Will Prices for Materials in Construction Be Published? Draft Law No.11057 Analysis

MPs propose to oblige procuring entities to publish data on resource prices in construction tenders. If the draft law is adopted, they will need to be published in a machine-readable format together with the contract, as well as with additional agreements and annexes, if these prices change in them.

This is a good step towards increasing transparency when procuring construction and repair services, that is, the recovery of Ukraine. However, it should be understood that for part of the contracts, the final prices for the materials used at the object will be indicated already in the certificates under which the procuring entity pays the contractor. Therefore, it will be impossible to fully detect overpricing by only analyzing those documents that were published at the stage of concluding the agreement. In general, overpayments are more likely when the cost is overestimated at the start of a procurement transaction.

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The first days of spring brought a new legislative initiative in the field of construction tenders—draft law No.11057. According to it, procuring entities will be required to publish information on prices for material resources when concluding contract agreements or on current repairs for public funds, introducing changes to them or clarifying the contractual price. Documents with such information will become integral annexes to procurement contracts in the field of construction. Let’s take a closer look at what the public will be able to find out and try to predict whether such a step will really help avoid overpricing for building materials.

Which contracts does the draft law focus on?

To introduce the changes, draft law No.11057 proposes to supplement the Law of Ukraine on Public Procurement (hereinafter referred to as the Law). Innovations proposed by the draft law should concern procurement contracts regarding:

• current repair services.
• works on the construction of new objects; expansion, reconstruction, major repairs, and restoration of existing objects and structures for industrial and non-production purposes;
• current repair services or construction works with the development of design documentation(i.e., design-build contracts).

The changes will affect not only procurement contracts concluded as a result of procedures, but also contracts concluded without the use of an electronic system (direct contracts) and having one of the above items.

What information about these contracts is to be disclosed?

Documents containing information on prices for material resources will become integral annexes to these contracts. If the procurement item, in addition to current repairs or construction, includes the development of design documentation, these integral annexes will be attached after drawing up the contractual price, clarified (agreed upon) in accordance with the approved design documentation.

As indicated in the explanatory note, these documents should be added to the procurement contract regardless of the type of contract price, including work on the construction of roads or the provision of road repair services.

What exactly will the documents on prices for material resources include? The draft law proposes the following requirements for the content of documents: name (with characteristics), unit of measurement, quantity, selling price, as well as the cost of transportation together with procurement and storage costs. It does not prohibit the inclusion of other additional information.

The draft law does not specify in more detail which documents and resources are referred to and instructs the government to make appropriate changes to the by-laws. But in general, material resources are raw materials, construction materials, fuels and lubricants, energy of all types, constructions, products, equipment.  This is the definition contained in the General Conditions for the Conclusion and Execution of Contracts in Major Construction, approved by Resolution No. 668 of the Cabinet of Ministers of Ukraine dated August 1, 2005, (hereinafter referred to as Resolution No.668).

How will procuring entities open information about resources at different stages?

First of all, prices for material resources will be published at the stage of concluding the contract. Now, Article 10 of the Law provides that the procuring entity within 3 working days from the date of conclusion of the procurement contract must publish it with all annexes. Draft law No.11057 proposes to add that the procuring entity shall also publish documents containing information on prices for material resources in a machine-readable format. They will need to be published along with the contract and all annexes.

If this is a direct contract, the procuring entity will have to publish the same amount of information (contract, annexes, information on prices for material resources) on Prozorro together with the report on it no later than 10 working days from the date of conclusion of such a contract.

The rules for reporting changes to the procurement contract will also be updated. Currently, under Article 10 of the Law, the procuring entity must, within 3 working days from the date of the changes, publish the notice and the changes to the contract itself if the essential conditions have changed in cases permitted by law. MPs propose to oblige the procuring entity to also notify about changes in prices for material resources.

The procuring entity will have to publish a notice of changes to the procurement 

contract and/or prices for material resources in two situations:

1)    if changes have been made to the essential conditions of the contract; if prices for material resources have changed, documents containing information on prices for material resources in a machine-readable format shall also be published;

2)    if it is a design-build contract and a contractual price is drawn up for it, clarified in accordance with the approved design documentation, it will also be necessary to publish documents with information on prices for material resources in a machine-readable format.

The requirements for the notice of changes to contracts are also proposed to be supplemented:

• in the field of the date of changes and in the field of their cases, it should be possible to indicate the date and cases when the contractual price was drawn up, clarified in accordance with the approved design documentation. This will be relevant for contracts concluded under the “design-build” principle;
• the description of changes will reflect both changes in essential conditions and changes in prices for material resources. 

Expectations vs. reality: will the draft law help fight overpricing?

