Latest: Determining price difference of construction works in contracts on public procurement of works

In April 2022 we formed a working group in which representatives of our largest construction companies, representatives of our Chamber HKIG, and our own members gathered and we prepared a comprehensive document with our proposal of a very simple and easily implemented Methodology and a practical presentation of the calculation of the change in the price of construction works - on the example of a typical items from the cost list of construction works - steel rebar.

Our proposal was completed on April 28 and then, in the following 7 days, we addressed in writing (e-mail) the various ministries involved, as well as all public companies and many other public contracting authorities in the Republic of Croatia.

In that document, we gave a general overview of the situation and, on the specific example mentioned earlier, explained how to apply our proposed Methodology for calculating price changes in construction works by applying the Sliding Scale calculation calculated by individual items/types of work. The reason is that due to relatively large differences in the production/supply prices of individual construction materials, in various cases of implementation of the construction contract, it is not optimal to apply the general formula of the sliding scale for all contracted items by applying the total index of increase in the average price of all construction materials on the market, but that it is necessary to create a sliding scale for specific, individual materials whose price increase significantly deviates from the average price increase of the "basket" of construction materials.

Furthermore, at the Days of Civil Engineers HKIG held on June 9-11, 2022 in Opatija, we held a working meeting with the Minister of Construction, Mr. Ivan Paladina, and discussed this issue and once again offered our more active cooperation and help with the official definition of the Methodology and design necessary legal framework.

Finally, the Ministry of Spatial Planning, Construction and State Property accepted only part of our remarks and proposals, and in consultation with some consultants made the final version of the Methodology, which the Government of the Republic of Croatia, together with the Conclusion, adopted on June 21, 2022 (relevant documents attached below).

What we consider to be crucial, and which has not been carried out and offered to the professional public by the Ministry of Construction, is the creation of practical examples of the Methodology for several different specific projects/types of work, with a presentation of the method of preparation and processing of the Price Analysis, Calculation of the sliding scale, Method of expressing the difference in price through tables in excel, and the way of creating calculation documents for completed works (temporary and completed situations), as well as the way of presentation and creation of invoices for calculating the difference in price for each temporary situation in the period in which the value of the difference in price is calculated in accordance with the adopted Methodology. We, UKDG consultants, believe that if a certain standard is not established and protocols are not defined, it will be very difficult to achieve a unique way of interpreting the Methodology, which will create unevenness and large differences between individual projects, Clients, Contractors, Supervisors and other project participants when determining and implementing the method of calculating differences in the price of the value of construction works, which should not be allowed under any circumstances.

Therefore, with its active involvement, the UKDG wants to help the professional public and all participants in projects carried out by public contracting authorities to standardize the criteria and achieve a standard way of Methodology implementation that will apply equally to everyone, regardless of which public contracting authorities the works are performed for. In this way, we protect fellow consultants involved in the implementation of these projects (supervising engineers, project managers) as well as Contractors and Clients from possible non-compliance, and subsequent problems with justifying and proving the performed activities before the authorities that control the business of public clients. (SAFU, State Audit, other bodies participating in investigative procedures).

"Conclusion 022-03/22-07/228, ed. number: 50301-05/16-22-9 of June 21, 2022, on mitigating the consequences of the global disruption in the markets of construction materials and products, and below, the Methodology for determining the price difference of the works in the construction contract in cases of changes in the prices of individual elements on the basis of which the price of the works was determined".

https://narodne-novine.nn.hr/clanci/sluzbeni/2022_06_71_1049.html

Members of UKDG - consulting companies in the construction industry perform tasks of technical consulting for clients in the processes of managing and realizing large investments in the construction industry.

Since they were actively involved from the very beginning in the activities to define the Methodology for determining price differences in contracts for the public procurement of works caused by the influence of changes in the prices of elements (construction materials), they worked out the practical application of the method and it is actively applied in business/projects - construction investments. on which they are engaged.

Numerous analyses and calculations of contract price changes have already been prepared and accepted.

