A significant part of the funds spent through Prozorro falls on construction. Last year, procuring entities signed agreements for such works worth almost UAH 280 billion, which is 30% of the total amount under contracts concluded. The cost of each construction object is based on the design and estimate documentation and consists of several parts: for example, operation of the necessary equipment, wages paid to workers, costs of materials.
We at DOZORRO systematically monitor the procurement of construction works, in particular look for inflated prices for construction materials. However, procuring entities and businesses noted that their cost in the contract may be too high because wages are included in this item of expenditure as they seem to be impossible to indicate in real terms due to restrictions.
So, we decided to find out how the level of wages in construction contracts is formed. We checked which regulatory framework settles and if it does settle this issue at all, studied the approaches of the AMCU and the State Audit Service, and asked the opinion of the Treasury.
Calculation of wages in construction
The main documents regulating pricing in construction are the Guidelines for Determining the Cost of Construction and the Procedure for Calculating the Estimated Wage (hereinafter referred to as Procedure No.281), which is considered when determining the cost of construction.
What is an estimated wage? This is an indicator that serves as the basis for calculating the cost of remuneration for construction workers. It comes in two types:
- the one that is considered in the project, on the basis of which the expected cost of a procurement transaction (investor estimate) is set, is determined by the procuring entity;
- the one that is considered in the contractual price, that is, the final value under the contract, is determined by the contractor.
The amount under wages adopted in the project should not be lower than the average monthly wage in construction for the previous year (determined by the State Statistics Service) multiplied by the inflation index (determined by the Cabinet of Ministers). In 2024, for example, the minimum limit for the investor estimate is UAH 13,707.89. The upper limit is not set.
The Procedure No.281 provides that potential contractors independently determine the amount under the estimated wages that they plan to receive at the construction site.
The law does not impose restrictions, local authorities do
In many communities, local councils (or even military administrations) have repeatedly adopted decisions over the past few years to set limits on estimated wages: either for the investor’s estimate only, or for both it and the contractual price.
There are even solutions with detailed calculations. For example, the executive committee of the Chornomorsk City Council provided an explanatory note, where the calculations are based on the formulas and information of construction organizations of the Odesa region. The Pavlohrad City Council is perhaps the only one that singled out in the text the right of the contractor to independently determine the level of wages that it considers necessary.
Are such decisions lawful? According to the Constitution of Ukraine, public authorities, local self-government bodies, and their officials are obliged to act only on the basis, within the powers, and in the manner provided for by the Constitution and laws of Ukraine.
According to the Law on Local Self-Government in Ukraine, it is not within the exclusive competence of local councils and their executive bodies to establish the level of estimated wages. However, they may consider matters within their competence and other laws. When deciding on the establishment of the estimated wage, local self-government bodies (LSGBs) refer to this Law, Procedure No.281, Procedure for State Financing of Major Construction, and even to the forecasts of economic and social development of Ukraine approved by the Cabinet of Ministers. These acts do not expressly provide for the authority of LSGBs to limit the level of wages to employees at the construction site.
According to one of the previous versions of the Procedure No.281, until September 2018, local self-government bodies could set the level of wages, which was taken into account for calculating the cost of construction if it was carried out at the expense of the local budget. However, even then, it concerned the design stage itself, and contractors could determine the wage they would pay to workers at their own discretion. But this norm has already been excluded from the document.
Currently, it follows from Procedure No.281 that the local council determines the amount of the estimated wage only if it itself purchases such works or invests, that is, like any other procuring entity or investor and only at the stage of project development (investor estimate documentation).
Therefore, such decisions, if they concern contractual prices of participants and/or objects for which work is not purchased by LSGBs, go beyond the powers granted to local councils and look like a consequence of an expanded interpretation of the current provisions.
Requirements in the tender documentation
Sometimes procuring entities also indicate the requirements for the level of the wage in the tender documentation: “must amount to 14,500.00,” “cannot be higher than 13,707.89,” “must comply with the level established by the … City Council.”
Article 22 of the Law of Ukraine on Public Procurement establishes a mandatory list of information to be specified in the tender documentation. It does not refer to the mandatory amount of a wage within construction for participants. Part three of the same article stipulates that the tender documentation may contain other information, the requirements for the availability of which are provided by law and which the procuring entity considers necessary to include in the tender documentation.
However, clause 5 of Procedure No.281 explicitly states that determining the amount of the estimated wage when drawing up the bid price is the competence of the participant.
Attitude of control and appeal bodies to wage restrictions
We analyzed the approaches of public authorities to establishing a requirement in the tender documentation to limit the level of estimated wages. Few potential participants decided to file a complaint with the AMCU. The system has only 5 cases in which there was a requirement for the procuring entity to establish the level of wages, while only 2 of them concerned its lawfulness. One of the decisions states that the establishment of the limit of the estimated wage is discriminatory in relation to economic entities, and therefore it is necessary to amend the documentation. In another case, the potential participant was not so lucky; he lacked arguments to prove his position and no changes were introduced.