MPs who are developers of the draft law motivate it by the fact that it is necessary to ensure the transparent use of funds in the procurement of construction and repairs. In the explanatory note, the authors refer to the fact that during the full-scale invasion, contracts under the relevant DK code were concluded for more than UAH 518 billion, and they also mention the recommendations of the 2023 European Commission’s report on Ukraine to strengthen the transparency and openness of public procurement. They argue that procuring entities mostly avoid publishing on Prozorro the prices of material resources that have been used and provide examples of investigations that have revealed multimillion overpricing.

The authors of the draft law No.11057 expect that the changes will ensure compliance with the principle of openness of public information, as well as become indisputable evidence of the intentions of the Ukrainian authorities to ensure the transparent and effective use of funds provided by international partners for reconstruction. It is expected that the new provisions will play a preventive function, and the obligation to publish information on the prices of material resources will prevent crimes. We also agree with this statement, especially when all this available information will also be checked by supervisory and law enforcement agencies.

Here is how construction expert Kristina Artemenko comments on this legislative initiative:

“The features of mutual settlements under contract agreements depend on the type of the contractual price. Considering the possibility of compensating for the increase in prices for material resources at the expense of funds for inflation (if these funds are provided for in the price), the prices of specific materials purchased for the performance of works may not correspond to the prices for them specified in the documents published to the contractual price.

Public awareness due to the openness of this information will contribute to a more responsible attitude:

– of the contractor—to the analysis of prices for material resources during the formation of the contractual price;

– of the procuring entity—to approving the contractual price.

This is important since the contractual price of the concluded procurement contract practically determines the limit of funds under the contract within which construction works must be performed as a result of public procurement.”  

Thus, draft law No.11057 has an excellent goal and justified expectations regarding the preventive nature of the impact on procuring entities. However, the proposed provisions raise questions about the practice of their application:

• The draft law does not specify which documents should become integral annexes to the contract and contain information on prices for material resources. There are three ways to potentially interpret this provision:

1) MPs mean the contractual price, and only changes to it will need to be published. It is the contractual price that is an integral part of the contract agreement concluded based on the results of a procurement transaction. In this case, draft law No.11057 will allow seeing the final prices for material resources only if the contractual price is solid and there is no compensation for the increase in prices due to inflation provided for by the contract. In other cases, it will rather contribute to a more responsible approach of procuring entities and contractors to the formation of the contractual price. Prices for resources can change without amending the contractual price — according to the procedure for mutual settlements established by the contract. Under such conditions, even if the procuring entity fully complies with the requirements of the law regarding the publication of changes in the contractual price, they will have a completely legitimate opportunity to purchase material resources at prices different from those published at the time of the conclusion of the contract—not to change the contractual price, but to accept the works performed at changed prices for materials in accordance with the procedure for mutual settlements.

Probably, the document that will need to be published in case of adoption of the draft law should be the final statement of resources. It is this document that discloses the prices for material resources included in the contractual price, with full information on the price components.

2) They mean service acceptance certificates: then, it will be incorrect to refer them to the integral parts of the contract and publish them on Prozorro because the certificates are already documents on its implementation. Their publication would make it possible to see the final prices of the materials in more cases than the publication of only the contractual price. But the rules on the publication of certificates should have been mentioned in other acts of legislation. Such an interpretation is unlikely.

3) They mean new documents that are not yet provided for by the current legislation: at the moment, this option of interpretation, given the lack of specifics, seems very likely. This means that the parties to the contract will have to draw up a separate annex to the contract with prices for material resources and publish it at each update. It is advisable to provide and specify the requirements for them in by-laws.   

• Full implementation of the draft law No.11057 is impossible before/without amendments to the by-laws. Currently, the methodology for determining the cost of road works and services to determine the cost of new construction, reconstruction, repairs, and maintenance of public roads, approved by the Order of the Ministry of Infrastructure No. 753, is in force. According to it, enlarged indicators of the cost of works are used, which include the cost of not only materials. The procuring entity cannot demand from the contractor information on the prices of materials laid down in the enlarged indicators because in accordance with Section IV, clause 4 of the Rules for determining the cost of construction, reconstruction, repair, and maintenance of public roads, approved by the Order of the Ministryof Infrastructure No. 273, when agreeing on the contractual price, documents and justification of calculations of enlarged cost indicators are not provided. To separate the prices for materials (with the selling price, transportation cost, and supply and warehousing costs), it will be necessary to create new documents.

• The volume of documents with information on material resources will depend on the object, but it is already clear that the number of positions of material resources can reach thousands. In practice, there may be different approaches to what volume to publish: draft law No.11057 does not indicate that it should be all material resources, although this is the first interpretation that comes to mind.

Perhaps some of these issues could be removed if procuring entities also had the obligation to publish the KB-2c service acceptance certificate of works under the contract with the final information on the cost of resources. But at the calculation stage, this information would look more appropriate on Spending than in the Prozorro system.

In our opinion, this draft law is undoubtedly a step towards greater transparency in construction procurement. After all, detailed estimates for many projects are not currently public and can only be obtained upon request. However, the real impact of the initiative on the sphere can be assessed only in practice if the draft law is actually adopted.

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.