Circular No. 09/2008/TT-BXD dated April 17, 2008 of the Ministry of Construction guiding the adjustment of construction prices and contracts in response to fluctuations in prices of raw materials, fuels and construction materials

CIRCULAR

GUIDING THE ADJUSTMENT OF CONSTRUCTION PRICES AND CONTRACTS IN RESPONSE TO FLUCTUATIONS IN PRICES OF RAW MATERIALS, FUELS AND CONSTRUCTION MATERIALS

Pursuant to the Government s Decree No. 17/ 2008/ND-CP of February 4, 2008, defining the functions, tasks, powers and organizational-structure of the Ministry of Construction;

Pursuant to the Government s Decree No. 99/2007/ND-CP of June 13, 2007, on the management of work construction investment expenses; and Decree No. 03/2008/ND-CP of January 7, 2008, amending and supplementing a number of articles of Decree No. 99/2007/ND-CP of June 13, 2007, on the management of work construction investment expenses;

Based on the Prime Ministers instruction in Document No. 164/TTg-CN of January 29, 2008, and Document No. 546/TTg-KTN of April 14, 2008, on the adjustment of prices of raw materials, fuels and construction materials, and construction contracts;

The Ministry of Construction guides the adjustment of construction prices and contracts in response to fluctuations in prices of raw materials, fuels and construction materials (below referred to as construction material prices) as follows:

1. Subjects and scope of application

1.1 This Circular guides die adjustment of cost estimates, bidding package prices, total investment capital and construction contracts of investors and contractors, applicable to state budget-funded work construction investment projects in response to fluctuations in construction material prices which are beyond the control of investors and contractors.

1.2. Adjustment of construction material prices applies to bidding packages which have been being executed at package contractual prices or fixed unit price-based contractual prices.

1.3. To change the form of contractual prices of contracts which have been performed from package contractual prices or fixed unit price-based contractual prices to adjustable price-based contractual prices in response to fluctuations in construction material prices which are beyond the control of investors and contractors.

2. Adjustment principles

2.1. Construction material prices shall be adjusted for constniction and installation volumes performed from 2007 which are affected by fluctuations in construction material prices resulting in higher (lower) work construction costs which are beyond the control of investors and contractors (below referred to as construction and installation volumes affected by price hikes).

2.2. Adjustment of cost estimates, bidding package prices, total investment capital and construction contracts of investors and contractors should be closely combined with measures to curb inflation, stabilize macro-economy and assure sustainable growth.

2.3. Investors and contractors shall determine construction and installation volumes affected by price hikes (cuts) and price adjustment levels on the principle of jointly sharing interests and responsibilities.

2.4. Construction materials eligible for price adjustment (increase or decrease) include all kinds of petrol, oil, iron and steel (including steel cables and pipes), asphalt, cement, sand, stone, gravel and brick, electric wires and cables, timber (including timber falsework and door), and glass. If it is necessary to adjust the prices of other construction materials in response to price fluctuations, investors shall report it to ministers, presidents of provincial-level Peoples Committees, presidents of economic groups, or chairmen of boards of directors of state corporations for decision.

2.5. In changing package contractual prices or fixed unit price-based contractual prices to adjustable price-based contract prices, it is necessary to identify contents and the scope of change, which may only be applied from the time of price fluctuation determined by investors and contractors based on the implementation progress.

3. Methods of adjusting construction material prices

3.1. Construction material prices may be adjusted for each construction contract, each bidding package and the w hole project. Additional expenses arising from the adjustment of construction material prices shall be stated in estimates of additional construction costs to serve as a basis for the adjustment of contractual prices, bidding package prices, cost estimates of works and total investment capital.

3.2. Additional construction costs may.be estimated by directly calculating material expenses or using adjustment coefficients of material expenses. Investors shall calculate adjustment coefficients of material expenses or apply price indexes publicized by the Ministry of Construction of the General Statistics Office. Additional construction costs shall be estimated pursuant to the Appendix to this Circular.

3.3. Additional construction costs shall be estimated once on the basis of construction and installation volumes affected by construction material price hikes (cuts) from 2007.

3.4. Investors shall adjust cost estimates, bidding package prices and total investment capital on the basis of additional construction cost estimates.

4. Adjustment of construction cost estimates of works after making additional construction cost estimates

4.1. For bidding packages for which contractors have been designated and will themselves implement the projects or contractors have been selected but construction contracts have not yet been signed or are being performed (at package contractual prices or fixed unit price-based contractual prices), investors shall estimate additional construction costs under the guidance in Section 3 above for use as a basis for the adjustment of construction cost estimates of works.