In our opinion, it is possible to identify several hypotheses why potential participants do not challenge the following requirements:
- they suit them;
- the unpredictability of the decision: participants are not confident enough in their position, so they do not want to take risks;
- a high cost of filing a complaint: at the stage of submitting bids, the fee is 0.3% of the expected value (minimum—UAH 2,000, maximum—UAH 85,000);
- the desire to remain anonymous: when registering a complaint in the system, the data of the complainant are published;
- the reluctance to increase the number of potential participants: the fewer discriminatory requirements, the higher the competition.
Within the practice of the State Audit Service, we found 16 relevant decisions regarding the establishment of limits on the amount of estimated wages. 14 conclusions on the results of the monitoring revealed a violation of the law on the content of tender documentation. In the 2 other conclusions sampled, the auditors did not assess the legitimacy of such a requirement but instead considered its compliance with the awarded participant’s tender bid.
Employers who disagreed with the conclusion appealed to the court to challenge the results; there were 5 such cases. In 4 cases, despite the different views of the courts of the first and the appellate instance, the decision on the lawfulness of the requirement to limit the estimated wage for the participants was the only one: there was a violation. Only one decision of the first instance does not agree with the following interpretation of the norms: the Zhytomyr District Administrative Court concluded that the tender documentation was drawn up in accordance with the law. The State Audit Service did not agree with the decision of the first instance and filed an appeal. However, the Seventh Administrative Court of Appeal dismissed this complaint.
State Treasury and registration of budget commitments
The business also mentioned that it did not set a wage different from that determined by local governments because it received information from the procuring entity that otherwise the Treasury would not register the contract. This means that payment for the work will not be received because procurement transactions at the expense of the national and local budgets are financed from accounts opened with the State Treasury Service of Ukraine. To do this, the Treasury bodies register and record budgetary obligations, check the availability of the necessary documents under procurement transactions.
So, we asked 10 different Treasuries, including the main one:
- When registering budget commitments under construction works contracts, do they check an explanatory note that identifies the main indicators adopted in the contractual price (in particular, the wage)?
- Do they consider the decisions of local self-government bodies on the approval of the estimated wage on the territory of the community?
- Do they register budgetary obligations under contracts for the procurement of construction works when the estimated wage differs from the one established by the decision of the local community?
The responses mentioned that the Treasury bodies:
- Do not check the information contained in the explanatory note (the level of the established wage). In addition, almost all Treasuries indicated that they did not have the authority to control business transactions in terms of accrued and paid wage amounts to the contractor’s employees.
- They do not consider the decisions of local self-government bodies to approve the level of estimated wages in the community.
- They do not check whether the size of the wage in the contractor’s estimates corresponds to the level of the estimated wage established by the decision of the local community.
Conclusions
Overall, at the legislative level, the issue of wages is settled: there is a minimum limit for the wage that is included in the project, and the freedom for businesses to choose how much they will pay their employees. Such a mechanism is a normal way of settlement, as participants plan costs, in particular wages, within the overall construction budget—the expected cost determined by the procuring entity in accordance with the project.
However, there are difficulties at the local level; local councils and even military administrations decide to limit wages at a specific level or up to a certain limit. Presumably, this is done to prevent overspending of budget funds. However, if the procuring entity honestly fulfilled their obligations during the development of the project, in particular in terms of estimates, and correctly determined the expected cost of construction works procurement, the participants will not be able to overestimate the cost of construction. Instead, wage restrictions might negatively affect procurement transactions:
- discourage participants from participating in them;
- encourage them to partially compensate for the planned wage costs at the expense of other items;
- and as a result—reduce the amounts of accrued and paid taxes.
In addition, regulations do not provide for the authority of local councils to regulate the level of wages that the business lays in the contractual price, and since September 2018, to indicate the level of wages in the investor’s estimate.
The experience of the State Audit Service, the Antimonopoly Committee of Ukraine, and the courts on this issue is not extensive, but for the most part, the bodies are inclined to believe that the participants have the right to independently determine the wage amount in the contractual price.
At the same time, when registering budget obligations, the Treasury bodies do not check whether the size of the wage in the contractor’s estimates corresponds to the level of the estimated wage established by the decision of the local community and/or the level of the wage defined in the tender documentation.
In fact, such restrictions can be regarded as interference in the economic activities and financial policies of contractors.
Therefore, we believe that it is expedient not to limit the level of the estimated wage during the procurement of construction works either in the tender documentation or by decisions of the local government. We suggest:
- that the Ministry for Development of Communities and Territories of Ukraine provide explanations to local self-government bodies on their powers in regulating the estimated wages within construction procurement, and, if necessary, expressly prohibit its restriction at least when calculating the contractual price;
- that procuring entities not require the business to determine a certain level of wages within construction procurement;
- that participants defend their right to independently determine the level of wages in the contractual price.
We would like the wage in the estimates to be real and the costs of it not to be included in other items. In addition, it might help influence the accrual and payment of fair taxes.
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.
