the moves they make. As a result, we offered the investor mediation before the Polish Attorney General’s Office as a safe way for the parties to evaluate and possibly implement changes to the contract.
The mediation meetings required us to be perfectly prepared, as both the ordering party and the mediator pointed out the absolute necessity of ensuring the formal and legal correctness of the negotiated changes, as well as their proper justification.
The first success was to convince the contracting authority to recognize our postulated change “in principle” – both economically and legally, which was a great opening point. This is because we have received confirmation that we have taken the right course of action, and it is difficult to argue with our arguments.
Subsequent negotiating rounds focused on the scope of the changes to be made, especially their value. The initial positions of the parties were far apart, but over the course of the talks, with the support of the mediator, they managed to bring them significantly closer.
In the end, the benefit obtained by our client was as much as 75% of the value he initially claimed. Of particular importance, the client was compensated for the ineffective valorization from the beginning of its validity on the contract until its formal termination.
Our activities were appreciated by the Client and well received by the Employer, and the benefits obtained – millions of dollars – were crucial in improving the economic balance of the project.
Given the current market situation, the settlement we obtained should be considered one of the precedents. We are well aware of how difficult it is nowadays to convince contracting authorities to allocate additional funds for the implementation of investments, but our author’s concept proved successful, thanks to its transparency and due justification.
In order to convince the contracting authority, it is necessary to take into account all levels – both legal, economic and factual, and to conduct negotiations accordingly.
Our team’s proprietary methods are also receiving positive responses on other projects, where valorization negotiations are also underway. With the goal of maintaining the effectiveness of our operations, we constantly monitor the market and tailor our solutions to the individual circumstances of each investment.
If you are interested in our working methods and want to try similar activities on your own projects, you are welcome to contact us.
Marta Dziewulska: m.dziewulska@dsk-kancelaria.pl
Jedrzej Witaszczak: j.witaszczak@dsk-kancelaria.pl
Wiktoria Zielinska: w.zielinska@dsk-kancelaria.pl
