Serwis GDDKiAArchiwum 2013

Unreliable Contractors not fond of EU Rules

Is it possible that Reuter’s material has been created only to satisfy unreliable contractors?

 

1. According to Reuter’s: “Poland stuck to its budget and the prices agreed in its contracts. That was the problem. In an industry where firms routinely bid as low as possible and costs routinely overrun, Poland frequently refused to budge on cost”.

What is the truth?

• Poland is very keen on fulfilling contracts by the book, on time and within the agreed budget – which is considered to be a commonly recognised standard in business worldwide.
• “Annexes –on-demand” policy was abandoned in 2009. Immutability of contracts for road investment execution is an advantage recognised as a positive example in this year’s report by ECA. Based on European Commission’s motion, recognising the possibility to amend contracts as “discretionary and non-transparent”, a limitation of unrestricted amending process has been established in 2009 in the Public Procurement Law, in order to avoid unjustified increase of contract value (art. 144.1 of Public Procurement Law about limitation of unrestricted annexing of contracts).
• Claims are acknowledged by Poland. But only when reasonable. In its report of October 2013 titled “Road constructing in Poland. Facts and Myths, Experiences and Perspectives” (http://www.pwc.pl/pl/publikacje/budow-drog-w-polsce.jhtml) consulting company PwC confirmed that “in justified cases GDDKiA acknowledges Contractors’ claims, including increasing contract value”. In such justified cases, in the years 2008 - 2012 contract price had been changed in 50 per cent of contracts. Total value of contract increase in the years 2007 - 2013 has amounted to 804 million PLN gross.
• Currently, prices in Poland are on the European level. Earlier, as pointed out by the ECA, they were ones of the highest in the European Union. According to the above mentioned report by PwC, the price for one kilometer of a motorway has decreased by 36 per cent and by 31 per cent in case of an expressway over the last five years. Currently, building one kilometer of a motorway in Poland costs 9,6 million EUR on the average, whereas a proper, European price level, designated by the ECA, is 9,4 million EUR for one kilometer of an equivalent road.

2.    According to Reuters, companies dispute over payments (“Five other firms have told Reuters they are still in dispute with the road agency over payment”).

 

What is the truth?

• GDDKiA settles all its payments in timely manner. Execution of company’s contractual obligations, as well as ensuring proper quality thereof is the condition for acceptance of the works.  
• In its report, PwC confirmed that “GDDKiA covers all its liabilities timely. In justified cases even much ahead of payment date. On the average invoice payments were ordered 24 days early, and in some cases even 48 days early”.
• Claims are basically demands raised against the Employer by the contractors pertaining to paying more than agreed for in the contract. There are no limitations  regarding submission of such claims – they are therefore raised in a massive manner. Currently, common courts of law hear sixty-one disputes with legal actions brought by general contractors. Total value of subject matter of these disputes amounts to nearly 5 billion PLN.
• According to the PwC report: statistics prove, that majority of disputes regarding claims submitted by the contractors against GDDKiA is overruled in court. In 2011 courts awarded Constructors with less than 30 per cent of the amounts claimed. In 2012 it was less 10 per cent.
• The average price offered by companies in tender procedures for road construction in Poland is 9,61 million EUR/km, which is similar to the European average (9,4 million EUR/km).
• All companies were offering similar prices, but they also had to comply with same rules, i.e. lack of annexes increasing the contract value on unjustified grounds. 
• When analysing the situation at the companies mentioned by Reuters one regularity can be observed – there are companies in the market that build roads successfully and raise additional claims as well as companies that start to build, focus on increasing their claims and fail to consider completion of an investment as their goal.

Companies that performed all their open contracts successfully:

Budimex:

• Contract value: approx. 16,5 billion PLN
• Court dispute value: 0,03 billion PLN

Strabag:

• Contract value: approx. 15,7 billion PLN
• Court dispute value: 0,11 billion PLN

Bilfinger Infrastructure:

• Contract value: approx. 3,8 billion PLN
• Court dispute value: 0,01 billion PLN

Companies that failed to perform their contracts:

Alpine:

• Contract value: 2,5 billion PLN
• Value of demanded surcharges: 1,88 billion PLN

SIAC:

• Contract value: 1,75 billion PLN
• Value of demanded surcharges: 1,11 billion PLN

SRB:

• Contract value: 2,6 billion PLN
• Value of demanded surcharges: 2 billion PLN

3. According to Reuters, Poland does not allow to clarify contractors’ doubts arising during the tender procedure ("In Germany or other European countries you say: ‘I have a request for clarification.' Then you have a meeting and it is clarified for all tenderers," said Kehlenbach, who has worked for the organization since 1997. "In Poland ... they say: ‘If you have a problem with the tender documents, do not submit the bid.'").