Specific activites

In accordance with the documents just adopted by the Government of the Republic of Croatia and the Ministry of Spatial Planning, Construction and State Property, in their work, UKDG members educate their clients, create sample examples of calculating price changes of individual contract items, practical examples of creating work value analyses with the definition of all steps how price change analyzes are made - with the determination of the coefficients of change of individual elements of the unit price as well as the calculation of the total difference in prices for selected items.

As part of this, they provide advisory services to clients and contractors on the application of sliding scale formulas to future contracts.

The applied methodology includes a comprehensive analysis of the unit price of an individual item and the share of influence of each of its maximum 5 components (material, labor, machines, fuel and fixed/invariable part) on the total calculation of the unit price.

Aware of a relatively large number of questions and differences in the way of interpretation and application, as well as numerous ambiguities and disagreements in the way of applying the officially adopted Methodology from the Government of the Republic of Croatia, UKDG members in their work provide professional assistance to fellow engineers - members of the HKIG and other engineering chambers and conduct education of state services, ministries and large public clients - with a practical introduction to the implementation of the Conclusion and application of the Methodology on concrete examples.

QUESTION NO. 1
Which methodology should be used for calculating the increase in unit prices and when should it be applied?

ANSWER:
There is only one sliding scale formula that uses a combination of methods of index and documentary methods, and which is in accordance with the Conclusion of the Government of the Republic of Croatia on mitigating the consequences of the global disruption in the markets of construction materials and products (NN 71/2022).

The Methodology, according to the same Conclusion, is applied to unexecuted contracts (for which no completed situation had been established) and for which a fixed price has been agreed.

The methodology for calculating the increase in unit prices is agreed upon in the annex to the contract between the Contractor and the Client. Then the Contractor sends the Client a request in accordance with the agreed methodology.

QUESTION NO. 2
Which formula is used for the sliding scale?

ANSWER:
The formula is determined with the Conclusion of the Government of the Republic of Croatia on mitigating the consequences of the global disruption in the markets of construction materials and products (NN 71/2022) and the attachment Methodology for calculating the difference in the price of construction, and the coefficients from that formula are analysed for each item that in its group of works has more significant share - it is tentatively defined so far among the UKDG consultants and the not very broad practice so far, that analyses are made for items that have a share greater than 5% in each group of works, but this can also be adjusted according to the specifics of the project. The coefficients are calculated through the analysis of the contracted unit price based on the component parts of the unit price (fixed part - indirect costs of the company and construction site, material, labour, fuel, machines) on the total unit price of the item.

QUESTION NO. 3
In the calculation of the price analysis to determine the increase in the unit price of a certain item, can the standards made by the Contractor be applied?

ANSWER:
Primarily, standards that are publicly published and publicly available from some relevant institution/source are applied, in order to enable all Contractors for the Client to use the same standards on different projects. Exceptionally, if there are no standards for an item/work, the standards created by the Contractor can be applied, with prior verification of their justification by the Supervising Engineer (it is recommended that the Supervising Engineer personally attends the work or measurements of the required work for one such item - to be personally convinced of the justification of the standards of work and consumption of materials previously stated by the Contractor).

QUESTION NO. 4
Can different fixed factors of the company (the so-called "coefficient a") be applied in price analyses of different items?

ANSWER:
Two company factors ("coefficient a") are applied:

• For all works performed directly by the contractor, one company factor is applied, usually in the range of 1.10 - 1.30

• For all works performed by subcontractors of the contractor, one manipulative cost is applied, usually 1.05-1.08

The specified factors represent a unique average amount for all items and all groups of works, regardless of the fact that, perhaps, the contractor calculated with a different fixed factor for each different item each time when forming the price.

It is not acceptable to apply different factors for different items - if they belong to the same project.

QUESTION NO. 5
If the contractor has contracted a significantly higher unit price than that which can be justified by price analysis, with the calculated participation of individual components of the price, how is the resulting difference calculated/treated? For example, the unit price of reinforcing steel with installation was agreed at a price of 12.00 kn/kg, and following a verified analysis of the price, it turns out that, when the factor of the company, the price of materials, labor, the participation of energy sources and machines are calculated, that all these 4 components have a total a price of, for example, HRK 10.00/kg, and what about the remaining difference of HRK 2/kg?

