Other Related Documents

11. Contract award

11.1 Review mechanism

11.1.1 Contracting authorities are encouraged to establish and maintain a formal challenge mechanism for all contractual proposals, including those within departmental authority, those sent to the Department of Public Works and Government Services Canada, and those submitted to the Treasury Board. This mechanism could range from a formal central review board to divisional or regional advisory groups, depending on the departmental organization and magnitude of contracting. Decisions made by these review units should be recorded and available for subsequent internal audits and for the periodic audits or evaluations conducted by the Auditor General or by the Treasury Board Secretariat. Departmental officials appointed to review contracts should include the appropriate senior financial officer as the chairperson in all cases. Others should be from disparate program areas to ensure balance. The appropriate senior departmental personnel officer should be included in the review of contracts for the services of individuals, and the appropriate senior materiel officer when materiel or materiel-related services are reviewed. Those in a possible conflict of interest situation are to declare themselves and be replaced. Summaries of the contract review proceedings should be provided regularly to deputy heads so that they can determine whether their delegated signing powers are being properly administered.

11.1.2 The review methodology should address such basics as:

• is the proposal within the contracting authorities' legislative mandate?
• are funds available?
• are the competitive requirements of the regulations observed?
• are the departmental signing authorities observed?
• does the proposal have legal clearance where required? and
• is the proposal in line with government policies on bilingualism, employment equity, conflict of interest, etc.?

The review mechanism should also be able to determine if the proposed work is actually required. It is possible that other centres of responsibility within a department or some other government agency has already carried out work that will satisfy the requirement. The review should look at more general considerations, depending on the circumstances such as whether the responsibility centre is the appropriate one to handle the work proposed.

11.2 Approval requirements

11.2.1 Treasury Board approval. The establishment of dollar limits above which Treasury Board authority is required is based on the premise that, at some level of size or complexity, the collective judgement of ministers should be brought to bear upon a decision to award a contract. The Financial Administration Act envisages prescribed ceilings (see sub-section 41(1)) to provide a central mechanism that ensures that appropriated money is spent effectively.

11.2.2 The powers of the Governor in Council to establish contract ceilings have been delegated to the Treasury Board under P.C. 1986-2746, Dec. 4, 1986.

11.2.3 The Treasury Board has established and periodically revises the contract dollar levels. These levels reflect the desire to permit contracting authorities to carry out their responsibilities while taking contracting risks and the overall interests of the government into account. Appendix C contains the Treasury Board Contracts Directive which specifies the approved levels above which Treasury Board authority is required before entering into a contract. See Appendix H for how to prepare requests for contract approvals, including submissions to the Treasury Board and applications to internal departmental authorities. For the inclusion in submissions of foreseeable amendments to contracts, see article 12.9.3. The total value of any contract should include all related costs e.g., profit, overhead, administration, travel, taxes, etc.

11.2.4 The Treasury Board Contracts Directive distinguishes between competitive and non-competitive contracts for determining the contract approval levels delegated to contracting authorities. It also differentiates between the traditional and electronic bidding processes for competitive procurement of goods (where authority has been delegated by the Minister of Public Works and Government Services) and services. By using electronic bidding methodology, a contracting authority increases its authority to enter into and amend a contract. For contracts that do not fall within the definition of competitive contracts, the non-competitive dollar levels of authority apply.

11.2.5 In many cases, prior approval of the program and related funding is sufficient for departments to proceed to contract. However, program approval does not carry with it implicit authority to enter into contract and, when significant risks and issues are involved, specific review and approval by Treasury Board should be obtained, even though the value of the contract is below the established limit. Treasury Board approval may also be requested for contracts that involve a substantial expenditure or unusual circumstances of general public interest. In addition, Treasury Board participation may be advisable in certain situations where interdepartmental responsibilities are being co-ordinated, when large follow-on contracts may be required, or where other national policies and objectives are related.

11.2.6 Most contracts handled by the common service agencies and departments with major contracting activities are recognized in the Treasury Board Contracts Directive by the higher levels of authority granted. The various dollar levels are reviewed periodically and adjusted to serve the best interests of the government. Special dollar levels may be prescribed by the Treasury Board for specific projects or programs for unique operational needs. The performance of contracting authorities in the above situations will influence decisions on levels of authority.

11.2.7 Contract splitting. Contracting authorities must not split contracts or contract amendments in order to avoid obtaining either the approval required by statute, the Treasury Board Contracts Directive or appropriate management approval within the department or agency.

11.2.8 Requirements for specific Treasury Board approval. As specified in Section 4.1.6, Treasury Board approval is required prior to entering into a contract or an amendment with a dollar value that exceeds the limits prescribed in the Treasury Board Contracts Directive. Other situations where prior Treasury Board approval should be sought includes, but is not limited to:

1. making advance payments if the contract or amendment requires Treasury Board approval (see section 8(2) of the Government Contracts Regulations, Appendix B)
2. entering into a contract with a former public servant in receipt of a pension where the total fee exceeds $5,000 during the lump sum payment period;
3. entering into a non-competitive contract with a former public servant in receipt of a pension where the total value of the contract exceeds $25,000;
4. entering into a competitive contract with a former public servant in receipt of a pension where the total value of the contract exceeds $100,000
5. for departments other than Public Works and Government Services Canada, entering into a contract containing provisions that limit the proposed contractor's liability;
6. entering into an initial contract that is within the department's contracting limits but where large follow-on contracts and/or amendments are planned;
7. entering into a contract where unusual circumstances of general public interest exist or where significant issues and risks are involved, even if the contract is within the department's contracting limits;
8. entering into a contract involving significant national policies and/or objectives, even if the contract is within the department's contracting limits;
9. requests for increased contracting authority or exceptional contracting authority; and
10. derogations from Treasury Board policies.

