Public pricing law in Germany

by Dr. Marc Pauka[1]

Public contracts awarded by the Federal Government of Germany and other contracting authorities are subject to the statutory scope of public pricing law according to the Ordinance PR 30/53 and the LSP. The main principles and the obligations that follow them are explained in this article.

Part A. Overview

Concept and purpose of public pricing law

In the public procurement law in Germany, especially in the defence and security sector, public pricing law is of particular importance. Public pricing law regulates the maximum price that the contractor of a supply or service contract within the meaning of Ordinance PR 30/53 may charge. If a price audit by the price audit authority (“Preisprüfungsbehörde”) shows that a contractor's price is above the maximum permissible price, this may constitute a violation of public pricing law and result in the awarding public entity being able to reclaim the difference.

Therefore, it is not beyond all probability that the risk of a claim for recovery will materialize in these sectors: The price audit statistics of the Federal Ministry for Economic Affairs and Energy of 17 June 2020 show a total of 1654 audited orders for 2019 with a total order volume of approx. EUR 2.5 billion, of which a total of approx. EUR 41 million was reclaimed in 521 orders.[2] This means that about one third of all inspected orders are reclaimed. In practice, a predominant focus of price audits on the basis of Ordinance PR 30/53 is in the arms industry. While price audits under Ordinance PR 30/53 are a rare exception outside the defence sector, experience has shown that the application of price rules in the defence sector is the rule.

The concept of public pricing law covers the legal regulations that determine the permissible level of the price in a public contract. The provisions of price law are the Ordinance PR No. 30/53 on Prices in Public Contracts of 21.11.1953 (Ordinance PR 30/53) and its annex, the Guiding Principles for Price Determination on the Basis of Cost Prices (“Leitsätze für die Preisermittlung auf Grund von Selbstkosten”, LSP). Due to these regulations, contractors are limited in their freedom of calculating their prices. According to the case law of the Federal Constitutional Court, this restriction of freedom of contract is to be accepted as long as the principle of proportionality is observed.

The regulations of the public pricing law are additionally explained by the first “Edict concerning the implementation of Regulation PR 30/53” and the “Guidelines for contracting authorities on the application of Ordinance PR 30/53”. Both documents do not have the character of a legal norm, they only provide assistance in the interpretation of the legal norms. In the defence sector, the price regulations are also subject to supplementary provisions in the standard contractual clauses of the Federal Ministry of Defence and the “Federal Office of Bundeswehr Equipment, Information Technology and In-Service Support” (BAAINBw), which are highly relevant in practice. For example, the contracts of the BAAINBw regularly also contain the additional contractual conditions of the Federal Ministry of Defence to the Procurement Regulations for Services Part B (ZVB/BMVg).[3] Furthermore, the contracts regularly include the special contractual conditions for cost prices, including payment terms of Annex K to the offer/order letter or the Additional Terms and Conditions for Cost Prices of Annex P.[4]

The regulatory purpose of Ordinance PR 30/53 is primarily to give priority to the market price over the cost price, as far as possible. Another important task of public pricing law is to maintain the general price level. As early as 1958, the Federal Constitutional Court ruled that the purpose and limits of public price law are determined by § 2 of the Price Act, which aims to "maintain the price level for all prices, the price level as a whole, i.e. to stabilize the general price level". This is mainly done by the fact that public pricing law sets the appropriate price in the form of a maximum permissible price for public contracts, thus preventing price-increasing tendencies in other markets. 

Part B. Overview of pricing law and price review

1.    The maximum price principle

The maximum price principle follows from § 1 para. 3 Ordinance PR 30/53. According to this standard, higher prices may not be demanded, promised, agreed, accepted or granted for services based on public contracts than is permitted under the provisions of the Ordinance.

It follows from the express “provision of a maximum price”, which may not be exceeded, that it is permissible to fall below this maximum price. Public pricing law therefore does not regulate which price is the appropriate price, but only which price may not be exceeded. The rule that higher prices may not be demanded, promised, agreed, accepted or granted prohibits exceeding the maximum price in any form. Not only the agreement, already the claim in the contractor's offer or the promise of higher prices by the contracting authority, e.g. in negotiations, is prohibited. Thus, the regulation makes it clear that both tenderers and contracting entities are subject to maximum price fixing.

An inadmissible exceedance of the permissible maximum price can be punished as an administrative offence by the authorities responsible for price formation and price monitoring (“Preisüberwachungsbehörde”) in accordance with § 11 Ordinance PR 30/53 in conjunction with the provisions of the Economic Criminal Act. In practice, however, this happens extremely rarely.