ANSWER:
In the price analysis of each contractual item, all known elements of the single price are applied. The purchase price of the material is proven exclusively by a copy of the invoice paid to the supplier. Furthermore, the price of the work, if it is not contracted, is taken from the accepted VTRs or is contracted subsequently with an annex in which the methodology is defined. The price of machine and fuel compensation is calculated by the contractor, as well as the company factor, which represents a fixed part of the unit price and is the same for all items of the contract. If, after the analysis with all components included, the single price cannot fully justify the contracted single price (10 kn/kg instead of 12 kn/kg), the difference (2 kn/kg) is considered to be the contractor's profit and is transferred to the fixed unit price for the item in question and the difference in fact is not calculated on it.

QUESTION NO. 6
If the contractor has contracted a significantly lower price than that which can be justified by price analysis, with the calculated participation of individual components of the unit price, how is the resulting difference calculated/treated? For example, the unit price for the supply and installation of reinforcing steel was agreed at HRK 5.00/kg, and after analysing the price, it turns out that, when the company factor, the price of work, the participation of energy sources, and machines are calculated, the price of purchasing materials per kg of reinforcing steel was only 1, HRK 60/kg (which is hypothetically unrealistic), how is this further calculated in the analysis of the unit price increase?

ANSWER:
If the agreed unit price of the item is unrealistically low - it is significantly lower than the market price that was valid at the time of the offer/contract, then the analysis of the increase in the unit price is approached in the following way: The input price of the material in that item is proven by the documentary method, and then analysed and all other components of the unit price: participation of company factors, labour, machinery and energy.

If one or more categories out of the 3 are offered (buildings, civil engineering and specialized construction activities), then the categories are selected depending on the type of work for which the unit price increase is calculated. For example, if we calculate the increase for works on roads where we have buildings, for items related to roads we apply the index for civil engineering, while for works on the construction of high-rise buildings we apply the index for buildings.

QUESTION NO. 7
What is the relevant index of the price change of labour?

ANSWER:
Extract from the DZS - average monthly gross salary per employee in legal entities according to NKD 2007 - for construction.

One or more categories out of 3 are selected (buildings, civil engineering and specialized construction activities) depending on the type of work for which the unit price increase is calculated. For example, if we calculate the increase for the road on which we have buildings, for the items related to the road we take the index for civil engineering, while for the buildings we take the index for buildings.

Documents for download:

Methodology for calculating the difference in the construction price - Presentation - 09/09/2022

Conclusion of Government of Croatia - 21/06/2022

Proposal of the UKDG Methodology, letter to the Ministry of Construction - 28/04/2022

After the Government of the Republic of Croatia adopted Conclusion 022-03/22-07/228, ed. number: 50301-05/16-22-9 of June 21, 2022, on mitigating the consequences of the global disruption in the markets of construction materials and products, as well as the Methodology for determining the difference in the price of works in construction contracts in cases of changes in the prices of individual elements on the basis of which the price of the works is determined, in the process of which the UKDG tried to give its active contribution, the UKDG started to develop proposals for determining the price differences of consultancy services for the implementation of such construction contracts in public procurement procedures.

An analysis of the state of the construction services market generally found the following:

• In the period from 2020 there was a significant increase in the value of construction works, and especially the value of real estate on the market.
• The rise in the prices of construction services was caused by a sharp rise in the prices of building materials, energy, and labor
• In order to account for the resulting differences and apply the aforementioned documents adopted by the Government of the Republic of Croatia, there was a great need for additional engagement of consultants on such construction projects.
• Analysing the realized prices of consultants' services in the same period, it was determined that they stagnated, and that they did not follow the rise of other prices in construction, which led to their real reduction and devaluation

Based on all of the above, UKDG as an association that represents the interests of its members - consulting companies in construction and which is closely related to our Chamber HKIG, decided to launch an initiative to determine the price difference for consulting services as well.

Also, UKDG strongly advocates that the additional and increased involvement of consultants in processing the contractor's requests regarding the price difference in construction works is recognized and adequately financially valued by public contracting authorities.