11.2.9 Emergency contracting. Contracting authorities may enter into contracts in response to a pressing emergency situation, as provided for in Part III of the Treasury Board Contracts Directive (see Appendix C). In circumstances deemed as a pressing emergency as defined in Appendix A, contract proposals that would normally require prior Treasury Board approval may be awarded and amended without the approval of the Treasury Board up to a total value (including any amendments) of $1,000,000. The amending authority offers contracting authorities the possibility of entering immediately into lower dollar value contracts to address the emergency situation and then amending them if necessary, once the scope of work involved is better defined. If time permits, the authorization of the Treasury Board should always be sought if the proposed contract expenditure exceeds the approved contracting authority level.

As suggested in paragraph 11.2.10, exercise of emergency contract authority should be limited to the most senior delegated official available.

As stated in the Policy requirements, use of the emergency contracting authority is to be explained in a report to the Treasury Board Secretariat within 60 days of the work being authorized or initiated. This report should detail the circumstances, the type and value of the contract awarded, whether it was possible to seek bids, and the delegation level at which the use of the emergency authority was approved. Contracting authorities should institute appropriate internal guidelines to ensure that the emergency authority is not abused.

11.2.10 Delegation of contracting authority. Contracting authorities should establish some differentiation of authority levels within the internal delegation of authority. Higher expenditures, complex situations, or very sensitive contracts should receive approval by a more senior level.

11.2.11 Once the contract proposal is approved by the appropriate authority, the actual contract documents may be executed.

11.2.12 Ratification of contracts. It is recognized that a contracting authority may have inadvertently entered into a contract without previously having obtained the required authority from the Treasury Board as a result of

• an administrative error; or
• a pressing emergency (Article 11.2.9), but where the emergency authority to contract has not been used and reported to the Treasury Board within 60 days.

In either of the preceding circumstances, if a contracting authority enters into a contract without obtaining the authority of the Treasury Board when such authority should have been obtained, a submission seeking ratification by the Treasury Board of the contracting or administrative action is to be made as soon as possible (preferably within 60 days of the work being authorized or initiated by the contracting authority). This submission for ratification of the contracting action should

• indicate that the minister (the Contracting Authority) of the department has been informed of the intended action, and has agreed to the commencement of work prior to seeking Treasury Board's ratification;
• explain the circumstances, the type and value of the contract awarded, and whether it was possible to seek bids; and
• where applicable, outline what corrective measures have been taken to minimize administrative oversights with respect to the awarding of contracts that require Treasury Board approval.

11.3 Government security policy

As stipulated in article 4.2, Related requirements, the government Security Policy is to be applied equally to procurement contracts as it is to internal operations. Where contracts or the bid solicitation process require access to Designated or Classified information by the contractor or where such contracts or bidding process involve the storage and/or processing of designated or classified information on the contractors premises, when it is the user department itself which is the contracting authority, consideration should be given to seeking guidance and/or assistance from common service organizations or contracting through a common service organization that has the resources to ensure compliance with the security policy and standards.

11.4 Contractual arrangements with other governments

11.4.1 Departments and agencies may, pursuant to section 3 of the Contracting Policy, arrange transactions that involve the transfer of goods, services or real property between departments, Crown Corporations, provinces, municipalities and the Territories. Transactions between the federal contracting authorities and provincial or municipal entities are not contracts pursuant to the Government Contracts Regulations or the Contracting Policy. These kinds of arrangements are usually covered in joint agreements.

11.4.2 Deleted.

11.4.3 Deleted.

12. Contract administration

12.1 General

12.1.1 Contracting authorities should manage and administer their contracts in a manner that ensures that they are successfully executed in accordance with the agreed terms of time, cost and performance.

12.1.2 Contract DocumentationThe terms and conditions of any contract issued pursuant to the Government Contracts Regulations and this Contracting Policy should be formulated in writing. This includes but is not limited to hard copy documents, facsimile copies or other electronic means.

12.1.3 Sanctions. If the contracting policy is ignored or if contracting practices or contract administration are not acceptable, the Treasury Board may direct that sanctions be imposed either on the contracting authority (the institution) or on the officials responsible. Sanctions may include any or all of the following:

1. revocation of contracting authority or reduction of the dollar levels above which Treasury Board approval must be obtained, either for a specified project or program or for a specific period of time;
2. establishment of special financial allotments within the funds allocated to the contracting authority which would limit spending to certain purposes or even require specific Treasury Board approval;
3. instructions to the contracting authority to apply the sanctions in the personnel policies of the Government of Canada against individual employees who have ignored the contracting policy.

Officials responsible for the management of contracts should be made aware of possible institutional or personal sanctions.

12.1.4 Canadian International Trade Tribunal. NAFTA, WTO-AGP and AIT require that members to the agreements maintain an independent bid challenge authority. The Canadian International Trade Tribunal (CITT) has been designated as the bid challenge authority for Canada for all three agreements. A potential supplier may file a complaint concerning a procurement practice to the CITT if the supplier is concerned that any part of the procurement process was unfair or discriminatory under the three trade agreements. In dealing with a complaint, the Tribunal must determine whether the government department or agency responsible for the procurement under review has complied with the requirements of NAFTA, WTO-AGP and AIT and such other procedural requirements, as prescribed in the Canadian International Trade Tribunal Procurement Inquiry Regulations. Information on the CITT and its complaint and inquiry process, are contained in the CITT publication Procurement Review Process - A Descriptive Guide. The CITT has the statutory authority to award the complainant reasonable costs associated with responding to the solicitation and filing the complaint. In addition, the CITT is authorized to:

1. recommend a delay in the awarding of a contract during the resolution of the bid protest;
2. issue a recommendation to resolve the bid protest, which may include directing the contracting authority to re-evaluate offers, terminate the contract or renew the competition process;
3. recommend the award of compensation for lost profit; or
4. make written recommendations to the contracting authority concerning practices that the CITT considers to be inconsistent with the agreements.