4.2. For bidding packages, work items or works for which contractors have not yet been selected, investors shall adjust their cost estimates according to current regulations.

4.3. The adjusted construction estimate of a work shall be determined by adding additional construction cost estimates to the approved construction cost estimate of the work.

5. Adjustment of bidding package prices after making additional construction cost estimates

Investors shall adjust bidding package prices by adding additional construction cost estimates determined under Section 3 above to approved successful bids. If the adjusted price of a bidding package does not exceed the approved price, the investor may decide to approve that price. If the adjusted price of a bidding package exceeds the approved price but does not result in an excess of the total investment capital, the investor may decide to approve and shall report it to the investment decider. If the adjusted price of a bidding package results in an excess of the approved total investment capital, the adjustment of total investment capital must follow the guidance in Section 6 of this Circular.

6. Adjustment of total investment capital after making additional construction cost estimates

The investor shall, based on adjusted construction estimates or adjusted bidding package prices, adjust the total investment capital. If the adjusted total investment capital exceeds the approved total investment capital, the investor shall report it to the investment decider for consideration and decision. Ministers, heads of ministerial-level or government-attached agencies, presidents of provincial-level Peoples Committees, presidents of economic groups, or chairmen of boards of directors of state corporations may decide on die adjustment of total investment capital of projects in which the investment is decided by the Prime Minister.

7. Modification of contracts after making additional construction cost estimates

7.1. For signed contracts, based on their terms and additional construction cost estimates, the investor and contractor shall sign additional contractual prices for use as a basis for contract settlement.

7.2. For bidding packages for which contractors have been selected but contracts have not yet been signed, the investor shall negotiate and sign a contract on the basis of additional construction cost estimates, successful bids, the bid invitation dossier and the bid dossier.

7.3. In case of change of package contract prices or fixed unit price-based contractual prices into adjustable price-based contractual prices, the investor shall report to the investment decider on the contents and scope of change for approval before adjustment. Adjustable price-based contractual prices comply with the guidance in the Construction Ministrys Circular No. 06/2007/TT-BXD of July 25, 2007, guiding construction contracts.

Ministers, heads of ministerial-level or government-attached agencies, presidents of provincial-level Peoples Committees, presidents of economic groups, or chairmen of boards of directors of state corporations shall decide on the modification of contracts for projects for which bidding plans are approved by the Prime Minister.

8. Organization of implementation

8.1. Investors shall consider and decide on the adjustment of cost estimates, bidding package prices and construction contracts in order to ensure the effective execution of projects. For projects approved by the Prime Minister, ministers, heads of ministerial-level or government-attached agencies, presidents of provincial-level Peoples Committees, presidents of economic groups, or chairmen of boards of directors of state corporations shall decide on adjustments.

8.2. For construction investment projects funded with the local budget, the investor shall calculate and adjust cost estimates, bidding package prices and contracts and bear responsibility for such calculation and adjustment; provincial-level Peoples Committees shall prescribe the application of construction unit prices, machine shift and construction equipment prices, and construction material prices. If notified or publicized prices are no longer suitable or unavailable, the investor shall base on prices in valid documents and invoices, which are suitable to market prices.

8.3. Pending the completion of adjustment procedures, the investor shall advance to the contractor the price difference as guided in this Circular at the contracts advance level for the unperformed volume and temporarily pay 80-90% of the price difference of the performed volume in order to prevent damage for the contractor and negative impacts on the work or project construction progress.

An advance or temporary-payment dossier comprises a written application for advance (or temporary) payment, adjusted contract (contract annex) and additional construction cost estimates.

8.4. If adjusted construction material prices result in the change in the project group, investors may continue executing these projects under regulations applicable to them before the adjustment (without having to carry but again procedures for project formulation, appraisal and approval).

8.5. For bidding packages of projects funded with ODA capital (except for contributed domestic capital), price adjustment complies with contractual terms. When necessary, investment deciders shall consider and decide on price adjustment after reaching agreement with donors; at the same time, ministries, branches and localities shall coordinate with the Ministry of Planning and Investment in working with donors on the addition of capital in response to price fluctuations.

