- Subcontractors threaten to leave construction sites if their contracts are not renegotiated
- They demand clear provisions in the law that would oblige them to index their contracts
- – In the longer term, none of the entrepreneurs will be able to financially continue the contracts without salary indexation – comments the president of one of the companies
- – This is a straightforward path to bankruptcy, bankruptcies and mass layoffs – he adds
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Increases in the prices of materials, fuels and wages are hitting companies operating in the construction industry, especially subcontractors. As the industry reports, for example since the beginning of the year, formwork materials have increased by 70 percent. Eclectic energy increased by 60% and salaries increased by 20%. At the worst moment, steel increased more than three times. Therefore, entrepreneurs call for urgent implementation of changes in the law. According to the Ministry of Development and Technology (Ministry of Development and Technology), consultations on the draft law on the valorization of contracts are currently underway. The ministry wants to complete the stage of preparing the regulations and start the legislative process as soon as possible. The expected date of entry into force is still the third quarter of 2022.
– As long as subcontractors do not obtain a real right to valorization from the beginning of their works and the full range of changes in the prices of materials or costs, most subcontractors will not receive any contract valorization at all – comments Robert Gil, sales director of one of the leading companies in the road marking industry in Poland.
The experience of other people in the industry shows that the recommendations and guidelines themselves do not work in practice. Therefore, it should be clear from the law that valorization applies to subcontractors to the same extent as general contractors. Contracts signed in 2020-2021 are implemented based on the provisions of the old PPL Act (Public Procurement Law). They did not directly mention the indexation of subcontractors’ remuneration. The ministry, on the other hand, is currently consulting with all interested entities, regardless of their role in the order fulfillment process. The catalog of proposals submitted by entrepreneurs is very wide. It includes postulates ranging from the introduction of compulsory valorization to the preparation of only relevant guidelines for awarding entities. Until the work on the draft regulation is completed, the Ministry of Regional Development is open to proposals from the business community.
– Recommendations of the President of the Public Procurement Office regarding exemplary review clauses for 12 types of industries, including construction, have been developed and made available for the needs of the new PPL already in 2020. Currently, work is underway with representatives of contractors and ordering parties in the area of valorization and review clauses for the construction industry . The wide participation of representatives of contractors and ordering parties guarantees a comprehensive perspective on the issue – emphasizes Michał Trybusz from the Public Procurement Office (PPO).
Work on review clauses focuses on a possible update and adding new aspects to the above-mentioned recommendations of the President of PPO. On the other hand, activities in the field of valorization clauses are aimed at creating a few examples, taking into account various types of contracts that awarding entities at various levels deal with.
– At the beginning of this year. the maximum indexation limit on road contracts conducted by GDDKiA has been raised from 5 to 10 percent. Due to the significant increase in the prices of materials and services, caused, inter alia, by war in Ukraine, the ministry proposed a higher limit also for contracts already in progress. In May, the Council of Ministers adopted draft resolutions prepared by the Minister of Infrastructure, assuming an increase in the financial limit of the National Road Construction Program by PLN 2.6 billion and the 100 Ring Road Construction Program by PLN 115 million. This will allow the introduction of a valorization mechanism on all contracts concluded for the implementation of national roads at the level of up to 10%. – informs Szymon Huptyś, press spokesman for the Ministry of Infrastructure.
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Key valorization
Legislative work is ongoing, but some subcontractors complain that general contractors are currently reluctant to raise their wages. As emphasized by Jan Styliński, president of the Polish Association of Construction Employers (PZPB), it is difficult to generalize. The expert has contact with many general contractors who valorize their salaries, even though the investor does not pay them for it. Most often, the general contractor does not agree to such a move, if his remuneration has not been raised. It is a rule of the Polish market that investors valorize payments to a small extent.
– We want the payment of indexation not to depend on the general contractor’s decision. It is known that the courts would confirm our position, but it is a long-term process. Few companies will go to court for fear that the case will not be closed. Therefore, when constructing new regulations, one should remember about subcontractors who in fact – as actual contractors of works and services – incur increased costs. General contractors in most cases do not have their own working teams. All works, services, fuels, material purchases or deliveries are outsourced to subcontractors. They de facto manage only contracts – says anonymously the president of one of the construction companies from the province Silesian.
