20 March 2025

Life Cycle Contracts in Public Procurements in Russia

March 20, 2025

BRACE ©

A life cycle contract (the "LCC") represents a complex and compelling phenomenon within procurement legislation. One can view this contract from various perspectives: as an effective form of public-private partnership (alongside concessions or investment agreements), as a long-term investment vehicle, and, in certain cases, as a type of comprehensive capital construction contract.

Above all, however, it is a specific type of procurement subject to the special rules of Federal Law No. 44-FZ dated April 5, 2013, On the Contract System in the Sphere of Procurement of Goods, Works, and Services for Ensuring State and Municipal Needs (the "Law No. 44-FZ" or the "Contract System Law"). This article analyzes the life cycle contract specifically within the context of the Contract System Law. Structuring the subject matter and price of this contract, providing security, evaluating bidders, and amending material LCC terms all possess a range of specific features that both customers and counterparty-suppliers must consider.

What is a Life Cycle Contract?

The term "life cycle contract" first appeared in Part 16 of Article 34 of the Contract System Law in 2013. Subsequently, in 2019, Clause 8.2 of Article 3 of Law No. 44-FZ formulated the definition of this contract. [1]

A life cycle contract always consists of two parts.

The first part of the LCC: Under the first stage of the contract, the contractor or supplier (the "counterparty" or "supplier") supplies a specific good to the customer or performs work to create a specific facility. As a rule, the subject of supply under an LCC involves machinery or equipment. Within the scope of the supply, the counterparty may also be obligated to manufacture (design and produce) the supplied goods. If the LCC is concluded for the performance of work, the subject of the contract is a capital construction facility (the contractor must build the facility, design it if necessary, perform related works, and commission it). Additionally, an LCC may cover capital repairs or the reconstruction of a facility.

The second part of the LCC: The counterparty that supplied the goods or created the facility must provide subsequent maintenance for such goods or facility (the "object of procurement", "facility", or "goods"). Maintenance aims to support the functionality and operability of the object of procurement. This may include not only repairs but also other measures: in some cases, the counterparty may be responsible for maintaining the facility as well as its disposal. Maintenance lasts for the service life of the object. This period represents a certain life cycle of the goods or facility; hence, the contract is called a life cycle contract. Such a cycle lasts several years, and LCCs are always long-term contracts.

One should not equate maintenance under an LCC with standard warranty obligations that a counterparty performs regarding supplied goods or completed work. A warranty obligation takes effect after the delivery and acceptance of the goods or work, and the warranty period is not included in the term of the contract itself. Furthermore, the supplier typically performs warranty repairs at its own expense; therefore, warranty obligations do not have a separate valuation. Thus, warranty relationships between the parties exist, as it were, outside the scope of the contract, even though they arise from it. Regarding life cycle support — it is an integral part of the contract itself. Supporting a facility in an LCC is a complex undertaking not limited merely to rectifying quality defects. The duration of such support (regardless of its length) is fully included in the contract term. The contract must calculate and separately state the maintenance cost. Therefore, one must distinguish facility maintenance under an LCC from warranty obligations in an ordinary contract.

A life cycle contract is always a mixed contract: it combines several types of obligations. From a legal standpoint, appropriate norms of civil legislation must apply to the different stages of such a contract, considering the nature of the specific obligations.

The first part of the LCC may include obligations:

to supply goods (if the subject of the LCC is the supply of goods and their subsequent maintenance);
to perform work (if the counterparty must create a facility and ensure its subsequent maintenance);
to perform work and supply goods (when, under the LCC terms, the counterparty must create a facility, equip it, and subsequently provide maintenance for such a facility).

The second part of the LCC, dedicated to life cycle support, represents a mixed form of providing services and performing work.

Life cycle contracts are primarily in demand when a high-value object of procurement requires long-term, high-quality maintenance—meaning the project involves significant financial expenditures. This contract form is considered more effective than ordinary supply or ordinary construction with warranty obligations. The Customer is relieved of the need to conduct several different procurements and conclude several contracts, as all maintenance functions throughout the facility's life cycle are assigned to a single counterparty.

When is a Life Cycle Contract Concluded?

The Contract System Law states that a life cycle contract may be concluded when purchasing new machinery and equipment (Part 16, Art. 34 of Law No. 44-FZ). However, the range of applications for this contract form is actually much broader. Specific cases in which the LCC structure may be used are listed in Decree of the Government of the Russian Federation No. 1087 dated November 28, 2013, On Determining Cases for Concluding a Life Cycle Contract (the "Decree No. 1087"). All types of contracts specified in this decree can be conceptually structured into groups based on the subject of the procurement.

The first group of procurements: A wide range of works related to motor roads. The subject of such contracts involves works for the construction, reconstruction, capital repair, design, engineering surveys, repair, and maintenance of motor roads. The object of the works may be the motor roads themselves and road sections, as well as their technological components (protective or artificial road structures, production facilities, and road infrastructure elements).