12.2 Financial considerations

12.2.1 The Financial Administration Act. Sections 32, 33 and 34 of the Financial Administration Act prescribes various financial controls in contract expenditures. Usually the financial aspects of contract administration are the responsibility of financial managers, but contract administrators should have a basic knowledge of the law and the financial management policies of the government. Much of this information is set out in the Comptrollership volume of the Treasury Board Manual issued by the Treasury Board Secretariat.

12.2.2 Advance Payments. Section 8 of the Government Contracts Regulations permits advance payments. If advance payment clauses are to be included in contracts, they must adhere to the principles of parliamentary control, the requirements of the Financial Administration Act (paragraph 33(3)(a)), and the provisions of the appropriation Acts themselves. Where contract approval is within departmental authority, advance payments can be approved by the department. However, as required by the Regulations, where contract approval is beyond departmental authority, advance payments require Treasury Board approval.

12.2.3 Preconditions For Using Advance Payments. Advance payments should be considered only in extraordinary circumstances, that is, when they are considered essential to program objectives. Contractors are expected to finance their work from their reserves or through commercial financing based on the anticipated payments from the contracting authority for full or partial completion of the work. Contracting authorities should consider the financing and interest costs to the Crown, as well as the method of recovery, when negotiating advance payments and should evaluate these costs when comparing other alternatives.

12.2.4 Further to the preceding, contracting authorities should consider including advance or progress payments in a contract only if:

1. adequate security for the payment is ensured;
2. the Crown receives value commensurate with the amount of the payment;
3. the contracting authority has adequate funds to provide the financing; and
4. one or more of the following criteria are met;
   1. economic advantage to the Crown;
   2. contractor could suffer hardship or provide financing only with difficulty or at rates considered to be uneconomic in relation to prevailing chartered bank prime lending rates;
   3. the value of the contract is considered to be beyond the assessed financial capabilities of the contractor;
   4. long duration for the contract performance;
   5. an entrenched tradition or practice or receiving advance or progress payments for the purchaser exists in a particular industry or segment of industry. (Supply Policy Manual Article 4202)

Advance payments are not necessarily warranted even if the preceding preconditions are met. While progress payments may be more common, advance payments are normally very much the exception.

12.2.5 Timing and Amount of Advance Payments. Except in extraordinary circumstances, in accordance with the principles of annual appropriations and the basis on which funds are appropriated by Parliament,

1. advance payments cannot be made in one fiscal year in respect of a contract that does not start until the next fiscal year;
2. where an advance payment is in respect of extraordinary start-up costs, the payment is to relate to, and cannot exceed, the actual start-up costs expected to be incurred by the contractor in the fiscal year in which the payment is made; otherwise, advance payments in any given fiscal year must relate to, and cannot exceed, the value of the work to be performed or the goods or services reasonably expected to be provided during that year;
3. multi-year maintenance contracts are to, as a minimum, provide for annual payments for each year of the contract, and multi-year licensing agreements should, to the extent possible, do the same; and
4. departments cannot carry funds over from one fiscal year to the next by transferring them to revolving funds or specified purpose accounts, or by pre-paying for goods and services from revolving funds.

12.2.6 Payments. As required by article 4.2, Related requirements, work performed or goods received under a contract are to be paid for in accordance with the government's payment on due date policy on the payment of accounts (see the Comptrollership policies) as follows:

1. the standard payment period is 30 days;
2. departments and agencies are to ensure that their systems and procedures are designed to attain this standard;
3. the payment period is measured from the date that the goods or services were received in acceptable condition at the location(s) specified in the contract or the date that an invoice in proper form was received, whichever is later;
4. interest shall be paid on payments made later than the due date where expressly authorized by contract or statute. For that reason, clauses authorizing the payment of interest are included in government contracts.

Payments are scheduled so that they are made as close as possible to, but no later than, the due date. Except where statutes, contracts or fee schedules approved by federal regulatory agencies provide otherwise:

• interest is paid automatically on accounts that are not paid on the due date, 30 days from receipt of an invoice or 30 days from acceptance of goods or service, whichever is later, if the government is responsible for the delay (i.e., accounts outstanding for 50 days or more when the standard payment period of 30 days applies);
• the period for which interest is paid automatically is measured from the due date to the date that the payment is issued.

12.2.7 The terms of the contract, where applicable, should state the dates when interim and progress payments are due. Progress payments should normally be made within the due date except where other terms are agreed to in the contract.

12.2.8 Interest is computed by multiplying the amount due by the applicable rate (see article 12.2.9 below) and the time period expressed as a fraction of a year in days, i.e., the number of days in the period for which interest is payable over a denominator of 365.

12.2.9 The rate of interest payable is the average daily Bank of Canada rate for the month preceding the current month plus 3%.

12.2.10 Exceptions. When it is more advantageous to the government, because of factors such as discounts, to pay accounts earlier, or when the terms and conditions for payment and interest under a contract are different from the 30-day standard, the standard payment period may be set aside.

12.2.11 Interest is not paid on an interim basis, on interest charges, or on advance payments that are late.

12.2.12 When goods or services are not considered to be in accordance with the contract, certification under Section 34 of the Financial Administration Act cannot be given. As required by the payment on due date policy, departments must notify suppliers within 15 days if the contract performance is disputed. The 30 day payment period begins upon receipt of the replacement goods or services or the revised invoice or additional information.

12.3 Contract documentation

12.3.1 Procurement files shall be established and structured to facilitate management oversight with a complete audit trail that contains contracting details related to relevant communications and decisions including the identification of involved officials and contracting approval authorities.

12.3.2 Under the North American Free Trade Organization, the World Trade Organization - Agreement on Government Procurement, and the Agreement on Internal Trade, Contracting authorities shall guarantee that complete documentation and records, including a signed and dated record of all communications with suppliers, are maintained to allow verification by the Canadian International Trade Tribunal that the procurement process was carried out in accordance with the agreements.

