The Contracting Authority's Handling of Appropriate Changes in Construction Contracts

Troels Engvej Hansen & Rie Jean Siiger

Student thesis: Master thesis

Abstract

The thesis examines the contracting authority’s handling of appropriate changes in public construction contracts. It does so by analysing the effects on the economical welfare from negotiations between the tenderer and the contracting authority in a game theoretical framework. The thesis takes its starting point by conducting a thorough analysis of the legal framework regarding the contracting authority’s handling of appropriate changes by examining the relevant sections in the Danish Public Procurement Act. It is found that the contracting authority primarily will have to base appropriate changes on the de minimis threshold of 15% of the contract value or by having pre-determined a clear, precise and unequivocal clause. It is concluded that, as a result of the unforeseeable nature of construction contracts, a clear, precise and unequivocal clause is unlikely to be in place for all possible circumstances. Thus, contracting authorities will often have to enter into negotiations with the tenderer regarding the price of the appropriate change. The thesis hereafter examines these negotiations in a game-theoretical framework. This is done by developing a simple model in which the parties' incentives and negotiations can be analysed through various bargaining schemes as well as the underlying principal-agent problem. It is concluded that, as a result of a combination of time pressure, preferences and the principles of public procurement, the contracting authority will enter into an unfavourable negotiating position and ultimately pay a higher price for the changes. In the integrated part of the thesis, an attempt is made to optimize the current legal situation with respect to overall economical welfare as well for the basic principles and purposes of the Public Procurement Act. This is done by initially analysing the legislature's current approach to the issue at stake. It is concluded that the current approach can be understood as a way to minimize society's costs. It is further concluded that the present legal situation is not found to be efficient, in regard to the scope of the thesis. In conclusion, the thesis states that by implementing cost-plus contracts for de minimis changes, expensive negotiations are avoided while still securing the principles of public procurement, which overall creates a more efficient legal position.

EducationsMSc in Commercial Law, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2019
Number of pages121
SupervisorsMarie-Louise Holle & Henrik Lando