The second group of procurements: Works that include only design and construction. In this procurement group, the object of the contract involves infrastructure facilities in various fields of application:

port infrastructure (sea or river), which also includes artificial land plots and hydraulic port structures;
aerodrome infrastructure;
communal infrastructure systems and communal utilities facilities, including water, heat, gas, and power supply facilities, sewerage, wastewater treatment, as well as facilities for the processing, utilization, and burial of household waste;
subway infrastructure;
off-street transport infrastructure;
urban ground electric transport infrastructure;
public railway transport infrastructure;
works for the design and construction of unique capital construction facilities.

The third group of procurements: The subject of this procurement group is the supply of goods. The objects of such contracts are specific categories of goods:

railway rolling stock;
subway vehicles;
off-street transport vehicles;
urban ground electric transport vehicles;
aircraft;
sea and river vessels;
self-propelled machines;
other types of equipment;
goods purchased under Clause 47, Part 1, Article 93 of Law No. 44-FZ. The production of such goods is created, modernized, or mastered based on a special investment contract. Such procurement is conducted exclusively from a defense-industrial complex organization that is the project investor, a party to the investment contract, and included in a special register;[2]
purchase of medical equipment included in OKPD 2 codes 26.60.11, 26.60.12, 26.60.13.130, 26.70.22.150, 32.50.12.000, 32.50.21.121, 32.50.21.122.

The fourth group of procurements: The specificity of such procurements lies in the fact that the subject of the contract includes not only the design and construction (or reconstruction) of a capital facility but also its outfitting with necessary equipment. The project documentation must initially provide for the composition of this equipment. This procurement group includes the following facilities:

healthcare facilities (including health resort treatment facilities) equipped with medical equipment;
facilities intended for the housing of military personnel and their families;
rear services facilities (utility, technical, medical facilities, bases for combat training, educational work, and troop service);
social service facilities for citizens (including inpatient and semi-inpatient facilities), such as residential care homes and boarding houses for children, the elderly, the disabled, and war veterans; psychoneurological boarding houses; health and gerontological centers, rehabilitation institutions, centers for psychological, pedagogical, and other assistance for various categories of the population; social service and adaptation centers, various shelters, and social hotels;
cultural facilities: theaters, museums and exhibition centers, libraries, circuses, cinemas, concert halls, as well as monuments and memorial structures.

The fifth group of procurements unites contracts aimed at preserving cultural heritage sites (the "CHSs"). Such a contract may include the following works regarding a CHS:

design;
reconstruction with restoration elements;
adaptation for modern use.

The subject of such a contract may also provide for the acquisition of equipment in accordance with the project documentation for the CHS.

However, the law contains an important caveat: a life cycle contract is concluded regarding CHS objects only if the following conditions are met:

if the cultural heritage site is officially recognized as being in critical condition;
or if the cultural heritage site is in a ruined state.

The sixth group of procurements: The subject of the life cycle contract is an automated information and measurement system (or systems) for accounting (the "AMS"). Importantly: the system must be intended for accounting for energy or utility resources. Such an LCC may provide for the following types of work:

works to create an AMS;
works to install meters and accounting units for the AMS system, as well as data collection and transmission devices;
works to create software necessary for the collection, storage, and transmission of accounting data.

The seventh group of procurements includes high-technology objects: information systems, data processing centers, and hardware and software systems—in other words, information technology resource systems (the "IT infrastructure facilities"). The scope of work under such a contract may include:

creating IT infrastructure facilities;
commissioning IT infrastructure facilities;
operating IT infrastructure facilities;
decommissioning IT infrastructure facilities.

Pricing Features of the Life Cycle Contract

Pricing for a life cycle contract has one distinctive feature. The price of such a contract always consists of two parts (Part 16, Art. 34 of Law No. 44-FZ):

The first component of the LCC price: The cost of the acquired goods (if the LCC is concluded for supply) or the cost of works (if the LCC is concluded for performance of works). If the LCC is of a construction nature, this may include the cost of design, construction, capital repair, or reconstruction of the facility. If the subject of the contract is supply—this part of the price includes the price of the goods themselves, the delivery cost (if provided for by the contract), and the cost of their manufacture (if the counterparty-supplier is obligated to produce the acquired goods);
The second component of the LCC price: The cost of subsequent maintenance and support of the created facility or supplied goods. The LCC assumes that the counterparty performs such support during the service life of the object of procurement. This includes maintenance, repair, and operation works (if provided for by the contract), as well as, if necessary, disposal services.

The LCC must list both cost elements separately. This does not mean the LCC lacks a single total contract price — on the contrary, it must be stated. However, in addition to this, the contract must necessarily distinguish and specify these two components of the price.

Under general rules, the contract price is fixed and stated in numerical terms. However, there are cases where the price is expressed through a formula (Part 2, Art. 34 of Law No. 44-FZ). In such a case, a maximum price value is determined—a monetary limit that cannot be exceeded. During the contract performance process, the amount of payment is calculated based on the formula embedded in the contract, but within the maximum price value.