12.4 Contract documentation content

12.4.1 All contract documents should contain conditions and clauses that reflect the requirements of the work to be produced or supplied under the contract. In addition, certain clauses are applicable for all contracts. As stated in article 4.2, Related requirements, other necessary clauses will include: a provision for paying interest when the Crown causes a delay in paying the contractor; a clause to permit the Crown to pay the Goods and Services Tax or the Harmonized Sales Tax; a clause covering possible conflict of interest situations; and, if relevant, a clause addressing intellectual property issues, including the ownership of intellectual property. An appropriate termination clause is especially important so that the contracting authority may end the contract if, for example, there is a change in the government's priorities or a cutback in funding. The Department of Justice representative in each department or agency should be consulted about contract terms.

12.4.2 As stated in article 4.2, the Standard Government Construction Contract has been prescribed for all construction contracts that exceed $100,000. The basic policy governing the principles and expression of the Standard Government Construction Contract is the perogative of the Treasury Board. However, the style and content are the responsibility of the Public Works and Government Services Canada.

12.4.3 When the Crown or the contracting authority is referred to in a contract, the proper designation is "Her Majesty the Queen in right of Canada, referred to in the contract as "Her Majesty," represented by the Minister of (the legal name of the contracting authority) referred to in the contract as the "Minister"." The applied titles of departments or agencies should not be used. Legal and applied titles for departments and agencies are set out in "Titles of Organizations", Federal Identity Program, issued by Treasury Board.

12.5 Criminal Code, the Financial Administration Act and the Trade Agreements

12.5.1 The Criminal Code of Canada, Section 748, Sub-Section 3 prohibits anyone who has been convicted of an offence under:

• Section 121, Frauds upon the Government;
• Section 124, Selling or Purchasing Office; or
• Section 418, Selling Defective Stores to Her Majesty,

from holding public office, contracting with the government or receiving a benefit from a government contract, unless the Governor in Council has restored (in whole or in part) these capabilities to the individual or the individual has received a pardon.

12.5.2 As stated in article 4.2, Related requirements, contracts are subject to the screening requirements of the Security Policy of the Government of Canada. The contracting authority is responsible for ensuring compliance. Contract administrators, therefore, must ensure that any necessary security clearances and/or reliability checks are carried out so that contractors and their employees, where applicable, are acceptable under the policy (see the Security Policy of the Government of Canada issued by Treasury Board).

12.5.3 As required by the Prime Minister's Conflict of Interest and Post Employment Code for Public Office Holders, September 1985, contracting authorities are to ensure that all requirements are met. These include inserting clauses, approved by Treasury Board, into every contract entered into by the Crown. They are contained in Appendix G.

12.5.4 Section 80 of the Financial Administration Act makes it an indictable offence if any regulations under the Act, including the Government Contracts Regulations, are violated. This section also applies to officers or employees who know of violations and neglect to report them. Section 81 makes the offering of bribes to influence the decisions of officials an indictable offence.

12.5.5 As required by the North American Free Trade Agreement, the World Trade Organization - Agreement on Government Procurement, and the Agreement on Internal Trade, contracting authorities must ensure that all requirements are met. Failure to comply with the agreements can result in an challenge under the Canadian International Trade Tribunal.

12.6 Contract performance

12.6.1 The management and administration of contracts involves many activities to ensure the fulfillment of a contract. This also covers those activities or events that can alter or disrupt the performance of a contract e.g., default of a contractor, disputes and contract amendments. This policy applies equally well to those other activities associated with the management and administration of contracts.

12.6.2 Whenever the satisfactory fulfillment of a contract is jeopardized, contracting authorities should take the necessary steps to serve and protect the interests of the Crown in meeting the terms of the contract, and then to protect (where appropriate) the interests of other parties involved in the contract. Contract disputes should be dealt with fairly and as promptly as possible. Contract amendments should be made with the same care that went into the original contract.

12.7 Non-performance of contractor

12.7.1 In every case of the impending or actual bankruptcy of a contractor, the contracting authority should contact the departmental legal adviser and ensure that any proposed action will not prejudice the Crown's legal position. When the bankrupt contractor is a company resident outside Canada, action should be taken in accordance with the bankruptcy law of the country concerned. Legal advice should be obtained locally, if necessary.

12.7.2 As stated in article 4.2, Related requirements, where a contractor has provided contract financial security in the form of a bill of exchange, a government-guaranteed bond, or a letter of credit, the contracting authority is to redeem these securities to satisfy the requirements of the contract. Any excess amounts are returned to the contractor after all federal claims have been satisfied.

12.7.3 When a defaulting contractor has provided financial security in the form of a surety performance bond or a surety payment bond, the bonding company becomes liable, up to the amount of and in accordance with the terms and conditions of the bond. In the case of a performance bond, the bonding company's liability is only to the Crown; under a payment bond, claims may be made on the bonding company by all those who have a direct contract with the principal contractor or a sub-contractor for the supply of labour, material or services.

12.7.4 Claims by Sub-subcontractors. During the course of a construction contract or when it is completed, a second-tier claimant, either a sub-subcontractor or a third level supplier, may make a claim against the prime contractor. When one or more such claims are made against the prime contractor, the posting of a claimant's payment bond by the prime contractor will permit regular payments under the contract while the disputes are being settled between the various parties.

12.7.5 When the contract of a defaulting contractor is secured by surety bonds, the bonding company:

1. when acting under the performance bond, should be paid all amounts to which the contractor would be entitled under the terms of the contract; and
2. when acting under a payment bond, should not be reimbursed for the payment of creditors from any funds held by the contracting authority until the work is substantially complete and the surety has fully discharged its obligations under the bond.

12.7.6 In case of bankruptcy, the claims of the Trustee in Bankruptcy for any amounts due and payable by the contracting authority to the contractor at the date of its bankruptcy are subject to the above conditions.

