What Happens When an SGK Incentive Is Withdrawn During a Public Contract?

Changes to social security contribution costs can materially affect labour-intensive public contracts. If an incentive available when a bid was priced ceases to apply during performance, the contractor may face additional costs.

Background

The company had signed a public procurement service contract before Law No. 6111 entered into force on 1 March 2011. In calculating its bid and labour costs, it had taken account of the five-percentage-point contribution reduction under Article 81 of Law No. 5510. Following changes in legislation and administrative practice, it was denied the incentive for the remaining contract period.

The lower courts’ findings

The company argued that its bid and cost calculations had relied on the incentive in force when the contract was signed. The first-instance court dismissed the claim, and the regional appellate court dismissed the company’s appeal on its merits.

The Court of Cassation’s decision

The 10th Civil Chamber focused on the legal and financial conditions existing when the contract was concluded. It treated the contribution reduction then in force as a lawful element of the contractor’s pricing. It considered the later change to the contract’s financial basis in light of legal certainty and the principle that agreements should be honoured. It concluded that the claim concerning the workplace covered by the contract signed before 1 March 2011 should have been allowed. The regional appellate judgment was set aside and the first-instance judgment reversed.

Does the same result apply to every public contract?

No. The contract date, legislation in force when the bid was prepared and inclusion of the incentive in the cost calculation were decisive considerations. The decision does not mean that every later incentive change automatically produces an outcome favourable to the contractor. Each contract’s date, specifications, pricing structure and applicable legislation need separate assessment.

What this means for employers and contractors

The contribution rates and incentives used in pricing labour-intensive public contracts should be clearly documented. Evidence of the cost assumptions used at the bid date may become important if legislation or administrative practice subsequently changes.

This article provides general information. Each case must be assessed in light of its own circumstances.

Tevfik Özkan