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The development of small and medium-sized businesses, as well as the increase in the rate of trade turnover at the state level in Russia, have led to the need for competent legislative regulation of the sphere of public procurement.
Adopted in April 2013, the federal law on the system of contracts in the field of public procurement N 44 FZ makes it possible to make the procurement procedure transparent, competitive and effective. It is one of the most relevant, popular and dynamically developing regulations.
Download the text of the latest edition of the law on public procurement
On this site you can find many more articles on Federal Law 44 on public procurement, its articles and individual provisions with comments and explanations.
“On the contract system in the field of procurement of goods, works, services to meet state and municipal needs” dated 04/05/2013 N 44-FZ.
Due to the release at the end of 2021 of the amending federal law N 504-FZ, from July 1, the law on public procurement is expected to undergo multiple changes. In particular, changes will be made to paragraph 1 of part 9 of article number 94 that we reviewed.
Pavel Goryachkin: Amendments of the Ministry of Construction to 44-FZ undermine the foundations of the contract system
— Pavel Vladimirovich, just yesterday information from NOSTRO appeared that metal prices went up again. In the previous wave, the Russian Ministry of Construction developed amendments to 44-FZ on the possibility of changing the contract price if prices for building materials increase. Will this bill save builders from ruin?
“I consider this bill to be absolutely ill-conceived and unprofessional, which undermines the foundations of the contract system and entails irreversible processes in the economy.
Construction companies are professional participants in the construction market, and when they participate in various competitive procedures, they must correctly assess their risks. This is not the first time we have encountered rising prices for building materials. I can recall that in 2006-2007 there was the same noise about the sharp rise in cement prices. Then this was also discussed at the government level, there were endless round tables. And at the end of 2021, the price of cement actually stood still, although it is also the “bread of construction.” And prices are rising not only in the construction industry. This is the first one.
Second: if we look at the history of first 94-FZ, and then 44-FZ, we will see the history of the endless struggle of builders with these laws. And in one way or another, changes began to be slowly made to these laws, which can be considered as concessions to builders. Moreover, this was often done not by introducing a package of changes to these laws, but sometimes the necessary articles or clauses were simply hooked into some abstract articles or laws, for example, into the law on shared-equity housing construction, into the Town Planning Code, and so on.
At the same time, Law 44-FZ “On the Contract System” was created in order to ensure the unity of the contract system itself. And this is the fundamental principle. Quite often there have been voices to bring construction into a separate law, but procurement takes place in different industries, and they have no less problems than builders. And rising prices are not a problem only for builders, it is a problem for our entire country in all industries.
Throughout the history of 94-FZ and 44-FZ - and this is already 15 years - builders have achieved a lot. At first, these laws did not distinguish construction in any way; the procedures were the same for all industries. In particular, 44-FZ contains Article 95 “Change, termination of contract”, and for many years subparagraph “b” of Part 1 of Art. 95 on changing the contract price by no more than 10% in the event of a change in the quantity or volume of services performed.
In 2021, this subclause was divided, and instead of one for builders, there were three. In one case, a construction site was withdrawn and it was allowed to change the contract price by up to 10%, including not only when the scope of work under the contract changed, but also in the event of some additional work. And other subparagraphs allowed, in the event of circumstances beyond the control of the parties, as well as in the event of changes to the project documentation taking into account the passage of state examination, by decision of the government of the Russian Federation, the regional executive authority, municipal authorities, to increase the contract price worth more than 100 million rubles up to 30%. And this point applies only to builders; no one else has such opportunities.
A change of up to 30% of the turnkey contract price is also provided. In addition, 44-FZ has a separate article 110.2 “Features of procurement for construction and reconstruction.” Again, only builders have a separate article in 44-FZ! Therefore, 44-FZ already contains enough mechanisms that isolate construction and can be considered in a certain sense as undermining the unity of the contract system, which raises reasonable questions among its other participants.
— Then why make more changes that are proposed by the Russian Ministry of Construction, if all the mechanisms are already in place?
