Cheap bids are expensive propositions, invariably
The ongoing delay in Ho Chi Minh City's drainage system project is an inescapable consequence of choosing contractors who put in unreasonably low bids, experts said.
They said low contract prices typically come with huge risks. At first it seemed that it was a win-win situation and that the city could save a lot of money by subcontracting parts of the US$199.96 million Environmental Sanitation Project to the low-cost bidders.
However, as the contract prices failed to cover actual expenses later on, the project was delayed several times and has eventually required additional funding of more than $110 million.
The project, which aims to build a new drainage system in the city to control annual flooding and increase the collection of wastewater, was originally scheduled for completion at the end of 2007. Around 1.2 million people were to benefit from the project.
Of the initial investment of $199.96 million, the World Bank provided $166.34.
The Washington-based lender in April had to give another $90 million to help find new contractors to replace China State Construction Engineering Corporation (CSCEC), which was responsible for the project's package 10. CSCEC has been blacklisted by the World Bank for its involvement in a corruption scandal in the Philippines.
The problem, said Project Director Phan Chau Thuan, is that remaining work left unfinished by CSCEC is the toughest part, dealing as it does with the removal of the current water pipeline system under the Nhieu Loc-Thi Nghe Canal. A temporary pipeline has to be installed to ensure that water supply to the city center is maintained when the main system is moved, he added.
Analysts said CSCEC may have intentionally delayed this particular job because it had submitted a low bid and did not want to suffer more losses.
The Chinese company won the contract with a bid that was 25-30 percent lower than other bidders.
To Van Truong, former head of the Southern Irrigation Planning Institute, said the unit price estimate the benchmark for price estimation in construction bidding is based on cost components fixed by the government, which are lower than real market prices.
Material costs and labor rates in HCMC, for instance, are higher than those in smaller cities but the unit price estimate is the same in the whole country, he noted.
When cost estimates are low and do not reflect reality, contractors who care about project quality will basically submit higher bids to ensure they have sufficient funds to complete the project. Meanwhile, some contractors will throw out even lower bids just to win the contract, Truong said.
Low bid prices combined with inaccurate cost estimates mean these contractors cannot escape huge losses, which leads to prolonged delays that sometimes last years, he said.
Unfortunately CSCEC is not the only contractor whose bid was too low.
Chinese-owned TMEC-CHEC 3, in charge of Package 7 of the project, won its contract with a bid that was 20-30 percent than the total cost estimate. The contractor was supposed to finish building a 9,000-meterdrainage system in November 2006, but an estimated 4 percent of the work is still undone.
As a result, the city will have to use its own budget and finance another contractor to complete the package by March next year.
All the delays have extended the deadline for the whole project to December next year.
Additional funds have driven the total investment up to $316.79 million.
Phan Phung Sanh, vice chairman of the HCMC Association of Construction Science and Technology, said the gap between bid prices and the total cost estimate for a project should not be more than 5 percent.
Within a 5 percent difference, the contractor can still manage to finish the project by, for instance, improving efficiency and downsizing their management workforce, he said.
But when bidders have contract prices that are too low, they will either compromise on the quality or cook up something to get more money, Sanh said.
The Law on Procurement needs to have a new regulation to ban bidders from offering too low prices just to win the bid at all costs, he added.
Other observers have also noted that none of the contractors who have unreasonably delayed key projects have been fined.