In a life cycle contract, a price formula may apply if the following conditions are met [3]:

First, such an LCC must be concluded for a term of at least three years.

Second, the initial maximum contract price of such an LCC must be 1 billion rubles or more.

Third, the subject of a life cycle contract with a price formula can only be the supply (including under a leasing agreement), as well as service maintenance and repair of the following objects:

railway rolling stock;
subway vehicles;
off-street transport;
urban ground electric transport;
buses powered by an electric motor and a traction battery charged from an external power source.

Methods for determining the life cycle contract price follow the general rules of contract legislation. The Customer calculates the so-called "life cycle cost" of the supplied goods or created facility based on methodological recommendations approved by the Ministry of Economic Development of Russia (Part 3, Art. 32 of Law No. 44-FZ).[4]

Certain life cycle contracts require mandatory banking support. Banking support is a type of state control over payments during contract performance. The supplier opens a special account at a bank, to which the Customer transfers payments under the contract. Two variants of banking support exist—simple and extended. With extended support, the bank not only monitors payments but also monitors the supplier's performance of its obligations.

Life cycle contracts are subject to mandatory banking support in the following cases:[5]

the contract is concluded by a federal customer (i.e., it is intended to ensure federal needs);
the initial (maximum) price of such a contract exceeds 10 billion rubles.

This requirement implies simple, rather than extended, banking support for the LCC.

Security Features of the Life Cycle Contract

Since the price of a life cycle contract is always divided into two components, the security for the performance of such a contract also consists of two parts (Part 1.1, Art. 96 of Law No. 44-FZ).

The first part of the security is directed toward the performance of the "base" part of the contract — the supply of goods or performance of works. Unlike the general rule, the amount of this part of the security is calculated as a percentage not of the total aggregate contract price, but of that specific part which it secures (Clause 1, Part 6.2-1, Art. 96 of Law No. 44-FZ). That is, the basis is only the price of the supplied goods or the cost of the performed works under the contract (the first component of the LCC price). This part of the security must be provided to the Customer prior to the conclusion of the contract.

The second part of the security is intended for the support of the contract object during its life cycle (i.e., maintenance, repair, and, if necessary, operation and disposal). The amount of this part of the security may not exceed 10% of the cost of such maintenance (Clause 2, Part 6.2-1, Art. 96 of Law No. 44-FZ). Unlike the first part of the security, the second part is not provided prior to the conclusion of the contract. Security for maintenance must be provided to the Customer by the time of signing the document of acceptance of the goods or work. If the supplier fails to provide the second part of the security, the Customer shall not sign the acceptance document, and the acceptance of the goods or works will not occur (Part 7.2, Art. 94 of Law No. 44-FZ).

One important feature should be noted: the second part of LCC security is very similar to another type of security that a supplier provides to a Customer to perform its warranty obligations. Under the general rules of the Contract System Law, if a warranty period is established for goods or works (services), the Customer may require the supplier to provide security for warranty obligations (Part 2.2, Art. 96 of Law No. 44-FZ). The law does not specify mandatory cases for providing such security; therefore, the Customer may exercise this option at its discretion. The amount of security for warranty obligations must not exceed 10% of the initial (maximum) contract price. The deadline for providing warranty security is the same as the deadline for providing maintenance security in an LCC—prior to the signing of the document of acceptance of performance (Part 7.2, Art. 94 of Law No. 44-FZ). As we can see, these two types of security are easily confused: both secure the further support of the functionality of the goods or work by the counterparty. In both cases, the maximum security limit is 10%. In both cases, the security is provided prior to acceptance, otherwise the Customer will not accept the performance. However, despite their similar nature, these types of security differ in character and legal status:

maintenance security in a life cycle contract is a necessary condition, as it is a component of the security for the performance of the contract as a whole. In an ordinary contract, security for warranty obligations is not mandatory; the Customer establishes it at its discretion;
the amount of maintenance security in an LCC is calculated from the cost of the maintenance itself, rather than from the total contract price. Conversely, warranty security is calculated from the aggregate initial (maximum) contract price;
the supplier's maintenance obligation for the object of procurement in a life cycle contract is significantly broader than standard warranty obligations. A warranty for goods or work does not, in itself, constitute a stage of the contract: warranty claims may never arise if the Customer has no complaints regarding the quality of the goods or work. In an LCC, facility support is always a structural part of the contract itself, and the maintenance period for the life cycle is included in the contract performance term. That is, in an LCC, this is an integral part of the obligations that the supplier must perform in any event.

This duality often leads some customers to fail to separately distinguish the amount of facility maintenance security in a life cycle contract, instead specifying a total contract security amount and additionally including a requirement for warranty obligation security. Consequently, under the terms of such a contract, not only the first part of the security, but the entire security amount (excluding warranty security) must be provided to the Customer prior to the conclusion of the LCC. Such a security scheme in an LCC is incorrect and can be challenged by bidders as early as the procurement stage. The law only obligates the supplier to provide the first part of the security before concluding the contract; therefore, the Customer has no grounds to demand both parts of the security at once.