12.7.7 As required in article 4.2.1 recognition is to be given to miscellaneous, indirect contractual obligations of a contractor and its sub-contractors (including suppliers) that arise from assessments by agencies of the government (e.g., Employment Insurance, Canada Pension Plan contributions, wages due the employees or by agencies of other governments in cases where a precedent of mutual cooperation has been established (e.g., workers' compensation acts)).

12.7.8 Authorities concerned should follow closely any bankruptcy proceedings involving contractors with whom they are involved, promptly submit any claims to the trustee and ensure these are acknowledged.

12.7.9 If the contractor must be removed from the job on account of bankruptcy or other default, action should be taken under the appropriate terms of the contract. If the contract is secured by surety bonds, the contract itself should not be terminated because this would also terminate the existing contractual relationship with the bonding company.

12.7.10 As stated in article 4.2, contracting authorities are reminded of their duty to pursue the rights of the Crown as a creditor under the Bankruptcy Act:

1. the right of secured creditors to realize on their security (sub-section 69(2));
2. the right to prove title to property in the possession of the bankrupt (section 81);
3. the right of creditors to offset money payable by them to the bankrupt against debts owing to them by the bankrupt;
4. payment of debts due the Crown in priority to payment of unsecured creditors of the bankrupt (section 136).

12.7.11 Contracting authorities should obtain a fair reduction in the contract price for less-than-specified performance.

12.8 Disputes

12.8.1 The key factor when disputes arise is the expeditious handling of the disagreement. This is particularly important because prolonged disputes can delay performance as defined in the contract and payment to the contractor. As such, the Minister of Justice has committed to working with client departments to introduce Dispute Resolution (DR) clauses into the various contracts to which the Government is a party. To this end, the Directive Concerning the Use of Dispute Resolution Clauses in Contracts (the Directive) has been issued by the Department of Justice. The Directive states that, in advising client departments and in preparing contracts for client departments, Justice legal practitioners must make every effort to insert dispute resolution clauses into contracts, where appropriate. Dispute resolution clauses may range from provisions for resolution of disputes as they arise, by way of structured negotiations, to other alternatives such as mediation and arbitration. Any inquiries regarding the Directive Concerning Dispute Resolution policy or the appropriate clauses should be made to your departmental legal services unit of the Department of Justice.

12.8.2 In a contract dispute, the decisions of the contracting authority made after the contract has been awarded, are challengeable in court. Under North American Free Trade Agreement, the World Trade Organization - Agreement on Government Procurement, the Agreement on Internal Trade, the bidding process can be challenged at the Canadian International Trade Tribunal. It is important, therefore, that legal advisers be consulted and that the actions of a contracting authority and its decisions on a contractor's claim be defensible in court.

12.8.3 Negotiations. Efforts should be made to resolve disputes as they arise, first by negotiating with the contractor. This can be through discussion between representatives of the contractor and the contracting authority or by a more formal review established by the department or agency. Contracting authorities should develop systems that ensure:

1. prompt attention is given to disputes;
2. unresolved disputes are brought forward quickly to a designated senior level in the department or agency for decision; and
3. the decision is quickly communicated to the contractor so that the contractor may take further action if so desired.

12.8.4 Mediation. When a dispute has not been resolved by negotiation, mediation by a third party may be used when it is acceptable to both sides. Mediation should conform to the following principles:

1. it should be voluntary on the part of the contracting department or agency and the contractor with respect to entry into mediation, selection of mediator, and acceptance of the mediator's recommendations;
2. the powers of a mediator should be limited to persuasion and cannot include adjudication. (There should not, however, be any restriction on the mediator in terms of making contacts and collecting information relevant to the dispute);
3. the costs of mediation should be shared equally by both parties.

12.8.5 Arbitration. Arbitration that is binding on both parties is an alternative to litigation, provided that both the contractor and the contracting authority agree to it. The agreement to allow for its use may be inserted in a contract at the outset, or it may be negotiated between the parties at the time a dispute arises. If allowance is to be made for, or there is the prospect of arbitration, the contracting authorities should first discuss the details of it with their legal advisor. This advisor has guidelines from the Senior Assistant Deputy Minister, Legal Services, Commercial and Property Law, Department of Justice, covering the format (including procedures) and contents of an arbitration agreement and of any arbitration clause to be included in a contract.

12.8.6 Contracting authorities, with the advice of their legal advisor, may refer all questions of fact and certain questions of law to arbitration without the formal concurrence of the Department of Justice. Treasury Board approval is not required to use arbitration. Some of the questions of law which can now be the subject of arbitration include:

1. the formation, validity, interpretation, application or enforceability of the contract;
2. the performance, breach, termination or other discharge of the contract;
3. the rights, duties, obligations or remedies of the parties created by or pursuant to the contract;
4. any other issue of private law that may arise between the parties relative to the performance of the contract; or
5. the interpretation and application of statutes that relate primarily or solely to commercial transactions including, for example, the Commercial Arbitration Act and the International Sale of Goods Contracts Convention Act.

12.8.7 Contracting authorities are required to have the prior concurrence of the Assistant Deputy Minister, Justice Canada, Business and Regulatory Law Portfolio, before proceeding with arbitration of any question that involves the interpretation or application of the public law of Canada (i.e., constitutional, administrative, criminal and tax law) including, without limitation, the interpretation of any statute relating to public law, or the exercise of any power under such law.

12.8.8 These modifications expanding the use of arbitration apply to all contracts entered into pursuant to the Government Contracts Regulations and to grants, contributions and other financial assistance agreements if they are of a commercial nature. Additional guidelines with respect to greater use of arbitration in real property transactions are being developed and will be issued separately by the Real Property Management Division, Comptrollership Branch, Treasury Board Secretariat.

12.8.9 Legal Process. When dispute resolution is pursued through arbitration, the parties appear before an Arbitration Tribunal, which takes the place of a court and makes an "award." While an arbitration tribunal has no authority to enforce its award, the Commercial Arbitration Code (Chapter VIII, Article 35) provides that such an award will be recognized as binding, and upon application in writing to a competent Canadian court will be enforced by a judgment of that court. Because the Crown Liability and Proceedings Act (Sections 29 and 30) prevents such a judgment from being executed against the Crown, in these cases the court also issues a Certificate of Judgment against the Crown, which obligates the Minister of Finance to authorize the payment out of the Consolidated Revenue Fund of any money awarded by the judgment.

