MPs Again Try to Allow Price Increase in Construction Contracts

Time passes, but the problem of frozen construction works, the price of which has increased due to the war, remains. Legislative restrictions still do not allow reflecting the increase in prices in contracts concluded as a result of tenders.

At the end of June, MPs submitted draft law No.9448 to the Verkhovna Rada, which proposes to amend the Law of Ukraine “On Public Procurement” in this direction. This is the third attempt to allow increasing prices in contracts concluded for budgetary funds — previously, draft laws No.8202 and No.9027 were submitted for the consideration of the Parliament.

A quick recap

Public procurement of construction works traditionally accounts for the lion’s share of all tenders in Ukraine. While construction is underway, the prices of materials and other components are rising. This problem became especially evident after the beginning of the full-scale invasion. However, Article 41 of the Law of Ukraine “On Public Procurement” prohibits changing the price and other essential terms of the procurement contract, except in a few cases. These cases, even considering the old and new estimate standards, make it impossible to adjust the price of construction works in accordance with market growth. Therefore, procuring entities freeze construction projects or terminate contracts, purchasing the rest of the works separately.

With draft law No.8202, MPs proposed to allow increasing prices in contracts for the procurement of works based on the results of adjustment and re-approval of the construction project, as well as to increase the prices of current repair services. To do this, MPs provided for a number of conditions, such as: a change in the price no earlier than six months after the signing of the contract; documentary confirmation by expert organizations that prices have increased; preservation of the volume and quality of work unchanged.

However, draft law No.8202 contained significant corruption risks. In the analysis and letters to the Verkhovna Rada Committee on Economic Development, Transparency International Ukraine warned about this and suggested ways to overcome the risks. Thanks to the joint work of MPs, lawmakers, and representatives of the public sector, some reservations were considered and an alternative draft law 9027 was submitted to the Verkhovna Rada. However, according to the results of consideration in the first reading, it was returned for revision.

It is logical to assume that after the return of draft law No.9027 for revision, the next version will be even more thoroughly cleared of corruption risks and be close to perfect. We have analyzed whether this is the case.

What draft law No.9448 proposes

The essence of the draft law is to allow changing the price of the contract for the procurement of construction works and current repair services concluded within the period specified by the draft law — under a number of conditions.

Which contracts may undergo the price increase?

The initiative concerns the contracts concluded during a state-level natural emergency related to the spread of acute respiratory disease COVID-19 in Ukraine caused by the coronavirus SARS-CoV-2, and after the introduction of the legal regime of martial law in Ukraine and until the day of its termination or cancellation in the prescribed manner.

Simply put, this is about the period from the beginning of the COVID-19 pandemic to the end of martial law. The emergency in connection with the pandemic officially began on March 25, 2020, when the Government adopted Order No. 338-р “On the Transfer of the Unified State Civil Protection System to the State of Emergency.”

The final time limit when contracts had to be concluded so that their prices could be changed has not been determined and is tied to the end of martial law. The legal regime of martial law has been in effect since February 24, 2022, introduced by the Decree of the President of Ukraine No.64/2022 — and the Victory is yet to come.

What conditions and restrictions will need to be met to change the contract price?

• An increase in the price is possible only in terms of unfulfilled volumes of works or services. That is, it will not be possible to review the price for the works already completed and pay for them at new prices.
• The price change must occur without changing the scope of works (services) and without changing their quality.
• The price can be increased based on the results of adjusting the contract price, under the condition of a documentary confirmation by an expert organization entitled to conduct an evaluation of the construction project in accordance with the law. That is, it should be an organization included in the List of the Ministry for Communities, Territories and Infrastructure Development of Ukraine.
• The price can only be changed once, and that’s if it goes up.
• It is prohibited for contracts whose place of performance is in the territories of Ukraine temporarily occupied by russia and/or territories of active hostilities. The lists of such territories are determined by the Order of the Ministry of Reintegration of the Temporarily Occupied Territories of Ukraine No. 309 dated December 22, 2022, and they are periodically amended.

An important requirement for public control is to publish information on when, how, and on what grounds the price of the contract increased. The draft law proposes to organize this as follows: the procuring entity, within 3 working days from the date of signing by the parties of the additional agreement on price increase, publishes a notice of amendments to the contract, changes to it (an additional agreement), as well as an expert opinion of the expert organization, on the basis of which the contract price was adjusted, in Prozorro.