 

What is the truth?

• Article 38.1 of Public Procurement Law states: “Contractor may request a clarification from an Employer regarding the specification of essential order terms and conditions”. It means, the obligation to clarify contractors’ doubts is described by Polish law and there is no possibility to avoid such obligation. GDDKiA – as stated in all controlling reports  - fulfills this obligation. In each tender procedure, GDDKiA receives hundreds of questions from contractors on the average.
• Repeatedly, due to the clarifications of tender documentation (SIWZ) GDDKiA has been modifying provisions of tender documentation. Moreover, meetings with tender participants are nothing GDDKiA is unfamiliar with. During tender procedure regarding A2 Stryków - Konotopa and S8 Piotrków Trybunalski –Rawa Mazowiecka pre-tender meetings with potential contractors were held, where all asked questions were answered. This practice will be continued in all projects foreseen in the “Design and build” procedure.

• In its report PwC stated – in the years 2007-2013, in tenders organized by GDDKiA  in case of doubts or questions presented by the contractors tender provisions (SIWZ) were repeatedly modified and made more precise. Consequently, in the analysed tenders, the average real period of placing bids was almost twice as long as the minimal term required by law
• Since GDDKiA is open to suggestions aiming at optimising investment process and recognises contractors’ remarks regarding changes to construction design, it has imposed the “design and build” formula. As stated by PwC – “Thanks to this new approach a contractor can introduce changes in a design and apply innovative technological solutions without the obligation to amend a contract”.

4. According to Reuters “Polish agency would in many cases not clarify project details when asked”. This means errors in designs occur, however GDDKiA refuses to settle unforeseen payments.

 

What is the truth?

• Errors in the preparation phase of an investment influence its costs during the execution phase. Therefore, new solutions are sought, which will allow to optimise designs and still secure their highest quality. The “design and build” formula applied in current tenders is the answer to the issue of late problem detection.
• According to a contract executed in the traditional system, in case of errors in design documentation, the risk is assigned to the Employer, and in this case Poland does not differ from other European countries.
• PwC indicated that “in some cases assigning risk to an Employer or a Contractor is derived directly from the provisions of FIDIC, i.e. general design obligations (subclause 5.1) and design error (subclause 5.8).
• In the above mentioned situation, all the costs of design errors are then transferred onto GDDKiA, which has never evaded this obligation. PwC’s report confirmed, that in justified cases GDDKiA acknowledges Contractors’ claims and increases the contract value.

5. According to Reuter’s: „An unfinished motorway bridge at Mszana, near Poland's border with the Czech Republic, stands as one example of the road agency's tough approach.”

 

What is the truth ?

• Constructing an 18-kilometer-long leg of A1 (nota bene consisting not only of a bridge in Mszana, as the article’s authors strive to suggest) has been described by Reuters as a flagship Polish construction site, which shows the absurd argumentation used in this report. The only peculiarity of this investment is that Alpine Bau - the firm trying to construct it, has twice attempted the execution of this contract. And has failed twice too. The reason was one only – this firm failed to fulfil its contractual obligations.
• Alpine Bau was also unable to conclude other investments in Poland, not only for GDDKiA. For instance, it failed complete building of the National Stadium in Warsaw.
• Alpine Bau not only abandoned construction site of the bridge in Mszana, but have also turned its back on its subcontractors, who were not paid for the already performed work. Alpine Bau’s unpaid liabilities were transferred to GDDKiA, which up until now has paid over 10 million PLN to Alpine Bau’s injured subcontractors.

• The credibility of Alpine Bau’s tender bids also raises concerns. During the first attempt, the whole bridge construction was calculated by Alpine Bau in the amount of nearly 120 million PLN net.

• GDDKiA withdrew from the contract due to gross violation of contract conditions – at that time this firm, being far behind the schedule, had completed only 20% of the bridge. The Contractor received about 12 million PLN net for the executed construction works. Thus, there was about 100 million PLN net left for completing of this bridge.