8.6. For works and bidding packages performed in the form of adjustable price-based contracts under the Governments Decree No. 16/2005/ND-CP of February 7, 2005, and Decree No. 112/2006/ND-CP of September 29, 2006, on management of work construction investment projects, if the delay in the contract performance is not at contractors fault, the volumes performed from 2007 may be adjusted in price under the guidance of this Circular.

8.7. Ministries, ministerial-level agencies, government-attached agencies, provincial/ municipal Peoples Committees, economic groups and state corporations shall direct, guide, inspect and supervise investors and contractors in adjusting construction material prices, costs estimates, bidding package prices, total investment capital and contracts in strict accordance with this Circular; and request investors not to let the adjustment of construction expenses affect the construction progress and, at the same time, to speed up the progress of construction of works, especially of important national ones.

8.8. Adjustment of construction cost estimates according to new wage levels complies with the guidance in the Construction Ministrys Circular No. 07/2006YTT-BXD of November 10, 2006, and Circular No. 03/2008/TT-BXD of January 25, 2008. guiding the adjustment of construction cost estimates.

8.9. Investors shall report to investment deciders for consideration and decision the transition of construction investment projects under Decree No. 99/2007/ND-CP on the management of construction investment expenses (including total investment capital, construction cost estimates, construction norms and prices, construction contracts, and payment and finalization of construction investment capital). Ministers, heads of ministerial-level or government-attached agencies, presidents of provincial-level Peoples Committees, presidents of economic groups, or chairmen of boards of directors of state corporations shall decide on the transition of projects approved by the Prime Minister.

8.10. For construction contracts for which full payment has been made in 2007 (full payment of contractual prices, including the value of signed contracts and added value, if any, in 2007), excluding warranty expenses as prescribed, construction material prices are not allowed to be adjusted.

9. Implementation effect

9.1. This Circular takes effect 15 days after its publication in CONG BAO and replaces the Construction Ministrys Circular No. 05/2008/TT-BXD of February 22, 2008. guiding the adjustment of construction prices and contracts in response to fluctuations in prices of raw materials, fuels and construction materials.

9.2. Investors of construction projects funded with capital of other sources are encouraged to adjust construction prices and contracts in accordance with this Circular.

Problems arising in the course of implementation should be reported to the Ministry of Construction for synthesis, study and settlement.

APPENDIX

(Attached to the Construction Ministrys Circular No. 09/2008/TT-BXD of April 17, 2008)

1. Table of additional construction cost estimates

2. Formula of adjusting material expense by offsetting direct material expense

VL =

Of which:

Qj is the volume of the ith material in the construction and installation volume affected by price fluctuation and may be determined on a resular basis (monthly or quarterly) or according to the take-over test phase.

CLj is the difference between the price of the ith material at the time of adjustment and the construction material price quoted in tne contract or bidding package cost estimate.

The construction material price at the time of adjustment is that announced by a competent state agency or the publicized price.

If at the same point of time, the construction material price quoted in the contract is lower than that announced by a competent state agency, CLi is the difference between the construction material price at the time of adjustment and the construction material price announced by the competent slate agency at that point of time.

In case a competent state agency fails to notify or publicize a timely or practical construction material price or the price of a construction material is not included in die material price notice or announcement, the investor and contractor shall base themselves on valid documents and invoices to determine the consuuction material price and bear responsibility for its truth fulness and accuracy.

Valid documents and invoices are those prescribed by the Ministry of Finance. If such invoices are impractical for some construction materials, contracts, lists of materials or handwritten documents which fully indicate names, addresses and signatures of the suppliers of construction materials, may be used instead.

3. Formula of adjusting consuuction material expense based on adjustment coefficient of material expense

VL = GVL x P x K

Of which:

GVL is the direct material expense in the contract.

P is the proportion of the expense for the material with an increased price to the direct material expense of the contract.

K is the coefficient of increase of the construction material price at the time of adjustment compared to the contractual price of the construction material subject to price hike. The investor shall calculate the coefficient of increase of the construction material price or apply the price index publicized by the Ministry of Construction or the General Statistics Office.

4. Other expenses

The general expense calculated based on the labor cost in direct expense is determined as follows:

C = NC x percentage of other direct expense x KNCC

NC is the labor cost constituting a direct expense of a construction and installation volume with adjusted material price.

KNCNC is the general expense calculated based on the labor cost, for the construction and installation volume for which the general expense is calculated based on the labor cost.

The proportions of general expense and pre-calculated taxable income are those set in the contract, bidding package or cost estimate.

Value-added tax shall be calculated according to state regulations.