The notice of amendments to the contract must also contain the usual amount of information on amendments under Article 41 of the Law of Ukraine “On Public Procurement,” including the date of amendments and their description.

Risks of the draft law

Despite a number of conditions, restrictions, and requirements for the transparency in price increase, draft law No.9448, unfortunately, contains significant corruption risks. Some were preserved from its predecessor, No.8202. It did not reflect the ideas for their elimination, which contained draft law No.9027.

1. Corruption risks, in which draft law No.9448 follows draft law No.8202:

1.1. A new scheme of abuse may arise due to the fact that the price can increase in future contracts based on the results of new tenders.

Unlike No.8202, draft law No.9448 has at least an initial date starting from which the price can be increased in the concluded contracts — this is the beginning of the pandemic in March 2020.

However, like its predecessor, No.9448 does not contain a deadline by which such contracts were to be concluded. That is, the provision applies not only to contracts concluded from the beginning of the pandemic to the beginning of martial law, but also to contracts concluded during the war, and even to future contracts that will be concluded.

In the analysis of the draft law No.8202, we warned: procuring entities will be able to announce procurement of construction works, whose expected cost will be underestimated; after concluding a contract with a participant with whom there is an agreement, the parties will be able to increase the price to the market value or even exceed it. Formally, these processes will look legitimate, especially with the opinion of the organization (chosen by the procuring entity at their discretion). However, in fact, they will eliminate competition in tenders for construction. Even if the expected cost is not inflated, the participant, by agreement with the procuring entity, will be able to dump in order to bypass competitors, be awarded, and re-conclude the contract already at market prices.

Considering that the procurement of construction works and current repairs constitute the lion’s share of all procurement transactions in the country and are necessary for the reconstruction of Ukraine — such an opportunity jeopardizes competition in Ukrainian procurement in general and the effectiveness of reconstruction.

1.2.  Possibility to increase the price without restrictions.

Like No.8202, draft law No.9448 does not contain safeguards for how many percent or how many times the maximum price of the contract may increase. On a case-by-case basis, the new price will be determined when adjusting the price. The complete absence of restrictions will contribute to abuse. The availability of documents from the expert organization will not solve the problem, since the performer will be chosen by the procuring entity from among the expert organizations.

1.3. Neither of the initiatives indicates a special procedure for the selection of an expert organization and/or additional control measures to ensure that the conclusion be reliable and impartial. It should be noted that this would require significant organizational resources and is unlikely to be implemented in a short time.

1.4. There is no requirement for a minimum amount of work or services to be performed by the contractor so that the cost of the remaining work or services can be reassessed. That is, there will be an opportunity to increase the price of the contract even in cases where the contractor has not even started the work or has completed a small part of it. In such cases, it would be more expedient to terminate the contract and hold a new tender at a new cost.

2. Draft law No.9448 also has its own new risk, which its predecessors did not have: there is no set period that must pass after the conclusion of the procurement contract before its price can be increased. This can make it easier to implement the scheme we wrote about above. Even the risky draft law No.8202 contained the minimum requirement for the expiration of 6 months from the date of conclusion of the contract to the possibility of increasing the price.

3. Lack of consistency with sectoral legislation governing the processes of determining the contractual price, conducting expert evaluation in construction, etc.

3.1. The increase in the price should be confirmed by an expert organization — both for contracts for the procurement of works and for contracts for the procurement of current repairs services. However, the current legislation does not regulate the process of confirmation by the expert organization of the increase in the price of the contract for the procurement of current repairs services, since these services are not considered to be construction in the sense of the current legislation.

3.2. Draft law No.9448 requires the publication of amendments to the procurement contract (additional agreement) but does not clearly indicate the publication of the updated contractual price. It is the contract price that reflects the prices of works and construction materials. Of course, it belongs to the concept of “changes” that require publication. But since only “additional agreement” is indicated in brackets after the word “changes,” there is a risk of interpreting this provision as a requirement to publish only an additional agreement.

4. Technical remarks.

4.1. Unlike draft laws No.8202 and No.9027, No.9448 does not envisage technical changes to the procurement contract in order to provide for the possibility of increasing the price as established by the law. That is, an additional agreement on price change will contradict the provisions of the procurement contract itself because in most cases, it contains an exhaustive list of grounds for changing the price of the contract from Article 41 of the Law of Ukraine “On Public Procurement.”

4.2. The draft law proposes to prohibit the application of the provision for contracts “the place of whose implementation is located in the temporarily occupied territories” and/or “on the territories of active hostilities, determined in accordance with the current legislation of Ukraine.”

