Abandonment of Building Auctions will Increase the Cost of Contracts

Fr om January 1, 2014, the Law on the Federal Contract System will come into effect. The above law is to replace Federal Law No. 94 on Placement of Orders for Supply of Goods, Fulfillment of Jobs and Rendering of Services for Public and Municipal Needs. On October 10, it became known that the issue of preservation of the mandatory electronic auction procedure is debated only as regards building contracts worth up to Rb 50m and Rb 150m for regions and both Moscow and St. Petersburg, respectively. Building contract for a larger amount can be placed at a tender.

Expedience of abandonment of placement of orders on building of large and technologically complex projects at auctions was traditionally justified by the fact that auctions failed to ensure selection of a bona fide supplier. In selection based exceptionally on the price, there is a high risk that an unscrupulous contractor may participate in a auction and win it by means of a price dumping, while in reality fails to meet its obligations.

However, the effective legislation provides for a sufficient number of instruments to protect customers from unscrupulous contractors. Firstly, if the amount of a contract on building of a project exceeds Rb 50m, the customer has the right to demand that bidders prove their qualification. The data that in the past five years bidders in the auction carried out development of similar building projects worth no less than 20% of the sum of the contract can serve as a proof of their qualification.


Secondly, if the amount of the contract exceeds Rb 50m, the customer is obligated to demand from the contractor a financial security in the amount of 10% to 30% of the sum of the contract (but no less than the amount of the advance payment) as a performance bond. Abandonment of advance payments for jobs under state contracts excludes a situation wh ere the contractor may receive budget funds and fail to meet its contractual obligations; it is hard to believe that a contractor which knows in advance that it fails to fulfill the order will risk its funds in the amount of 30% of the sum of the contract.


At the same time, abandonment of the mechanism of placement of orders at auctions actually means dismissal of transparent procedures for selection of contractors as in order to be admitted for participation in the tender the contractor has to go through a pre-qualification procedure. If all the suppliers meeting the above qualification criteria can participate in the auction, qualification requirements at a tender are set by the customer and in case the latter acts in bad faith the above requirements can be formulated in such way that only one contractor suitable to the customer will meet them.


In addition to the above, at a tender qualification of the contractor is taken into account in the process of evaluation of bids. Such evaluations are always rather subjective and in comparison of contractors with more or less the same qualification provide plenty of opportunities to manipulate the results of the tender.


A switch-over to a tender-based placement of orders is related not only to higher risks of corrupt practices, but also the risks of unjustified increase in contract prices. For example, with the qualification criteria being regarded as more important than the price the contract can be awarded to the supplier with a small edge in qualification (for example, the 21-year record of professional service as compared to the 20-year record of service of the competitor), while the price may differ considerably (for example, by 25%).


On the other side, when the Law on the Federal Contract System was approved many experts believed that auctions on building projects would be abandoned altogether. So, projects worth Rb 50m is a compromise. However, the possibility of such a compromise is the best counterargument against allegations of those who say that electronic auctions in building are not a good idea. Indeed, if the electronic auction procedure is fairly reliable to ensure proper building of the project worth up to Rb 50m (for example, building of most kindergartens), why does not it fit more expensive projects?


А.B. Zolotareva, PhD (Law), Director of the Center for Legal Studies