An error in the procurement procedure results in a clawback –

Why an Error in a Public Contract Counts as a Breach of Budgetary Discipline

This text is based on the rules for subsidies from the state budget, state funds, and the National Fund under Act No. 218/2000 Coll. (under Czech legislation); in the case of a subsidy from the budget of a municipality or region, a similar but separate regulation applies under Act No. 250/2000 Coll., on Budgetary Rules of Territorial Budgets. A breach of budgetary discipline includes, among other things, the unauthorized use or retention of funds received by the recipient from the state budget, a state fund, or the National Fund (§ 44 of the Budgetary Rules). The decision to grant a subsidy usually imposes an obligation to select suppliers in accordance with the Public Procurement Act. Anyone who violates this obligation uses the subsidy in violation of the conditions.

For the subsidy recipient, the most important rule concerns the moment of the breach. The law explicitly considers a breach of budgetary discipline to also include a breach of an obligation directly related to the purpose for which the subsidy was granted, which occurred before the receipt of the funds and which persists at the moment of their receipt; the first day of the breach is then the day you receive the money (Section 44(1)(j) of the Budgetary Rules).

An error in a tender published before the payment request thus does not become a problem only during an audit, but at the moment the subsidy is credited to your account — provided, of course, that it directly relates to the purpose of the subsidy; a minor defect without this link is not assessed in this way. However, in this case, according to the law, the penalty is not calculated from the receipt of the money, but only from the day following the day by which the recipient was obliged to pay the levy under the payment assessment.

This construction explains why levies also affect projects that turned out well. The work is completed, the supplier has been duly paid, and the purpose of the subsidy has been fulfilled. From the perspective of budgetary rules, however, part of the money was used in violation of the conditions under which it was provided, and that is enough.

The administration of levies is carried out by tax offices in accordance with the Tax Code, and the recipient has the status of a tax subject in the proceedings. The dispute is therefore not conducted with the subsidy provider or with the ÚOHS, but with the tax administration, and the rules of tax proceedings apply to it, including appeals and lawsuits to the Regional Court. This choice of process has practical consequences: the arguments, supporting documents, and deadlines are governed by the Tax Code, not the Public Procurement Act, and the defense must therefore be able to work with both regulations simultaneously.

Liability and the Amount of the Levy: Two Different Questions

In a 2025 judgment, the Supreme Administrative Court clearly separated what determines whether a levy will be imposed at all and what determines its amount. It stated that considerations of whether a breach of the Public Procurement Act could or could not have influenced the selection of the most suitable bid are not material to the liability for the breach of budgetary discipline itself, but are a material circumstance when assessing the proportionality of the amount of the levy (judgment of the Supreme Administrative Court, file no. 8 Afs 60/2024 of August 22, 2025, available at vyhledavac.nssoud.cz).

The dispute concerned a recipient of a subsidy from the Operational Programme Research and Development for Innovation, who received over CZK 366 million for the project. The audit revealed errors in several tenders: failure to disqualify a foreign bidder who did not prove qualification within the deadline, failure to extend the deadline for bids after a change in the tender conditions, and non-transparent provisions of the tender documentation. The tax office assessed levies of over CZK 11.7 million, and the court upheld them.

Three conclusions emerge from the judgment that subsidy recipients are usually unaware of. First, the audit does not have to prove the existence of a specific supplier who would have submitted a more advantageous bid but for the contracting authority's error; a qualified assessment of why the competition could have been jeopardized is sufficient. Second, the disputable nature of the interpretation of the law is not a reason to reduce the levy. And third, the levy is not a criminal sanction, so the prohibition of double counting of the same circumstance does not apply to it.

The judgment concerned tenders awarded under the previous Public Procurement Act. However, its conclusions regarding the levy are based on budgetary rules, not on specific procurement procedures, and generally apply to tenders awarded today as well.

The amount of the levy is then determined by the tax office to the extent to which budgetary discipline was breached, or according to a lower rate determined by the provider (Section 44a of the Budgetary Rules). Generally, the levy cannot be higher than the total amount of the subsidy paid as of the date of the breach; however, the law does not explicitly exclude this upper limit for a defect existing before the receipt of the money. How severely a specific error will impact you is therefore assessed according to the rate set by the subsidy decision and how convincingly you demonstrate its minor impact on the competition — our Prague-based Czech legal team at ARROWS law firm always prepares these arguments against the text of the subsidy decision.