12.8.10 Costs and Disbursements. In preparing for arbitration, any expenses incurred by the contracting authority are a charge to a departmental appropriation, whether the eventual decision is rendered for or against the contracting authority.

12.8.11 When the Minister of Finance receives a Certificate of Judgment against the Crown and authorizes the payment out of the Consolidated Revenue Fund of any money awarded by a court judgment, this payment will incorporate any costs determined and levied by the arbitration tribunal and included in its award. In this context, contracting authorities should note that the cost associated with the actual conduct of arbitration is normally shared equally by the contracting authority and the contractor. Contracting authorities should also understand that the money paid on their behalf from the Consolidated Revenue Fund will eventually be accounted for, either by transferring funds from a departmental appropriation or by seeking supplementary funding. Any payment of an award to a contractor by the contracting authority as a result of an arbitration decision is to be reported annually in the Public Accounts; this will ensure both visibility and accountability.

12.8.12 Where a contracting authority terminates arbitration proceedings and agrees to pay a contractor without the necessity of an arbitral award, the money for such a payment will have to be taken from a departmental appropriation. In some instances, particularly where the interpretation of a contract is involved, this is accomplished by simply amending the amount allotted for the contract. It is the responsibility of the contracting authority to ensure that any such payment is within its amending authority for contracts as set out in Schedules 1 through 4 of Appendix C, otherwise the contracting authority is required to obtain Treasury Board approval for any such payments in excess of this amending authority.

12.8.13 Revenues. The contracting authority should collect or enforce payment of an award to the Crown consequent to the arbitration decision in accordance with the "Comptrollership" volume of the Treasury Board Manual. The money collected, including any insurance proceeds, should be deposited to the credit of the particular project, a departmental appropriation or the Consolidated Revenue Fund, as appropriate. The Standard Federal Government Construction Contract form describes how to deal with insurance proceeds arising from construction contracts.

12.8.14 Litigation. An alternative to arbitration is, of course, litigation. By convention, matters referred to arbitration are not then subject to litigation unless the arbitration was defective in form or content. Where the contractor or contracting authority decides that litigation should take place, the Department of Justice assumes responsibility for subsequent action in accordance with the Department of Justice Act.

12.9 Contract amendments

12.9.1 Even though the Contracts Directive allows for amendments, contracts should not be amended unless such amendments are in the best interest of the government, because they save dollars or time, or because they facilitate the attainment of the primary objective of the contract. Work definitions should be carefully developed. Contracts should then be properly administered to avoid unanticipated amendments except to change the scope of the work. Amendments to existing contracts often call for more administrative work and little can be done through competition to encourage the contractor to do additional work or respond to changes at the lowest possible cost.

12.9.2 Every effort should be made to avoid:

1. inadequate initial funding, resulting in amendments to increase the contract value;
2. inadequate pre-planning, resulting in amendments to change the design, specifications or quantity involved; and
3. improper administrative procedures, necessitating amendments to change the specifications and delivery or other requirement in order to protect the contractor or government agency involved.

12.9.3 Many contract amendments are, in fact, prudent. Often contract amendments or probable amendments can be foreseen when the initial contract is contemplated. In such cases, the proposal section of the approval document should indicate the likelihood of such amendments, including a maximum cost limit. Where Treasury Board or managerial approval is required and the original contract proposal to the Treasury Board or departmental management has been approved, subsequent amendments do not require the same level of approval as long as they are within the original intent of the proposal and applicable amendment authorities.

12.9.4 Extra costs. Departments and agencies are advised to include clauses for cost overruns in contracts. In situations where, the Crown has received no additional or apparent benefit and there is uncertainty whether a legal liability exists under the terms of the contract. Legal advice should be obtained as to whether the extra costs may be considered as an amendment to the contract. Additional payments should, in any event, cover only the additional reasonable costs incurred by the contractor and should be considered only if the circumstances were beyond the contractor's control and the contractor was without fault or negligence and could not reasonably have foreseen the actual circumstances at the time the contract was entered into. Each case will be treated on its own merits with payments allowed within delegated authorities and appropriate approvals sought in the event that the changes exceed authorities.

12.10 Contractual arrangements involving Crown corporations

12.10.1 Subsection 41(2) of the Financial Administration Act states that the Government Contracts Regulations do not apply to federal or provincial Crown corporations unless the legislation of the Crown corporation specifically requires that it be subject to Subsection 41(1) of the Act. Consequently, the Treasury Board Contracts Directive and relevant policies do not apply to Crown corporations. Arrangements between departments and Crown corporations cannot be contracts in a strictly legal sense (the Crown cannot contract with itself).

12.10.2 Reserved.

12.10.3 Agency status. When a department or agency has been designated as an "agent" of a Crown corporation, the contracting procedures and authority limits of the contracting authority continue to apply. As stated in article 4.2, Related requirements, the contracting authority cannot assume the powers of a Crown Corporation even when undertaking work on its behalf. In practice, the department or the Crown corporation will seek Treasury Board authority when a proposed contract exceeds the limits prescribed in the Contracts Directive.

12.10.4 Contractual arrangements with other governments. There are situations where contracting authorities obtain goods and services from other government entities such as provinces, municipalities and provincial Crown corporations. There are also times when the federal government co-operates with a provincial or municipal body to carry out a project. Usually, these arrangements are embodied in federal-provincial agreements, normally governed by legislation or related to the overall mandate of the federal authority. When this formal federal-provincial relationship is not applicable, a contractual relationship between the federal contracting authority and the other government entity may be appropriate. As called for by article 4.2, all contracting policies, including the dollar limits for contracting (Appendix C), apply to the federal organization.