One must remember: Part 1.1 of Article 96 of the Law is mandatory (imperative) in nature. It does not allow the Customer to waive the second part of the security, combine it into a single sum with the first part, or replace it with the provision of warranty security. Therefore, in a life cycle contract, warranty security is not a substitute for or an analog of the second part of the contract security.

The opposite situation is observed in some life cycle contracts. All the aforementioned types of security are present simultaneously: the supplier provides the first and second parts of the contract security and is also required to provide additional warranty security. Such a structure is permitted, as it does not contradict the law provided the security deadlines comply with the rules: the first part is provided prior to contract conclusion, while the second part (maintenance security) and warranty security are provided prior to the acceptance of the goods or works.

All other conditions for providing security for LCC performance correspond to the general rules of Law No. 44-FZ. The amount of the first (main) part of the contract security is determined as follows (Part 6, Art. 96 of Law No. 44-FZ):

the security amount may range from 0.5% to 30% of the price of the goods or works;
if an advance payment is provided for, the security amount must not be less than the advance;
if the advance exceeds 30% of the initial (maximum) contract price, the security amount must correspond to the amount of the advance;
if the advance payment is subject to treasury support, the base price for calculating the security is reduced by the amount of the advance;
if all settlements under the contract are subject to treasury support, the Customer may choose not to establish security at all. If the Customer still decides to establish security, its amount must not exceed 10% of the initial (maximum) contract price;
when settlements under the contract are determined by a formula, there is no initial (maximum) price in such a contract. Therefore, the security amount is calculated based on the maximum contract price value (Part 24, Art. 22 of Law No. 44-FZ).

The supplier chooses the method of security at its discretion: a deposit of funds or the provision of an independent (bank) guarantee. During the contract performance process, the supplier may change the security method (Part 7, Art. 96 of Law No. 44-FZ).

As the contract is performed in stages, the amount of provided security is proportionally reduced (Parts 7, 7.2, 7.3 of Law No. 44-FZ). For this to occur, a contract stage must be "closed" — that is, properly performed and delivered to the Customer with the signing of an acceptance document. Additionally, the supplier must have no outstanding penalties (liquidated damages). If an advance payment was transferred under the contract, the volume of performance must be at least equal to the amount of the paid advance for the security amount to be reduced. If the supplier issued a bank guarantee to the Customer, it does not need to be replaced due to the security reduction: the volume of secured claims is reduced automatically based on information about the closing of the stage entered into the register of contracts (Part 3.1, Art. 45 of Law No. 44-FZ). If security was provided in funds, the portion of the funds by which the security was reduced must be returned to the supplier (Part 27, Art. 34 of Law No. 44-FZ). Similarly, the security is reduced when the contract price is lowered by agreement of the parties.

If the contract volume increases, the supplier must provide the Customer with additional security (Part 1.3, Art. 5 of Law No. 44-FZ). If security was provided in funds, the supplier transfers an additional amount proportional to the increase in the contract price. If the contract is secured by a bank guarantee, the supplier may either obtain a new guarantee considering the changed conditions or amend the terms of the existing guarantee. It is important to remember that when extending the term for performing work, the term of the security guarantee must also be extended if the new work term exceeds the term of the issued guarantee.

Amending Life Cycle Contract Terms

Amending material contract terms is always a "painful" endeavor for both the Customer and the supplier. The Contract System Law contains a principle: when performing a contract, its material terms may not be amended, except for a series of exceptions listed in Article 95 of Law No. 44-FZ (Part 2, Art. 34 of Law No. 44-FZ). For amending a life cycle contract, several additional opportunities exist.

First, it is permitted to change the volume or type of works under the contract, provided that the LCC price changes by no more than 10% (Subclause 1.3, Part 1, Art. 95 of Law No. 44-FZ). Thus, the LCC price within a 10% limit can be either increased or decreased. A question may arise: how does this additional opportunity differ from the standard condition for amending a contract set forth in Subclause 1.2 of Part 1 of the cited article of the Contract System Law? After all, the base norm also permits a 10% change in the contract price due to a change in the quantity of goods or works? The difference lies primarily in the fact that in an LCC, one can change not only the volume (i.e., the quantity of works) but also their types. The volume of works is the number of units provided for by the estimate for each type of work. Types of work are the estimate items themselves. Since it is not always possible to precisely foresee the entire range of works during the design and estimation stage, the law justly permits such amendments to the contract.