— As for the proposal of the Russian Ministry of Construction to increase the contract price when the cost of building materials changes, which arose at the suggestion of builders and developers with the beginning of rising prices for rolled metal products, one can only regret it. Yes, indeed, there is an increase in prices for metal and other building materials. But I want to draw your attention to the fact that following the rise in housing prices, manufacturers of building materials began to raise prices - this can easily be checked by dates. The rise in prices for rolled metal products began at the end of October 2021, and housing prices began to rise since the beginning of summer. You know, after reading the reports of our leading developers for 2021, you can see that they are simply in “chocolate”! Owners of planes, yachts, and real estate in London live very well and skim off the cream. At the same time, they can often keep their own contractors in black bodies. And in public they begin to throw hysterics and explain the rise in prices by saying that their production costs are rising. Nothing like that! Therefore, I believe that this wave of legislation is speculative in nature, especially since government procurement has nothing to do with housing developers, where 100% is private capital.
If we approach this bill from a contractor's point of view, I can say that this law will only make things worse for everyone. As soon as the discussion of the Ministry of Construction's proposals on the possibility of increasing the contract price to 30% begins in connection with rising prices for building materials, leading to an increase in the estimated cost of more than 5%, the Russian Ministry of Finance will immediately say: why are we only talking about increasing prices? There are also price reductions! In our article 95, an increase or decrease in cost is prescribed. What does the reduction fixed in the law mean? This means that any savings by the contractor will immediately turn into theft and will provide additional incentives for our law enforcement agencies to further imprison construction workers under the Criminal Code.
I have always said and I will emphasize again: many of the positions that the professional community proposes for inclusion in legislation seem good upon first reading. But when you start to analyze this, you realize that if you work within the strict framework of the law, then if you act in accordance with it, you are protected. As soon as we begin to blur these boundaries and make all sorts of assumptions, we only make things worse for ourselves. Any vague framework of legislation allows inspection, control, and law enforcement agencies to interpret this as they need it.
And no one, proposing such initiatives, thinks about the consequences! Yes, when overhauling a steel roof, it is easy to prove the increase in prices for the main material - metal. Now imagine a comprehensive overhaul or construction of a large facility. What would such a law mean in this case? In order to agree on a change in the contract price, all contractors will have to post absolutely all documents, balance sheets, primary documentation, their contracts for verification, and become absolutely open and transparent to the customer. How else? We cannot change the contract price based on abstract reasoning. What if you bought this rolled metal a long time ago and it was lying in a warehouse? What if you have some special relationship with the materials supplier? All this needs to be proven and shown; no one will take your word for it. And the Russian Ministry of Construction’s bill itself states that the government must develop a mechanism for assessing changes in the price of materials. How will we evaluate? If you want to change it, please prove it and post all the documents.
— Builders are unlikely to like this...
- That's what we're talking about! Do you want it this way? Yes, now for every nail and for every bag of cement you can be accused of theft and sent to places not so remote. And not only on large contracts - on any nonsense! And someone now thinks that after the bill is passed, he will reap the joys of an increase in the contract price. This is ridiculous!
In addition, we must answer the question: who will pay for all this increase in the contract price? We have a budget process, budget schedule, budget obligations that are formed for the current year. We have long-term three-year budget planning - and what do you propose to do? How will we carry out budget planning if almost the entire volume of the targeted investment program, the limits of budget obligations in the form of subsidies have the potential to grow by 30%! What limits will we set? This is simply impossible! Moreover, we are on the verge of large budget investments, including in engineering and transport infrastructure. We are talking about trillions of rubles - and where else can we get 30% of these amounts? Yes, we will simply plunder the National Welfare Fund and turn the country into a large unfinished construction project.
