In the first half of 2024 alone, the DOZORRO project identified almost UAH 130 million of potential overpayments at construction tenders. In fact, every thirteenth hryvnia in the contracts we monitored was an overpayment. More than UAH 39 million on insulation of houses and UAH 5 million on a shelter in the Dnipropetrovsk region, more than UAH 2 million on lyceums, almost UAH 10 million on an administrative service center in the Vinnytsia region, and almost UAH 2 million on hospitals in Zhytomyr. This is just the beginning of the list because the problem is not local; it covers every region.
Why is this so?
Construction is a regulated industry where any technological process is preceded by a large layer of preparatory works: planning, obtaining permits, preparing project documentation, conducting an examination, approving the project, and selecting a contractor at a tender.
At which point do construction prices become inflated? Usually, we pay attention to the last stage and look for overpayments and abusers there. The prices for construction materials are inflated by the participants—construction companies. They inflate the prices because they can do it; the expected cost of a procurement transaction allows for it. In the end, the business is looking for an opportunity to make money, so it offers its price within the expected cost. After all, the expected cost determined by the procuring entity is the maximum amount they are willing to pay.
How is the expected cost formed?
If we look at the process stage-by-stage, then after the need for construction arose, the procuring entity:
1) draws up project planning tasks;
2) procures the development of project documentation;
3) conducts its examination; approves the project;
4) and only then purchases construction works.
At the first stage, they must draw up and approve the project planning assignment. This is an important document that defines the main requirements for all project planning solutions, the basic parameters, the cost and organization of construction. It is developed based on urban planning and technical conditions, state building codes, so it requires a high level of qualification.
The quality and correctness of its preparation determines the fate of the entire project planning and, as a result, construction. Not every procuring entity has design engineers on staff. Sometimes specialists are engaged on a contractual basis, but there are few such procurement transactions on Prozorro. We suspect that it is at this stage that corruption schemes can begin. For example, procuring entities may entrust the preparation of the project planning assignment to a corresponding organization that is to win the tender, and the payment for these works is already included in the expected cost.
After the stage of pre-project works, the procuring entity purchases works on the development of the project planning documentation. Under the concluded contract, there is a selection of project planning solutions and a preliminary calculation of construction costs, including materials. Such information is reflected in the investor’s estimate documentation.
The final stage of project planning is a mandatory examination of the project and its approval. Within the examination, it is determined whether the project meets the requirements of the legislation. Often, procuring entities impose the obligation to pass it on to the project developer. They, as a procuring entity, are interested in obtaining a positive conclusion as soon as possible, so they might attract unethical experts.
Only after that can the procurement transaction for construction works regarding a certain object be announced. Its expected cost is usually equal to the cost of the construction itself, determined in the estimate. This determines associated costs, which proportionally depend on it: expertise, technical supervision, the services of a consulting engineer, the maintenance of the procuring entity’s service, and the profit of the construction company.
Why are there overpayments on construction materials?
There are many regulatory acts in the construction industry, in particular determining the cost of operating construction machines and mechanisms, staff remuneration, inflation risks, and other related works and services. All these cost items are standardized and regulated. For example, the cost of using equipment is connected to the scope of works and established by standards; wages are up to an average level, which is determined annually. Therefore, one of the few opportunities for speculation about the cost of the project is the price of material resources. In addition, the scope of works can also be overestimated, which also leads to an increase in costs.
Who shall check the prices and when?
The basic document on pricing is the Guidelines for determining the cost of construction. It states that the current prices for resources in the estimate documentation are accepted according to the procuring entity’s data or, on their behalf, from other sources. That is, the procuring entity must personally, or by entrusting it to another organization (usually the project planner), analyze the prices. Consequently, it can be concluded that the procuring entity is responsible for the correctness of pricing, even if this process is entrusted to someone else. Overall, given the number of items of building materials, not every procuring entity has the resources to conduct a full-fledged analysis; in addition, it is necessary to understand how to do it.
In April 2022, the Guidelines were detailed in this part—they provided for the obligation to approve the procedure for such an analysis. Such a methodology, for example, was created by the Agency for Restoration—the procedure for analyzing current prices for material resources in construction. We see that the document has a real impact on procurement. In the procurement of regional recovery services that approved these procedures, we are much less likely to find overpayments.
But only a few of the procuring entities have such methods. Therefore, as a result, we have only a formal obligation to check prices and no liability if the procuring entity fails to do this or does it poorly.