12.11 Protecting the interests of the Crown

12.11.1 General. Part II of the Government Contracts Regulations deals with securing the due performance of contracts. The contracting authority is to determine the need for and amount of financial security, subject to the Regulations, policies and Related requirements.

12.11.2 The following is the policy on financial security and the use of insurance in contracting. For more details, see Appendix R which contains the Policy on the Use of Standby Letters of Credit as an Alternative to Bid or Contract Security for Federal Government Contracts.

12.11.3 Financial security. The various forms of financial security exist to ensure that the contractor's obligations under the contract are carried out, to protect the interests of subcontractors, sub-subcontractors and suppliers, and to protect the Crown against loss should a low bidder fail to enter into a contract. The principal traditional techniques are holdbacks, security deposits and surety bonds. When security is obtained, contracting authorities will apply the procedures for the handling of bonds and security deposits set out in the Government Contracts Regulations.

12.11.4 Form and amount of security. The bidder or contractor has the option to submit a security deposit in the form he or she wishes to provide, however, the following criteria can be used as a guide to determine the form and amount of security:

1. the type of work and the custom of the trade or profession;
2. the consequences of the failure or inability of the contractor to fulfill contractual obligations;
3. before solicitation of bids, the stability of firms likely to compete for the contract. As a general rule, the more elaborate the prequalification of prospective contractors, the less the need for security in the contract;
4. after solicitation of bids, the capability of the specific contractor, including (as deemed applicable and available) the financial structure, performance record, payment record, credit rating and availability of cash in relation to commitments.

As specified in the definitions in the Government Contracts Regulations, a security deposit may be a bill of exchange payable to the Receiver General and certified by an approved financial institution on itself, a government guaranteed bond which is convertible to cash, or any other form of security acceptable to the contracting authority and approved by the Treasury Board. The only other forms of security that have been approved for general use are bid and contract surety bonds and claimant's payment bonds issued by acceptable bonding companies and irrevocable standby letters of credit which have been issued by a financial institution which is a member of the Canadian Payments Association.

Contracting Authorities should not specify in the request for proposals or tender call the type of security to be submitted.

12.11.5 Holdbacks. Holdbacks serve two purposes:

1. to provide an incentive for the contractor to complete the work according to the stipulated specifications; and
2. to provide the Crown with access to funds for commitments resulting from a contractor's non-performance.

Negotiated holdbacks should be large enough and last long enough to ensure that all contractual requirements can be met. This can be determined by assessing the firm's financial capability, performance record, payment record, markets or industry volatility and the degree of risk inherent in the work.

12.11.6 Security deposits. The contracting authority determines the amount of the deposit required and ensures that the actual deposit is acceptable under the Government Contracts Regulations (see Part II of the Regulations, sections 10 to 17, concerning the procedures governing these instruments. See also the Comptrollership policies. When cash, certified cheques, other bills of exchange, letters of credit, or government-guaranteed bonds are submitted as contract security, the contracting authority usually specifies a minimum of 10% of the value of the contract. Surety bonds are usually required to have a total value of 100% of the value of the contract. In construction contracts, the amount of security provided by surety bonds is usually 50% of the total value of the contract in a performance bond, 50% of the total value of the contract in a labour and material payment bond, and the total value of the claims in a claimant's payment bond. When government guaranteed bonds are submitted as security, their value should be current value, not necessarily face value.

12.11.7 Surety bonds. If surety bonds are proposed by the bidder or contractor and are acceptable to the contracting authority, the appropriate model bond form should be used for consistency and uniformity. Model forms for bid bonds, performance bonds and payment bonds have been approved by Treasury Board for use in construction contracting and are shown in Appendix S. A list of insurance companies whose bonds (regardless of purpose) are accepted by the government is contained in Appendix L, which is revised as required.

12.11.8 Bid security. The amount required as bid security is also determined by the contracting authority as guided by the traditions or customs generally followed in the type of contracting being undertaken. For construction contracts the following bid and contract security is usually requested by the contracting authority:

1. For bid security when the amount exceeds $30,000
   • if the security is a bill of exchange or a government guaranteed bond, 10 percent of the amount bid up to a bid total of $250,000. If the bid exceeds $250,000, the foregoing amounts are requested plus 5 per cent of the amount in excess of $250,000.
2. if the security is a surety bond, 10 per cent of the amount bid.

12.11.9 Normally, neither a bid bond nor a security deposit protects against the withdrawal of an offer before its acceptance, unless the offer is made under seal. The model bid bond form contains a provision obligating the bonding company to compensate the Crown for higher costs in case of withdrawal, but does not provide a basis for legally enforcing entry into the contract. Where use of the model form is not appropriate or where contracting authorities judge it to be in the public interest to require the additional protection of offers made under seal, assistance of legal officers should be sought in preparing bidding documents. (The seal concept does not apply in Quebec, but the bidder who undertakes to keep an offer open for a specified period of time cannot withdraw the offer without becoming exposed to a damage claim.) If a security deposit is made, withdrawal of an unsealed tender before acceptance entitles the tenderer to the return of the deposit.

12.11.10 Provision for damages or penalty payments. A clause referring to provisions for damages or penalties, where applicable, should be included in contracts. Legal advice should be sought concerning the types of damages or penalties which could be included and wording of the clause.

12.12 Insurance

12.12.1 Contractors are responsible for ensuring that they manage and have relevant financial protection against the risks to which they are exposed, especially those over which they have control. Consequently, the general policy of the government is not to indemnify contractors against such risks. Normally, therefore, a general condition of every contract is that the contractors indemnify and save the Crown harmless from all manner of claims and damages. As commercial insurance is one option available to and frequently used by responsible contractors for this purpose, it should always be understood that, in the first instance, insurance is for the protection of contractors in support of their potential liability to indemnify the Crown and others, and only ultimately for the protection of the Crown.