Second, it is permitted to amend any material LCC terms if the following circumstances coexist (Clause 8, Part 1, Art. 95 of Law No. 44-FZ):[6]

the term of the life cycle contract is at least one year;
the subject of the life cycle contract involves design, construction, reconstruction, or capital repair works on a capital construction facility. That is, this possibility is inapplicable to contracts for the supply of machinery or equipment;
the price of such a contract must be no lower than the limit established by the Government of the Russian Federation. To date, such a limit is 100 million rubles, or 1 million rubles if the contract was concluded prior to December 31, 2022;[7]
the cause of the amendments is circumstances beyond the parties' control that make the performance of the contract impossible (including the need to amend the project documentation). The law does not contain precise clarifications as to what such circumstances represent. The Ministry of Finance of Russia states that the list of unforeseen circumstances is considered open and cites as an example a change in the cost of price-forming construction resource items that does not depend on the parties;[8]
such an amendment must not increase the contract performance term. In this case, the term for the state expertise of the project documentation is not included in the contract term (if the reason for the LCC amendments relates to project adjustments);[9]
such an amendment must not increase the contract price by more than 30%. During the contract performance, the parties may conclude several supplementary agreements to change its price, but the total volume of the price increase must not exceed 30%;[10]
for such a contract amendment, it is necessary to obtain a decision from the authorized state body: the Government of the Russian Federation, the executive body of a constituent entity of the Russian Federation, or the local administration (depending on whether the procurement is for federal, regional, or municipal needs). A written justification for the contract term amendments is prepared based on such a decision.

This opportunity allows for the simultaneous amendment of several material terms (e.g., price and performance term). Additionally, based on Clause 8, Part 1, Article 95 of Law No. 44-FZ, only one term can be amended—for example, only the term or only the price of the contract.

Third, a one-time amendment to the LCC term is permitted (Clause 9, Part 1, Art. 95 of Law No. 44-FZ). In this case, the term can be extended for a period not exceeding the performance term originally established upon concluding the contract. For such an amendment, the following conditions are necessary:

the subject of the life cycle contract involves design, construction, reconstruction, or capital repair works on a capital construction facility. Accordingly, one cannot apply Clause 9, Part 1, Article 95 of Law No. 44-FZ to contracts for the supply of machinery or equipment;
the cause of the amendments was circumstances beyond the parties' control that make its performance impossible. In this situation, such circumstances include not only the need for project documentation amendments but also a contract delay caused by the counterparty's fault.

The procedure for extending the contract term includes a series of mandatory conditions:

if the amendments involve adjustments to the project documentation, the new contract term includes the period for the state expertise of the project;[11]
if the supplier provided funds as contract security, the parties must agree on a new term for returning these funds to the contractor;
if the contract is extended due to the counterparty's delay, amendments can be made to it only if the counterparty has paid all penalties (fines or late fees) presented by the Customer;[12]
the counterparty must provide the Customer with new security for the contract performance, considering the extended term.

Fourth, an increase in the contract price is permitted when the estimate exceeds the original price (Clause 11, Part 1, Art. 95 of Law No. 44-FZ). This refers to a situation where, during the course of the works, it becomes clear that the estimated cost does not fit within the contract price. Such an amendment is possible under the following conditions:

the subject of the life cycle contract involves design, construction, reconstruction, or capital repair works on a capital construction facility;
the contract price must not increase by more than 30%;
the new estimate must be verified for accuracy by a special check within the state expertise process;
it is necessary to obtain a decision from the authorized state body: the Government of the Russian Federation, the executive body of a constituent entity of the Russian Federation, or the local administration (depending on the level at which the procurement is conducted).

Fifth, a reduction in the contract price is permitted if it exceeds the estimate (Part 1.2, Art. 95 of Law No. 44-FZ). Such an amendment is possible under the following conditions:

the subject of the life cycle contract involves design, construction, reconstruction, or capital repair works on a capital construction facility;
the accuracy of the new estimate must be confirmed by a special check within the state expertise process.

Unlike a price increase, a price reduction when it diverges from the estimate does not require the consent of authorized state bodies.

Material terms of a single LCC during its performance may be amended on various grounds; however, if the law establishes any restriction (e.g., a ban on exceeding the contract price by more than 30%), then all amendments are made considering previously introduced changes as well as legal restrictions.[13]

Additionally, the Contract System Law provides a special opportunity to amend any material terms of contracts concluded prior to January 1, 2026 (Part 65.1, Art. 112 of Law No. 44-FZ). Such an amendment is permitted under the following conditions:

the parties' agreement is required to amend the contract;
circumstances beyond the parties' control arose during contract performance, making its performance impossible;
it is necessary to obtain a decision from the executive body (the Government of the Russian Federation, a constituent entity body, or the local administration), depending on the procurement level.

This norm exists independently of Article 95 of the Contract System Law and serves as a special ground for contract amendment. It contains no restrictions for making amendments. Therefore, based on this norm, one can, for example, increase the price or term of a contract beyond the limits established by the general rules of contract legislation.[14]

All other (general) grounds for amending material terms established in Law No. 44-FZ may also apply to life cycle contracts. For example, the LCC price can be reduced without changing the volume of works or quantity of goods (Subclause 1.1, Part 1, Art. 95 of Law No. 44-FZ). When changing the quantity of goods or volume of works, the price is reduced or increased within 10% (Subclause 1.2, Part 1, Art. 95 of Law No. 44-FZ). The terms of individual stages may be amended without extending the contract term (Clause 12, Part 1, Art. 95 of Law No. 44-FZ).