It is at this stage that there is an opportunity for overestimation and even corruption-related collusion. Therefore, it is at this stage that something needs to be changed.
How to identify price inflation?
In fact, the only opportunity for the public now to influence the situation and prevent overpayments in construction is to analyze the estimates that can be freely accessed on Prozorro. Or is it still unlikely?
Firstly, not all procuring entities publish information about the prices of materials dutifully; some only indicate the total amount of expenses. Then, to analyze the contract, you need to appeal to the procuring entity with a request to provide the necessary documents. Procuring entities might be obliged, at the level of the law, to publish prices for materials together with the contracts concluded on Prozorro. We at Transparency International Ukraine support this initiative. Although it will not solve the problems with price inflation globally, it will definitely facilitate public monitoring.
Secondly, the information does not always reflect the technical and qualitative characteristics of the materials, in particular the dimensions and manufacturer data. Often, the project documentation, instead of specific data on the required resource, only indicates the name of the product group, for example, “concrete.” Concrete can be classified according to a considerable list of features: density, grade, class, frost resistance, and intended purpose. In addition, you can use dry concrete or purchase ready-made mixtures. Accordingly, prices vary greatly.
Thirdly, not always the prices in the contract are the final prices for construction materials. When we find potential overpayments in the course of our monitoring, procuring entities often state that:
– the expected cost was determined on the basis of the projected cost of construction, which passed the examination, so the price is within the norm;
– even if it is not normal, the price is dynamic, so it can be adjusted.
– the parties will sign service acceptance certificates according to actual volumes and current prices for material resources, so the price is not final.
Do all inflated prices result in overpayments for the works performed?
During the analysis, it is necessary to consider the type of contractual price—it can be firm or dynamic. With the firm contractual price, the final cost is recorded at the time of the conclusion of the contract; the actual costs shall not differ from those specified. That is, if you find an overpayment in the contract, then the only way out for the procuring entity is to conclude an additional agreement to reduce the price.
The dynamic price implies the possibility of changing the cost of materials by increasing or decreasing it throughout the construction period, depending on the current prices for materials. Therefore, the final prices can only be seen in the service acceptance certificates. They can be either higher or lower than those set in the contract. This is what procuring entities use as an argument when we find potential overpayments in their transactions.
This is not always a banal excuse. One such case is the reconstruction of a residential building in the village of Buzova in Kyiv oblast. Based on the results of the monitoring, the DOZORRO team asked the procuring entity to provide service acceptance certificates. As it turned out, the prices for materials in them were significantly lower than the prices in the original estimate. Sometimes, even with a dynamic price, procuring entities conclude an additional agreement to reduce it. This is precisely what happened in Dnipro after DOZORRO’s appeal.
In addition, the contractual price may take into account inflation. An increase in the cost of materials in the market may affect the change in prices in the service acceptance certificates. But the responsibility for their analysis is entrusted to the procuring entity. Therefore, even if the prices in the contract correspond to market prices, the actual costs may be higher.
The law does not establish which price to choose, so according to our observation, procuring entities often choose a dynamic one. They probably find it more convenient.
What could be done with it?
Currently, the public can only look for overpayments in certain tenders and demand that procuring entities adjust prices with additional agreements or in the certificates. These are situational efforts that will never be able to overcome price inflation in general.
The main corruption risks are contained at the stage of preparation of the project assignment and in the process of developing project documentation. In the hands of unethical procuring entities, public procurement can become a tool for legalizing corruption. That is why it is important to improve the procedure for analyzing prices for construction materials that are laid down in the project and establish the liability of the procuring entity for its violation. It is also necessary to determine a single approach to the analysis of prices for material resources.
Now is the time to get serious about this issue. The Russians are destroying Ukrainian cities every day. A lot will have to be rebuilt, and we hope that the maximum number of such projects will go through Prozorro. But the most significant thing is that the sources of funding for such projects are taxpayer funds and financial support from international partners. Therefore, to spend these funds more rationally and prevent the risks of corruption, it is necessary to establish clear rules for determining and checking prices for construction materials in tenders.
This publication was prepared with the financial support of the European Union. Its content is the sole responsibility of Transparency International Ukraine and does not necessarily reflect the views of the European Union.
This publication was prepared in cooperation with TI Ukraine monitoring specialist Borys Nesterov.
Source: zn.ua