Procurement Defects Most Frequently Evaluated during Audits

A common defect is the failure to extend the deadline for submission of bids after a change in the tender conditions. The contracting authority modifies parameters, the delivery deadline, or the scope of the subject matter via additional information, but leaves the deadline running. The audit then assesses whether it was a clarification or a change to which bidders needed time to react, and a defense based on the claim that it was merely an explanation is usually difficult.

The second typical defect is the incorrect assessment of qualifications, especially in the case of foreign bidders. The contracting authority accepts documents issued only for the bidder's country of seat, fails to invite them to supplement the documents, and does not disqualify the bidder. In the aforementioned dispute, the court explicitly stated that the contracting authority's passivity in verifying qualifications cannot be evaluated in its favor.

The third defect, which is the most surprising, is non-transparent tender documentation. In the same dispute, the recipient stated in the documentation that if a bid exceeded the expected value, it could be a reason to cancel the procedure. The court assessed this as non-transparent because the contracting authority — at that time still under Act No. 137/2006 Coll., on Public Contracts — gave itself a broader right to cancel the procedure than allowed by its Section 84(2)(d) and (e), and for this single defect alone, the levy was set at 25% of the subsidy amount.

A similarly restrictive interpretation of the grounds for canceling a procedure also applies under today's Section 127 of the Public Procurement Act: a procedure can only be canceled for reasons worthy of special consideration or due to an unpredictable material change in circumstances, not at the sole discretion of the contracting authority (Section 127 of Act No. 134/2016 Coll.).

The fourth group consists of errors in evaluation and selection. This includes accepting a bid that does not meet the technical conditions of the tender documentation, or failing to cancel a procedure in which, after the disqualification of an unsuitable bidder, only a single bid remained. Which of these defects threatens your tenders depends on the type of subject matter, the number of additional pieces of information, and how the tender documentation was written — therefore, the Prague-based Czech legal team at ARROWS law firm reviews tenders funded by subsidies individually against the file, not according to a general checklist. The general context of transparency in procurement is analyzed in the text on transparency in public procurement.

How Much the Levy Is and When Rates Are Not Cumulative

In the decision to grant a subsidy, the provider may stipulate that a breach of certain conditions will be penalized with a levy lower than the entire subsidy (Section 14 of the Budgetary Rules). It will specify a percentage range, a fixed percentage share, or a fixed amount, taking into account the severity of the breach and its impact on the purpose of the subsidy. These rates are usually in the annex to the decision, and those who do not know them do not know what risk they are working with.

The dispute in question shows what such rates look like. The annex to the subsidy decision there distinguished, among other things, less serious breaches for which a levy of 5 to 10 % of the subsidy amount could be imposed. The recipient sought classification in this category, but the court rejected this because it was not a formal error, but a defect with a fundamental impact on the selection of the supplier. Before signing the subsidy decision, it is therefore worthwhile to know exactly what falls into which category.

The tax office is bound by these rates and cannot deviate from them. In the case of a percentage range, it chooses a specific amount based on the severity of the breach and its impact on compliance with the purpose. If the provider does not set a lower rate for the given breach, the levy is the entire amount in which budgetary discipline was breached, i.e., the subsidy amount used in violation of the conditions.

A special rule on concurrence applies to public contracts. In the event of multiple breaches of obligations in public procurement, a levy in the amount of the highest levy set by the provider is imposed, unless the provider explicitly states otherwise. Three errors in one tender therefore do not mean a triple levy, but a levy for the most serious one. In the mentioned dispute, the same rule was established by the subsidy decision, and the court verified that the amount of the levy was indeed based only on the most serious breach and that less serious errors had no effect on it.

A penalty of 0.4 per mille of the levy amount is added to the levy for each day of delay, up to the amount of the levy. Generally, it is calculated from the day following the breach; therefore, in audits conducted years later, it often reaches the amount of the levy itself. However, for defects that existed before the receipt of the money, the law provides an exception, and the penalty is calculated only from the expiry of the deadline for paying the levy under the payment assessment. How to defend against a sanction you consider disproportionate is analyzed in the text on defense against disproportionate subsidy fines.