Features of Supplier Selection and Evaluation for Concluding a Life Cycle Contract

If a life cycle contract is concluded through a competitive procedure (auction or tender), the Customer must comply with the rules for evaluating bidders seeking to conclude such a contract.

Under general procurement rules, four criteria may be used when selecting bidders (Part 1, Art. 32 of Law No. 44-FZ; Clause 6 of Decree of the Government of the Russian Federation No. 2604 dated December 31, 2021, On the Evaluation of Bids for Participation in the Procurement of Goods, Works, and Services for Ensuring State and Municipal Needs... (the "Decree No. 2604")):

contract price;
expenses incurred by the Customer after accepting the contract results (i.e., costs for the operation and repair of the supplied goods or built facility);
characteristics of the object of procurement (qualitative, functional, and environmental);
qualifications of the bidders.

If procurement is conducted in the form of an auction, only one criterion is applied—the contract price proposed by the bidder. If the Customer conducts a tender, at least two criteria must be used, one of which will be price-related (Clauses 4 and 5 of Decree No. 2604).

However, features are provided for the evaluation criteria for bidders when concluding a life cycle contract. Since the subject of the contract includes not only the supply of goods or performance of works but also subsequent maintenance (support), the Customer's costs for such maintenance must be included in the contract price upon its conclusion. Consequently, the "expenses" criterion is absorbed by another criterion—"contract price." Therefore, instead of the standard "contract price" and "expenses" criteria, the Customer may use one special criterion: "life cycle cost of the goods or of the facility created as a result of the work" (Part 3, Art. 32 of Law No. 44-FZ; Clause 6 of Decree No. 2604). In this case, the rules of Decree No. 2604 regarding the application of the "contract price" criterion apply to such an evaluation criterion.

This possibility extends to any life cycle contracts regardless of their subject, object, or specifics (manufacture and supply of equipment or construction of a capital facility).

In addition, special conditions are established for evaluating bids for procurement under a life cycle contract that provides for the design, construction, reconstruction, or capital repair of a capital construction facility (Clause 31 of Decree No. 2604).

First, in such procurement, the evaluation criteria "expenses" and "characteristics of the object of procurement" are not applied at all when selecting bidders.

Second, the bidders' qualifications are evaluated exclusively based on confirmed experience corresponding to the subject of the contract (performance of similar work). Other qualification criteria present in Decree No. 2604 (availability of financial resources or qualified specialists, material and production facilities, business reputation) are not applied.

Third, the detailing indicators by which bidders' qualifications are evaluated also have specific features. The experience of applicants must be confirmed by a performed contract or agreement (the "confirming agreement"). The subject of such an agreement must be an object similar to the object of the ongoing procurement—i.e., the life cycle contract. In the documentation, the Customer must specify one of the objects that may serve as the subject of a confirming agreement. Decree No. 2604 contains an exhaustive list of such analogous objects:

capital construction facility (except for a linear object);
linear object (except for a motor road);
motor road;
highly dangerous, technically complex, and unique capital construction facility;
cultural heritage site.

Fourth, the Customer may accept the following types of contracts (or agreements) as confirming agreements:

a life cycle contract whose subject is the design, construction, reconstruction, or capital repair of a capital construction facility;
a contract for the design, construction, and commissioning of capital construction facilities (not categorized as an LCC);
a contract for the design, engineering surveys, construction, reconstruction, or capital repair of a capital construction facility (not categorized as an LCC);
any other contract for the performance of construction, reconstruction, capital repair, or demolition works on a capital construction facility (including a linear object), as well as for the performance of works to preserve cultural heritage sites.

There is one "concessionary" point for bidders: if a confirming agreement initially contains project documentation as an annex, the bidder is not obligated to submit such documentation to the Customer as part of the experience confirmation documents. That is, the Customer may accept agreements for evaluation without project document annexes (Subclause "d", Clause 31 of Decree No. 2604).

Fifth, if the works under the life cycle contract involve obtaining a permit to commission a capital facility, the Customer is entitled to accept for evaluation only those confirming agreements that contain a similar condition regarding the need to obtain such a permit.

Sixth, one must comply with the weight ratios established for life cycle contracts. When a tender is conducted, several evaluation criteria are used; therefore, the Customer must establish detailing indicators and weight values for each criterion. The sum of the weight values of all applied criteria must be 100% (Parts 4 and 5, Art. 32 of Law No. 44-FZ; Clause 8 of Decree No. 2604). For various categories of procurements, Decree No. 2604 establishes the permissible weight ratio of criteria—the maximum weight values that the Customer is obligated to observe. For a life cycle contract, the limit percentage for weight values consists of the following parameters (Clause 3 of Appendix No. 2 to Decree No. 2604):

the minimum weight for the "price" or "life cycle cost of the goods or of the facility created as a result of the work" evaluation criterion must be 60%;
the maximum weight for the "bidder qualification" evaluation criterion must be no more than 60%.