2.        The fixed-price principle

According to § 1 para. 2 sentence 1 Ordinance PR 30/53, fixed prices are to be agreed as far as the circumstances of the order allow. A fixed price exists if the type and scope of the service are clearly determined and a final binding agreement on performance and consideration is made. Fixed prices within the meaning of § 1 Ordinance PR 30/53 are the market price according to § 4 Ordinance PR 30/53 and the fixed cost price according to § 6 para. 1 and 2 Ordinance PR 30/53.

On the other hand, the “cost guide price” (“Selbstkostenrichtpreis”) according to § 6 para. 3 VO/PR 30/53 and the “cost reimbursement price” (“Selbstkostenerstattungspreis”) according to § 7 VO PR 30/53 are not fixed prices. Accordingly, there is no fixed price if remuneration "on a cost basis" without a maximum limit is agreed in a supply contract.

The principle of agreeing on fixed prices does not preclude the agreement of price escalation clauses. Rather, such so-called price reservations are generally regarded as permissible, since these clauses only adjust the fixed prices to changed economic circumstances. The basic character of the prices as fixed prices does not change.

3.        The “Price Stairs”

The price types that define the maximum permissible prices are not only conclusively regulated in terms of their number. The Ordinance PR also regulates a mandatory precedence of application of the price types among each other (so-called “price stairs”):

First of all, § 3 of Ordinance PR 30/53 clarifies that general and special price regulations take precedence over the other price types of Ordinance PR 30/53. The general and specific pricing rules are therefore the first step of the price stairs. Such regulations exist in Germany, for example, for tobacco products, medicines or numerous transport services. Such regulations do not exist for IT services, for example.

The second stage is represented by market prices. According to §§ 1 (1) and 5 (1) no. 2 of Ordinance PR 30/53, for services on the basis of public contracts, preference is generally to be given to market prices in the meaning of § 4 of Ordinance PR 30/53 over cost prices in the meaning of §§ 5 to 8 of Ordinance PR 30/53, so that cost prices may only be agreed in exceptional cases. Market prices are, for example, list prices for software of the shelf that are generally and continuously applied.

Pursuant to § 5.1 no. 1 of the Ordinance PR 30/53, the cost prices follow thereafter, which may only be agreed in exceptional cases under this provision if price regulations pursuant to § 3 of Ordinance PR 30/53 do not exist for the service and market prices pursuant to § 4 of Ordinance PR 30/53 cannot be determined. According to § 6 Ordinance PR 30/53, there is a further order within the cost prices due to the fixed price principle (§ 1 para. 1 sentence 1 Ordinance PR 30/53). According to § 6 para. 1 Ordinance PR 30/53, cost prices are to be agreed as fixed cost prices if possible. Fixed cost prices thus represent the third stage of the price stiars.

If a fixed cost price cannot be determined, a target price must be agreed in accordance with § 6 para. 3 Ordinance PR 30/53 (fourth step of the price stairs).

Only if a fixed price determination is not possible, according to § 7 para. 1 Ordinance PR 30/53 may cost reimbursement prices be agreed (fifth step of the price stairs).

In IT service contracts, e.g. for programming services, the total price is usually stated as a cost reimbursement price with a maximum limit, since the number of hours required usually cannot be calculated in advance.

The order of the price types that must be observed is therefore:

1. general and specific price rules;

2. market prices;

3. fixed cost prices (“Selbstkostenfestpreise”),

4. cost guide prices (“Selbstkostebnrichtpreise”) and

5. cost reimbursement prices (“Selbstkostenerstattungspreise”).

The price stairs also apply to price components: In public IT contracts for services e.g. the total price is regularly agreed as a cost reimbursement price, but the daily rates as a price component are then agreed as market prices.

4.        The principle of unity in the in the Ordinance PR 30/53

The principle of unity means that the prices of Ordinance PR 30/53 are a closed price system and the regulations on the price types are final. The contracting parties to a public contract are not entitled to agree on different types of prices. On the one hand, it follows from this that only those types of price that are regulated in the regulation can be applied to public contracts. On the other hand, it follows that it is irrelevant for the legal assessment what price the contracting parties have stated in the contract. Due to the legal precedence of the provisions of Ordinance PR 30/53 and the principle of unity of the price types, only the price that is permitted under the regulation applies by law. The price stairs therefore take precedence over all contractual agreements on the price type.

In practice, this turns out to be particularly problematic when market prices are agreed, but the price audit subsequently determines a cost price as the correct price type. It is then often very difficult to prove the appropriateness of the cost price, since market prices have to be documented in a completely different way. High recovery claims from the contracting authority are often the result.

5.        Services of subcontractors

In contrast to the contract between the contracting authority and the main contractor, the latter's contract with subcontractor is not automatically covered by the scope of public pricing law. Rather, according to § 2 para. 4 no. 1 Ordinance PR 30/53, the following further requirements must be met: Firstly, the contracting authority must express a request that the subcontractor’s services are to be included in the scope of the public pricing law. Secondly, the subcontractor must have become aware of this request before or at the time of closing of his contract or, thirdly, he must agree to the application of the public pricing law after the closing of the subcontract.