• Alpine Bau submitted a bid in the second tender for constructing the Świerklany – Gorzyczki leg of the A1 motorway. It confirmed correctness of the previously contested design and offered to finish the bridge for half the price mentioned in its previous bid. For this company has indicated that it will finish constructing this bridge for only 58 million PLN (at that time 80 per cent of this bridge still needed to be finished).
• During the second attempt to construct this bridge, Alpine Bau was publically proposing to demolish the bridge and build an embankment instead. This proposal was not only totally absurd, but also not in accordance with environmental regulations or contractual conditions. Basically, the Contractor who was supposedly financially incapable to cover 20 million PLN for the execution MA 532 Amending Programme of the bridge, in line with the order passed by Ślaskie Voivodship Construction Supervision Inspectorate, proposed that it would at its own expense demolish this bridge and build an embankment instead. Estimated costs of such procedure is about 120 million PLN.
• During the second attempt to construct this bridge, Alpine made technical mistakes– last year experts from Ślaskie Voivodship Construction Supervision Inspectorate issued a decision confirmed that the Contractor had made an error. Despite their declarations to follow the Amendment Programme, Alpine Bau had never fulfilled their contract obligation.
• Current contractor of the bridge, Przedsiębiorstwo Usług Technicznych INTERCOR sp. z o.o., is conducting construction works based on the existing documents. Works which could not be completed by Alpine Bau for over a year, were completed within a few weeks.
• Alpine Bau’s debt presented by the trustee in its bankruptcy proceedings amounts to 40 billion PLN. In Poland itself, Alpine Bau has executed agreements worth about 2,5 billion PLN – which clearly indicates that the reason for this firm’s problems could not be one insignificant, in business of this scale, bridge in Mszana.
• Former members of the executive board of Alpine Bau are now under criminal proceedings in Austria.  

6. According to Reuter’s: „The ravine the bridge had to span isn't wide, or especially deep. In fact the brook at the bottom of it is only about four meters across - the length of a small family car”.

 

What is the truth ?

• The truth is shown in the pictures below, taken in June 2013 by the Contract Engineer. The valley under the bridge under construction had been flooded after heavy rainfall. It was a regular spring under Polish climate conditions, not even close to floodings of 1997 or 2010.

7. According to Reuter’s the State is responsible for bankruptcies.

 

What is the truth ?

• According to PwC – contractors have not always been able to ensure the continuity of actions and cash-flow stability at their enterprises. Among all the investment projects executed within that time, on both national and local level, road projects constituted approximately 26% of all construction investments in Poland. The volume of such large projects was too significant to handle for some companies and it affected their financial condition negatively. Amid contracts signed by GDDKiA, nine firms were announced bankrupt. It stands for 3% of overall number of construction firms, which went bankrupt in 2012.

• According to PwC: It cannot be stated that constructing for GDDKiA was in any case the direct reason for bankruptcy, since GDDKiA was a substantial, but not the only Employer for constructing firms. Alpine Bau is an example of a bankrupt enterprise, which at that time was executing many contracts for GDDKiA as well as other Employers and its debt was 16 times larger than the value of all constructions conducted for GDDKiA.
• In the last two years Poland has paid overdue remuneration of subcontractors, suppliers and service providers, instead of the General Constructors, who did not cover their liabilities. Up to September 2013, GDDKiA has paid almost 1 billion PLZ to those entrepreneurs, whom general contractors, such as: SIAC and Alpine Bau failed to pay for the conducted construction works.

• Subcontractors working on Polish roads construction sites are under legal protection of article 647 (1) of Polish Civil Code. This article creates joint liability of an Employer and General Contractor for paying remuneration to subcontractors. As this regulation is not used in all cases and some subcontractors are not paid basing on article 647(1), there is also a second path – a Statute from June 28th, 2012.

• These debts are paid using, among others, bonds of those unreliable contractors. GDDKiA is effectively regaining due amounts, secured as bank performance bond on the contracts.
• In currently signed contracts, Suppliers and Subcontractors are even more secured, which is another drawback for some Contractors. GDDKiA can make the General Constructor’s remuneration payment contingent upon the coverage of his subcontractors’ claims.

Alpine Bau won a tender for the extension of national road no. 16, bidding, according to GDDKiA and National Chamber of Appeal, with grossly low price. Alpine Bau appealed against GDDKiA’s order, convincing the court that it has evaluated its bid correctly. As a consequence, Alpine Bau failed to construct the road, however it has submitted a claim against GDDKiA for an increase of the contract value.