What to Do Before Submitting a Payment Request

Since a defect directly related to the purpose of the subsidy that exists before the receipt of the money becomes a breach on the day of its receipt, the cheapest audit is the one you perform yourself before requesting payment. Go through every tender funded by the subsidy against the conditions of the decision and find out whether the documentation complies with the law and whether you have complied with it.

The first step is to compile an overview of tenders with their risks. For each tender, you need to know whether the tender conditions were changed and deadlines extended, how qualifications were assessed, how many bids remained after disqualification, and whether the documentation contains its own grounds for cancellation beyond the scope of the law. These are the four points that audits check most frequently.

The second step is to evaluate what can be done about the detected defect. As long as the contract is not concluded, some errors can be corrected in the procedure itself, for example, by extending the deadline or re-evaluating qualifications. Other times, the correct solution is to cancel the procedure and publish a new one, which is a decision with its own risks; when a contracting authority is allowed to cancel and how suppliers defend themselves against it is analyzed in the text The contracting authority canceled the tender procedure in which you submitted a bid.

The third step is communication with the provider. If you find a defect that can no longer be corrected, it is better to address it with the provider before the audit finds it, and to know the rate that applies to it under the decision. Whether it is worth opening up the defect or, conversely, defending the procedure as lawful depends on the nature of the error and the wording of the subsidy conditions — therefore, the Prague-based Czech legal team at ARROWS law firm makes this choice only after analyzing the specific tender.

Recipient Errors That Unnecessarily Increase the Levy

The most common error is relying on the fact that the tender was previously approved by the provider or was not addressed by the ÚOHS. Neither protects the recipient. The tax office assesses the tender independently; in the mentioned dispute, the court explicitly confirmed that the provider's initial failure to point out the discrepancy could not affect the outcome of the subsequent audit finding.

The second error is arguing that it was a formal defect with no impact on the outcome. This argument is aimed only at the amount of the levy, not at liability, and has strength only if it is documented. Furthermore, the court refused to allow the complexity or disputability of a legal issue to be applied as a mitigating circumstance.

Those who merely claim that the same supplier would have won will not succeed; those who document why the error could not have influenced the range of bidders stand a chance of a lower rate. The third error is ignoring the penalty. Recipients focus on the levy and treat the penalty as a minor item. For breaches that occurred after the receipt of the money, it is calculated from the breach and can reach the amount of the levy, so for older projects, it is usually as large an amount as the levy itself. Timely payment of the levy stops further growth of the penalty even if you continue to defend against the levy.

The fourth error is a late request for waiver. The General Financial Directorate may, for reasons worthy of special consideration, waive the levy or penalty in part or in full, but the request must be submitted no later than one year from the legal force of the payment assessment. The submission of the request itself does not postpone the obligation to pay the levy, so without a separately resolved deferment, the penalty continues to run. In addition, the law excludes from the waiver of the levy part of the funds covered by the budget of the European Union, so it is necessary to first find out which way the money flowed to your project. The context of assessment deadlines is analyzed in the text on statute of limitations on returning subsidies.

Final Summary

The article has shown that an error in a tender procedure for a subsidized project does not just become a problem with the ÚOHS, but a breach of budgetary discipline for which the tax office will assess a levy. Liability is determined by the breach of the rules itself, while the amount of the levy is determined by its impact on the competition and the rates set by the provider.

For company management, two pieces of information and one date are decisive. The first piece of information is the levy rates in the annex to the subsidy decision, as these determine how much a specific error will cost you. The second is the list of tenders with risk points. The date is the day of the payment request, because a defect that persists at that moment becomes a breach on the day the money is received.

Delay becomes expensive here in two ways. The penalty for defects arising after the receipt of the money runs from the breach and can reach the amount of the levy, and a defect that could have been corrected in the procedure can no longer be corrected after the contract is concluded. Recipients who prevented a levy had their tenders reviewed before they submitted the payment request.

Our Prague-based Czech legal team at ARROWS law firm will review tenders funded by subsidies even before the payment request, propose remedies for detected defects, represent you in tax audits and in levy proceedings as well as before administrative courts, and prepare a request for waiver. Write to us at consultation@arws.cz or explore our public procurement service.