12.12.2 Because the cost of insurance is normally included in prices and failure to carry adequate insurance could jeopardize performance, contracting authorities should satisfy themselves that contractors make prudent use of insurance. Contractors should not procure insurance on risks that are the responsibility of the government unless the respective responsibilities are so commingled that they are indistinguishable. However, when the Crown has acknowledged, or elected to assume the risk on a predetermined or case-by-case basis, especially when the risks are under the control of the government, e.g., contractors' property in the care, custody and control of the Crown, such risks may be self-underwritten by the government.

12.12.3 Contracting authorities should obtain an opinion on liability from their legal advisers and refer to the appropriate Treasury Board directives on risk management when contracts or amendments are contemplated.

13. Construction contracts

13.1 General

13.1.1 This section sets out Treasury Board policy for construction contracts.

13.1.2 Bidding. Section 7 of the Government Contracts Regulations does not specify how bids for construction contracts should be obtained. However, departments should give public notice for construction contract bids over $60,000.

13.1.3 Bid depositories. Bid depositories are offices operated by the construction industry through which trade contractors may send their bids to the prime contractors of their choice who are bidding on construction projects. Additional information as well as a list of acceptable bid depositories is found in Appendix N.

13.2 Administration of construction contracts

13.2.1 The standard federal construction contract form should be used for all construction contracts over $100,000 except those which, in the judgment of the contracting authority, must be modified to meet special circumstances. The principles and policies expressed in the Standard Construction contract are the perogative of the Treasury Board. However, the style and content of the Standard Construction contract are the responsibility of the Department of Public Works and Government Services Canada.

13.3 Construction claims mediation

13.3.1 This part sets out mediation guidelines.

13.3.2 The mediator's role is to make recommendations on the degree of liability and the amount of any damages. Since the Crown's liability, if any, under the contract is a legal question, departments should consult their legal services before deciding to go to mediation.

13.3.3 A single mediator, rather than a panel, should be appointed wherever possible because it generally results in a more expeditious and economical mediation service. The mediator should be acceptable to both the contracting department and the contractor. Mediators who have knowledge of construction practices and contracts, as well as experience in claims analysis, should be considered.

13.3.4 The "Mediation Agreement" should give the mediator authority to form opinions, make findings, and prepare recommendations about the matter(s) in dispute. The process should not be subject to judicial procedures such as rules of evidence, and the mediator should be allowed reasonable access to information and to employees of both the Crown and the contractor.

13.3.5 The "Mediation Agreement" should make provision for the mediator to:

1. base any opinions, findings, conclusions and recommendations the terms and provisions of the contract;
2. provide any reasonable calculations to support the opinions, findings, conclusions and recommendations;
3. within the time-limit established under the agreement, submit to both parties, a written report containing final recommendations and conclusions.

13.3.6 The mediator may hold hearings at times and places acceptable to the parties and the mediator. If the parties cannot agree, the mediator may, in the interest of due diligence, set any necessary times and locations.

13.3.7 The parties should not be represented by legal counsel at any hearings held by a mediator. If either party wishes to be represented by legal counsel, litigation or arbitration should then be considered.

13.3.8 If either party retains independent experts, the mediator may hear these experts in the presence of the parties and should allow a rebuttal.

13.3.9 Submissions should be made to the mediator in accordance with the following provisions:

1. each party, at its own expense, may call any witnesses and produce any documents that it considers necessary to substantiate its submissions;
2. copies of such documents should be submitted to the mediator within the time limits established under the mediation agreement.

13.3.10 The mediator's fees are to be agreed upon before appointment. Any agreement should provide for reimbursement of travel expenses in accordance with the Treasury Board Travel Policy, and of other reasonable costs incurred during mediation. Provision may also be made for the mediator to obtain expert assistance with the approval of the parties to the contract.

13.3.11 If a party elects to obtain independent expert assistance, that party bears the full costs.

13.3.12 All fees and costs incurred by the mediator are to be shared equally by the parties.

14. Goods contracts

14.1 General

14.1.1 This section sets out the Treasury Board policy for goods contracts.

14.1.2 Bidding. Section 7 of the Government Contracts Regulations permits the contracting authority to determine the appropriate bidding methodology. This may include giving public notice, for example, by means of electronic bidding methodology or solicitation of bids from suppliers on a list representative of the suppliers of the required goods. All requirements for goods that are subject to the provisions of the North American Free Trade Agreement and the World Trade Organisation - Agreement on Government Procurement must be advertised in the Government Business Opportunities publication and using electronic bidding. All requirements for goods that are subject to the provisions of the Agreement on Internal Trade must be published on the electronic bidding system.

14.1.3 Authority to enter into goods contracts. The Department of Public Works and Government Services Act, Statutes of Canada, 1996, Chapter 16, Section 6, gives the Minister of Public Works and Government Services exclusive authority to acquire materiel or goods.

14.2 Delegation

14.2.1 According to Section 9 of the Department of Public Works and Government Services Act, the Minister of Public Works and Government Services may delegate "... any of the Minister's powers, duties or functions under this Act to an appropriate minister within the meaning of the Financial Administration Act" for such periods and under such terms and conditions as deemed suitable.

14.2.2 The conditions specified by the Public Works and Government Services Canada governing their Minister's delegation of purchase authority are detailed in the Public Works and Government Services Canada Customer Manual or under separate departmental Memoranda of Understanding.

14.2.3 The delegations generally apply to all departments and agencies, excluding National Defence, listed in Schedules I and II of the Financial Administration Act (FAA) and to branches designated as departments for the purposes of the Act.

14.2.4 The dollar limits in the Treasury Board Contracts Directive, as well as all policies and guidelines concerning the acquisition of materiel, apply only after a contracting authority has received appropriate procurement authority from the Minister of Public Works and Government Services.

14.2.5 The management of materiel is the responsibility of user departments. Policies governing materiel management, including EDP materiel, are contained in the appropriate Treasury Board policies.