Distinguishing the Life Cycle Contract from Comprehensive Contracts and Other "Turnkey" Construction Contracts

A life cycle contract may include design, construction, reconstruction, or capital repair works on a facility. However, other types of procurements also exist in the law that involve comprehensive works for construction, reconstruction, or capital repair. Although such contracts involve "turnkey" works, they differ from LCCs in many aspects, and some types of similar construction contracts are regulated by special norms altogether.

The LCC is most frequently confused with the so-called comprehensive contract, the subject of which simultaneously involves project preparation, engineering surveys, and the actual construction (or reconstruction, capital repair) of a facility (the "comprehensive contract").

A comprehensive contract is a special type of procurement (Part 56, Art. 112 of Law No. 44-FZ). It may be concluded until January 1, 2026 (unless this date is further extended at the legislative level). The project documentation for such a contract may provide not only for the capital facility but also for the equipment necessary for its operation. In such a case, the Customer may combine construction works and equipment supply in one contract (Part 57, Art. 112 of Law No. 44-FZ). At first glance, this scheme is very similar to a life cycle contract. However, in reality, these are completely different types of contracts.

In 2020, supplements regarding comprehensive contracts were added to the Contract System Law. State authorities at the federal, regional, and municipal levels were to approve lists of capital construction facilities, and the procedure for concluding and performing contracts for the construction of such facilities was regulated by special norms (Parts 56–63, Art. 112 of Law No. 44-FZ).

Unlike other "turnkey" construction contracts, including LCCs, the pricing for a comprehensive contract follows separate rules. Its initial (maximum) price, the methodology for compiling the estimate, and the procedure for price amendment are regulated by a Ministry of Construction of Russia order issued specifically for this type of procurement.[15]

The comprehensive contract price must be divided into several parts (Part 61, Art. 112 of Law No. 44-FZ):

the cost of design works;
the cost of construction (reconstruction or capital repair) works;
the cost of equipment provided for by the project to be supplied under the contract.

As we can see, the principle of structuring the comprehensive contract price differs from the price structure of a life cycle contract: in an LCC, the first part of the price includes the cost of design, construction, and necessary equipment. The second part of the LCC price always determines the cost of subsequent facility support. A comprehensive contract basically does not provide for support, but it does separately distinguish the cost of design and the equipment supply price.

The result of a comprehensive contract is always a building or structure for which a commissioning permit must be obtained (Part 63, Art. 112 of Law No. 44-FZ).

Although a comprehensive contract allows for a combination of construction and supply, it does not involve the subsequent maintenance of the capital construction facility. Therefore, such a contract is not a life cycle contract, as the Ministry of Finance of Russia has repeatedly pointed out.[16]

Furthermore, one must distinguish an LCC from other "turnkey" construction contracts:

works for the design, construction, and commissioning of capital construction facilities. Such contracts are regulated by Decree of the Government of the Russian Federation No. 563 dated May 12, 2017... (Part 16.1, Art. 34 of Law No. 44-FZ);
works to preserve cultural heritage sites (Part 16.2, Art. 34 of Law No. 44-FZ). The subject of such a contract may involve various methods of CHS preservation: conservation, repair, restoration, or adaptation for modern use, as well as all related works: design, scientific research, surveys, author's supervision, technical supervision, and scientific management;
works for design, engineering surveys, and construction if the Customer will use standard project documentation (Part 16.3, Art. 34 of Law No. 44-FZ).

Despite the law's separation of comprehensive contracts, "turnkey" contracts, and life cycle contracts as independent procurement varieties, in terms of performing construction works, all of them are subject to urban planning norms regulating design and construction.

Summarizing the characteristics of a life cycle contract, one can highlight the primary features specific to this type of procurement:

a life cycle contract involves not only the creation of a facility or the supply of goods but also the counterparty's obligations for the subsequent maintenance of such a facility (or goods) during its service life. Since these duties are combined in one contract, the life cycle contract is always mixed in nature (performance of works or supply of goods, as well as provision of services);
the subject of a life cycle contract may involve both construction (reconstruction or capital repair) works on a facility and the supply of goods (machinery and equipment);
the maintenance obligation in an LCC should not be confused with the ordinary warranty obligations of a contractor or supplier. The maintenance period corresponds to the life cycle of the object, which generally lasts longer than a standard warranty period. Under warranty obligations, the counterparty is only obligated to rectify defects in the goods or facility. Maintenance obligations for an LCC object are significantly broader: this may include not only repair but also the operation or disposal of the object. Warranty obligations do not have a "contract price": the counterparty rectifies defects at its own expense. Maintenance in an LCC has its own cost, which is stated in the contract and must be paid by the Customer. Most importantly: facility maintenance is a separate stage of obligations in an LCC, and this obligation exists until the end of the maintenance period regardless of the state and quality of the facility, and regardless of whether the Customer has complaints. The maintenance period is always included in the performance term of the life cycle contract. Conversely, a supplier's warranty obligations arise only after the termination of the contract, and if the Customer has no quality complaints, warranty performance may never occur;
the life cycle contract price must necessarily be divided into two main parts: the cost of performing works (or the goods supply cost) and the cost of subsequent maintenance;
security for the performance of a life cycle contract is also divided into two parts. The first part secures the supply of goods or creation of a facility and is provided prior to contract conclusion. The second part secures maintenance during the life cycle period and must be provided to the Customer prior to the delivery and acceptance of the facility or goods. The amount of the second part of the security may not exceed 10% of the cost of the main works (or the goods price);
the Contract System Law provides additional opportunities for amending the material terms of "turnkey" construction contracts. These opportunities also apply to construction life cycle contracts. If the subject of an LCC is the supply of goods rather than the construction or reconstruction of a facility, it will not be able to amend the contract terms using these special norms;
the process of evaluating bidders for concluding an LCC must be conducted considering special requirements. First, in any LCC procurement, the "price" evaluation criterion can be combined with the "expenses" criterion, resulting in the use of a single "life cycle cost" criterion. Second, in construction LCCs, the "expenses" and "characteristics of the object of procurement" criteria should not be applied, and bidders' qualifications are evaluated exclusively based on experience confirmed by performed contracts.