The request of the contracting authority must be expressed to the main contractor and must have been made in good time and expressly in order for this to be legally effective. In addition, it must be proportionate. In view of the importance of maintaining the price level, proportionality will generally be given if the subcontractor’s services in question have a significant influence on the price of the main contractor.

In the business area of the Federal Ministry of Defence or the BAAINBw, para. VII.2 of the Appendix Sheet P or No. VIII.2 of Annex Sheet K states that "when awarding subservices to third parties whose total value (excluding VAT) per company exceeds EUR 50,000 per company", the main contractor is obliged, inter alia, to inform the subcontractors before or at the time of closing of the subcontract that the awarding authority requires the application of Ordinance PR No. 30/53 to the subcontract. If the main contractor does not comply with this obligation, the authority is entitled to withhold an amount equal to 10% of the price of the subcontract.

6.        The price audit

A price audit may be initiated ex officio by the price auditing authority. However, price auditing authorities regularly take action at the request of the awarding authority. The price audit procedure shall commence with the notification by the price auditing authority to the contractor that a price audit procedure has been initiated and a request to provide the documents for a particular contract.

The actual audit is regularly carried out in two steps: First, especially in the case of companies that carry out many public contracts, a so-called fundamental audit (“Grundsatzprüfung”) is carried out. The focus of this audit, which forms the basis of all other individual audits, is the audit of overhead costs and the surcharge rates to be derived from them. As a rule, the fundamental audit also includes the determination of the appropriateness of employee hourly rates, which are of great practical importance, especially for IT services.

The fundamental audit is followed by the individual contract audit (“Einzalauftragsprüfung”), in which the costs of the individual contracts are examined. The findings of the fundamental audit are incorporated into the individual contract review. The result of the individual contract audit shall be the maximum allowable price of the respective public contract.

The findings of the price auditing authority are usually explained in a final meeting with the contractor. They are then recorded in the audit report of the price monitoring authority and communicated to both the client and the contractor. According to the prevailing opinion in the literature, the audit report does not constitute an administrative act. It is therefore not subject to judicial review. Only when the client asserts a recovery on the basis of the price audit report can the result of the price audit be reviewed by the courts.

The Client may use the price audit report to assert claims for recovery against the Contractor. With regard to the limitation period of claims in public pricing law, a distinction must be made: A claim of the client against the contractor for repayment of the overpayment shall become statute-barred in accordance with the general principles of law pursuant to §§ 199 para. 1, 195 German Civil Code (“Bürgerliches Gesetzbich, BGB”) within three years beginning with the end of the year in which the claim arose and the contracting authority was informed of the circumstances, which substantiate the claim. A sovereign price audit, on the other hand, is not a claim under civil law and is therefore not subject to the provisions of the statute of limitations.

Price audits are the responsibility of the price auditing authorities as a sovereign task. However, in the so-called "departmental agreement" of 1 February 2010, the Federal Ministry of Defence and the BAAINBw[5] stipulated that the BAAINBw (at that time still known as the Federal Office of Defence Technology and Procurement, BWB) has the right to agree on price audits with its contractors on a contractual basis. In this way, the BAAINBw agree with the contractor in accordance with para. 1 f. of the departmental agreement in the case of fixed cost prices and cost target prices for a preliminary calculation audit on a contractual basis. The audit of cost reimbursement prices is ‑ in accordance with para. 3 of the departmental agreement – always in the jurisdiction of the price auditing authorities. However, the BAAINBw may agree with the contractor on a contractual basis to price audits  if the price auditing authority is unable to start the audit within one year of the price audit request.

Corresponding contractual agreements can be found in para. II. and II. of the Appendix Sheet K and Appendix Sheet P.

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[1] Dr. Marc Pauka is a specialist lawyer for public procurement law.

[2] Price audit statistics "Audit of German defence, stationing, other public contracts and grants in the months of January - December 2019" of the BMWi available at https://www.bmwi.de/Redaktion/ DE/Artikel/Wirtschaft/vergabeverfahren.html

[3] Additional Terms and Conditions of the Federal Ministry of Defence to the Procurement Regulations for Services Part B (ZVB/BMVg) of 28 January 1998 in the version of the first amendment of 10.05.2001; available at: https://www.bundeswehr.de/de/organisation/ausruestung-baainbw/vergabe/formulare

[4] Appendix sheets K and P are also available at: https://www.bundeswehr.de/de/organisation/ ausruestung-baainbw/vergabe/formulare

[5] The departmental agreement is available at: https://www.bundeswehr.de/de/organisation/ ausruestung-baainbw/vergabe/formulare Neuer Text