However, these concepts are dynamic, the lists of such territories change periodically. Therefore, a question arises: as of what date, the place of contract implementation should not belong to these lists.

Thus, draft law No.9448 has a number of risks and shortcomings, including corruption-causing ones. Partially, the provisions of the draft law do not correspond to the explanatory note: it states that inflation affected contracts concluded between July 1, 2020, and February 24, 2022, and instead, the draft law proposes to cover the contracts concluded from March 2020 until the end of martial law with the provision, and not before its beginning.

How to improve the draft law and do we need to reinvent the wheel?

We support the basic idea of draft laws No.8202, No.9027, No.9448, designed to allow bringing prices to the current market level in contracts for construction and current repairs. But if it is the draft law No.9448 that will pass through the further stages of the legislative process, we urge finalizing it significantly: to establish anti-corruption safeguards and bring it in line with the sectoral legislation.

In search of optimal solutions for the draft law No.9448, we propose to dwell on some anti-corruption ideas already reflected in its predecessor No.9027, and enhance them by implementing the recommendations of the Committee on Anti-Corruption Policy of the Verkhovna Rada, provided in the conclusion to the draft law No.9027.

1. From the draft law No.9027, it is advisable to consider the following safeguards:

1.1. To limit the range of contracts in which it will be possible to increase the price to those concluded before the start of the full-scale invasion. To do this, “after the introduction of the legal regime of martial law in Ukraine and until the day of its termination or cancellation in the prescribed manner” should be replaced with “before the introduction of the legal regime of martial law in Ukraine.” To determine the initial limit, economic studies of inflationary processes and their impact on the possibility of fulfilling contracts concluded after the beginning of the pandemic are needed.

1.2. To establish an upper limit on the increase in price, taking economic studies and statistics on the level of increase in prices for typical construction materials as a basis. At the same time, it is worth heeding the recommendations of the Committee on Anti-Corruption Policy of the Verkhovna Rada and providing that the increase in the price of contracts should be proportional to the specific increase in prices in the market of construction materials and works, but not more than 50%.

1.3. To establish the period that must elapse after the conclusion of the procurement contract before its price can be increased. It would be better if it is an economically justified period. In addition, it is necessary to determine the minimum percentage of works or services that the contractor must already perform before adjusting the cost of the remainder. This will help avoid cases where the parties increase the price immediately after the conclusion of the contract. If the contractor did not have time to start construction or repair, or performed a small part, then it is more expedient to purchase the remainder through a new tender, rather than increasing the price of the existing contract.

2. To consider the recommendation of the Committee on Anti-Corruption Policy of the Verkhovna Rada and determine transparent and competitive principles and/or procedure for selecting an expert organization that will conduct an evaluation of the construction project and current repairs services and on whose decision the possibility of increasing the contract price will depend.

3. To work on the issues related to the price adjustment process, including current repair services. In particular, it is worth considering the possibility of creating a bylaw that would determine the procedure for increasing the price of the contract for the procurement of construction works and current repairs services within the limits established by the Law, regulate the details of price adjustments and the participation of expert organizations. In this case, the blanket norm should contain a reference to such a bylaw.

4. To provide that the procuring entity must publish not only the additional agreement, but also the contractual price, including all its calculations in Prozorro, in the requirements for reports on amendments to contracts.

5. To work on technical issues, namely:

5.1. To provide for including a condition to increase the price of the contract in the text of the contract itself (within the limits specified by law).

5.2. To clarify that the place of implementation of the procurement contract must not be within the temporarily occupied territories or territories of active hostilities at the time of amending the terms of the contract to increase the price.

It is important to process the risks in their totality — then each of them separately will be less dangerous. For example, having introduced all the proposed safeguards, the question of the period that should pass from the conclusion of the contract to the increase in the price will no longer seem so important. At the same time, selective elimination of risks will not save the situation: for example, maximum transparency of processes does not yet guarantee effective control.

Currently, draft law No.9027 looks less risky than its successor No.9448. Therefore, an alternative direction of further work may be the revision of No.9027 because it has already eliminated a number of risks that arose again in No.9448. We urge MPs to consider the above-mentioned comments and suggestions — regardless of which draft law on increasing prices in construction contracts will pass through the Parliament.

The legal analysis was prepared within the USAID UK aid project Transparency and Accountability in Public Administration and Services / TAPAS.