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References

[1] Federal Law No. 449-FZ dated December 27, 2019, On Amending the Federal Law On the Contract System in the Sphere of Procurement of Goods, Works, and Services for Ensuring State and Municipal Needs.

[2] Decree of the Government of the Russian Federation No. 96 dated February 20, 2004, On the Consolidated Register of Defense-Industrial Complex Organizations.

[3] Decree of the Government of the Russian Federation No. 19 dated January 13, 2014, On Establishing Cases in Which a Price Formula and a Maximum Contract Price Value are Specified Upon Concluding a Contract.

[4] Order of the Ministry of Economic Development of Russia No. 567 dated October 2, 2013, On Approving Methodological Recommendations on the Application of Methods for Determining the Initial (Maximum) Contract Price, the Price of a Contract Concluded with a Single Supplier (Contractor, Executor).

[5] Clause 3 of Decree of the Government of the Russian Federation No. 963 dated September 20, 2014, On the Implementation of Banking Support for Contracts.

[6] Letter of the Ministry of Finance of the Russian Federation No. 24-06-06/13415 dated February 25, 2022.

[7] Clause 1(1) of Decree of the Government of the Russian Federation No. 1186 dated December 19, 2013, On Establishing the Contract Price and the Limit Contract Price at Which or Above Which Material Contract Terms May be Amended by Agreement of the Parties Based on a Decision of the Government of the Russian Federation, the Highest Executive Body of a Constituent Entity of the Russian Federation, and the Local Administration, if Contract Performance is Impossible Due to Circumstances Beyond the Parties' Control Without Amending its Terms.

[8] Letter of the Ministry of Finance of Russia No. 24-06-06/45785, Ministry of Construction of Russia No. 24044-AL/09, FAS Russia No. PI/47490/21 dated June 10, 2021, On the Position of the Ministry of Finance of Russia, the Ministry of Construction of Russia, and FAS Russia on the Issue of the Possibility of Amending the Price and Performance Term of a State Contract.

[9] Letter of the Ministry of Finance of Russia No. 24-03-07/8590 dated February 10, 2020. [10] Letter of the Ministry of Finance of Russia No. 24-06-06/118779 dated November 27, 2024.

[11] Letter of the Ministry of Finance of Russia No. 24-03-07/18880 dated March 12, 2020; Letter of the Ministry of Finance of Russia No. 24-03-07/8590 dated February 10, 2020.

[12] Letter of the Ministry of Finance of Russia No. 24-03-07/78265 dated October 11, 2019.

[13] Letter of the Ministry of Finance of Russia No. 24-06-06/118779 dated November 27, 2024.

[14] Information Letter of the Ministry of Finance of Russia No. 24-01-07/31697 dated April 12, 2022; Letter of the Ministry of Construction of Russia No. 29368-IT/09 dated June 27, 2022.

[15] Order of the Ministry of Construction of Russia No. 604/pr dated August 21, 2023, On Approving the Procedure for Determining the Initial (Maximum) Contract Price, the Subject of Which May Simultaneously be the Preparation of Project Documentation and (or) the Performance of Engineering Surveys, the Performance of Construction, Reconstruction, and (or) Capital Repair Works on a Capital Construction Facility, the Price of Such a Contract Concluded with a Single Supplier (Contractor, Executor), the Methodology for Compiling the Estimate of Such a Contract, and the Procedure for Amending the Price of Such a Contract in Cases Provided for by Subclause "a" of Clause 1 and Clause 2 of Part 62 of Article 112 of Federal Law No. 44-FZ dated April 5, 2013.

[16] Letter of the Ministry of Finance of Russia No. 24-03-08/18966 dated March 12, 2020; Letter of the Ministry of Finance of Russia No. 24-01-06/62640 dated July 17, 2020.