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Meanwhile The ministry assures that the issue of valorization of subcontractors’ remuneration will be included in the proposed regulations, because there are such demands on many sides. The increase in the prices of materials and other costs of execution of concluded contracts affects both general contractors and subcontractors. As in the case of work on the new public procurement law or the so-called covid regulations, the ministry strives to adequately secure the interests of subcontractors in the field of salary indexation. It is expected that the general contractor whose remuneration has been indexed will be required to appropriately adjust the remuneration of the subcontractors participating in the performance of the contract. And here industry experts point out that the new regulations should explicitly state that the valorization of remuneration applies mainly to subcontractors. Such a decision cannot be left to the general contractors.
– There have already been proposals for valorisation annexes to contracts, which are to be a response to the significant increase in the prices of materials, fuels and services related to the war in Ukraine. Unfortunately, the general contractor still does not have to evaluate the subcontractor’s works based on the full valorisation basket, but only on the obligatory CPI index and one other selected index – points out Robert Gil.
According to the Ministry of Development and Technology, the issue of how to effectively protect the interests of subcontractors is still the subject of a series of works and analyzes. The Ministry is of the opinion that the level of protection of their interests should at least correspond to the level of protection of the interests of general contractors. As in the case of the so-called covid regulations, the prepared solution does not impose contractual penalties on the ordering parties for not changing the contract with the contractor (general contractor).
– It is important to regulate the liability for general contractors who do not want to valorize their wages. Unfortunately, our experience shows that if they are not obliged to do so, they do not voluntarily decide to make such a move – claims the president of the Silesian construction company.
Percentages under the magnifying glass
Construction industry experts say the maximum indexation limit is too low. In the opinion of many of them, 10 percent. does not cover the actual cost increase. At the same time, experts on the subject add that the possible withdrawal from the contract due to a sudden increase in prices is not such a simple matter. Usually, such a decision means payment of a contractual penalty and a case in court. Sometimes you wait for a sentence and you never know what it will be like, so it’s better to try other solutions.
– 10 percent it can cover certain contracts that are at the final stage of implementation. On the other hand, if someone had mainly asphalt or steel works, then such a limit does not mean anything. We applied to the minister for 18 percent. And if for some reason prices started to fall, the above-mentioned the threshold could be lowered. However, as a rule, we are in favor of the lack of a maximum limit, because it is a global standard. Such a solution functions, for example, in the Czech Republic or Romania. In addition, there are also contracts in Poland, even with GDDiA, for example for the construction of several mountain tunnels, in which there are no valorization limits – emphasizes the president of PZPB.
As the president of the Silesian company points out, currently subcontractors are executing contracts, exposing themselves to considerable losses. In the longer term, none of the entrepreneurs will be financially able to continue contracts without salary indexation. It is a straightforward path to bankruptcy, bankruptcies and mass layoffs. And at this point it should be noted that the general contractors themselves confirm this problem in the journal GDMT geoin Inżynieria roads bridges tunnels 2/2022. Therefore, it is particularly important that the new regulations are introduced as soon as possible. Commenced public investments in the country cannot be stopped. If new subcontractors replace the bankrupts, the remuneration for construction services will be much higher than the valorisation costs in question.
– According to the valorization principles, half of the risk related to the increase in contract execution costs is assumed by investors, and the other part – by general contractors. And this mechanism is obligatorily transferred downstream on a one-to-one basis, ie to the subcontractor and further subcontractors. However, in our opinion, it should not be in the proportion of 50 to 50. It should be 80 to 20, ie the valorization should be charged at 80%. salary, not 50 percent. Because more than half of the costs are actually rising. On average, the profit in construction works is usually 5% at the level of the general contractor, and 10-12% at the level of subcontractors. – analyzes President Styliński.
Currently, MRiT does not receive any signals indicating the increasing withdrawal of contractors or subcontractors from concluded contracts. The ministry emphasizes that the new public procurement law significantly strengthened the protection of the interests of subcontractors, as the work on it took into account the experience from previous crises on the public procurement market. However, some industry players are not that optimistic about this. And they warn that if contracts start to be massively terminated, it will be too late to change the legislation.
– We have a market model where we rely on various specialist companies, i.e. usually on smaller subcontractors. If they withdraw from the contracts, the investments will not be implemented. The risk was already visible in March, and today it is increasing and valorization has really become essential. If the changes continue, we will have an avalanche of such waivers and difficulties in investment processes. We need to introduce indexation mechanisms that will then realistically reflect the price increases that we expect from the turn of 2023 and 2024, after correction in the coming months, summarizes the president of the Polish Association of Construction Employers.