Therefore, I believe that the Ministry of Construction’s proposal is absolutely ill-conceived, unprofessional, goes against the fundamental mechanisms of the contract system, undermines its foundations, and entails irreversible processes, including colossal corruption and criminal risks. Does anyone really think that he will receive the money, close the contract and sleep peacefully? Nothing like that! We have a statute of limitations of up to 10 years, so you increased the price of the contract today, and in 10 years you could be handcuffed for fraud. And you will sit and wait for years for the investigation of your case. And this is all around! Business Ombudsman Boris Titov rings the bells: all pre-trial detention centers are filled with construction workers, and now women construction workers have also gone there en masse. Everyone thinks that this is about someone else, and not about them - but it’s about you!
Therefore, according to the information I have, including as part of a conversation with the leadership of the Russian Ministry of Finance, the Ministry of Finance is going to give a negative opinion on this proposal of the Ministry of Construction. I brought my position to the Ministry of Finance, in principle we agree with it, so I think that the Ministry of Construction’s legislative efforts should be directed in a slightly different direction.
— So what should builders do in the face of rising prices for all building materials? The concern of builders is understandable when they sign a contract and start building at one price, but two years later the price has risen, there is no money and no completed project. What to do?
— You need to be able to predict such things. If you see that the contract is unprofitable - and you should see it! – You don’t need to take this contract! For example, our road contracts have begun to fall through, which means we need to reconsider prices. This is the task, first of all, of the customer - the correct justification of the initial maximum price of the contract, which, by the way, is done on the basis of the Methodology of the Ministry of Construction and to which there are a lot of complaints.
In order to have money, including for procurement at the optimal price, you need to understand that the line in the budget “limit of budget obligations” or the volume of financing of targeted investment programs does not appear from somewhere above, they appear from below. The basis for the appearance of this line is the approved estimated cost, which has undergone a verification procedure. And we again return to the Ministry of Construction and its subordinate institutions. We need to start with it, because according to all established rules, the customer approves the estimated cost, which has passed the verification of accuracy, and which, by the way, was cut by Glavgosexpertiza. So the Ministry of Construction first cuts the real value of government contracts, and then starts making such destructive proposals. Maybe we should “correct something in the conservatory” and formulate an initial maximum contract price normally, so that we can understand the real volumes of investment? Because there is no real approved estimate documentation - no money, no limits.
In addition, we have been talking for a long time about the need to provide for a reserve - now it is 2-3%, for unique objects up to 10%. But many estimators and Glavgosexpertiza do not miss this reserve. In Soviet times, we had a reserve of 18% for reconstruction. Moreover, if we reserve something, this does not mean that we will choose this money. I believe that this is a normal way to solve economic problems.
— That is, business needs to stop demanding changes to laws, and look for opportunities, correctly evaluate the projects it undertakes?
“We can’t build for the sake of building.” If the contract is unprofitable, why did you take it, what were you thinking, what were you counting on? What if you steal something somewhere and replace the materials with cheaper ones? It's time to end this! And I repeat once again that there are opportunities in the current legislation to increase the contract price; there is no need to invent something new. The customer today is under very strict control, there are limits, and he will not bend over his head. And if you change contractors and turn objects into long-term construction, as in Crimea, the money will simply go nowhere.
In addition, there are decisions of the Supreme and Constitutional Courts, which directly stated that the increase in prices for building materials does not apply to force majeure circumstances. This is the economic essence of the customer-contractor relationship. Therefore, all conversations on this topic lie not in the area of changing legislation, but in proper business planning. You need to realistically assess your capabilities. Of course, there are situations when companies operate at a loss, just to save their workforce, equipment and company. But this is completely incomprehensible to me as an economist.
And the Ministry of Construction needs to be concerned not with how we can correct something during the execution of the contract, but with ensuring that we have high-quality design and estimate documentation and that the initial maximum contract price is correctly calculated. Then there will be bidders and there will be profits. But if you first “castrate” it at the design stage and undergo verification of the reliability of the estimated cost, and then begin to propose ill-considered amendments, this is incomprehensible to me. So the Ministry of Construction should look for problems and begin to solve them in its department.
Larisa Porshneva
