Improper pricing creating losses in infrastructure projects

In a discussion on solutions to improve effectiveness of projects, especially public investment projects, Pham Van Khanh, Head of Department of Economic Construction (Ministry of Construction), said that the losses that have occurred in various infrastructure projects in the past have been caused by improper pricing.

Illustrative photo.

Illustrative photo.

JOURNALIST: - How does the construction pricing impact the effectiveness of public investment projects? Can we manage the losses that have been incurred continuously over past times?

Mr. PHAM VAN KHANH: - The inappropriate legal framework and improper construction pricing is among several reasons for the ineffectiveness of public investment projects. If we have enough tools to manage reasonable costing to suit with the market mechanism, the implementation quality of public projects will improve and the cost will be under control too.

Furthermore, a complete, consistent and transparent regulation system will help us to monitor the investment process, create a more transparent and competitive business environment, and reduce avoidable losses in infrastructure investment projects.

Currently, Vietnam has 20,000 construction cost norms for public infrastructure construction projects. Most of them have been built a long time ago and have not been suitable with the market mechanism. The management of these norms and pricing mechanism is subsidized and many old technologies are still allowed to be applied causing higher construction costs of projects. The norm for determining material cost, labor cost, and the cost of other machinery and tools are not suitable with market mechanism.

For example, the unit price when we buy 1kg of steel is the same as the unit price of 100kg of steel. The norm of labor cost is classified into two groups with a difference of 13%. However, in practice, this difference amounts to several hundred percent. The difference between cost of leasing machinery and tools for one hour and one week is 10-30%. The improper mechanism to define direct and indirect cost of machinery and tools is also another reason for losses in construction.

Vietnam lacks the data system to manage construction cost, support decision making and create a transparent business environment.

So far, we do not have a regulation for application of new technologies in cost management activities, especially for public construction cost management.

Currently, many countries are using the BIM construction information model to estimate the cost of a project on the computer before implementing in practice. This model helps reduce construction time and cost by 20-30%.

These are some constraints that caused losses in public investment projects.

- The Ministry of Construction has recognized this improper pricing system and required developers to do correct pricing on each project, so why until now the norms of construction cost are still being used?

- It is true that since 2007 the Ministry of Construction has required authorities to change by learning experience from other countries. Over the last three years, the Ministry of Construction has received significant support from Japan, Singapore, China and Korea. Especially Japan experts have given Vietnam some reference regulations, mechanism and methods. Vietnam and Japan have discussed and analyzed the situation and suggested suitable solutions for Vietnam. However, it takes us a long time to have enough conditions to resolve this problem completely.

Currently, we are building a system of construction norms and unit prices to suit with the market mechanism. To make it effective, the new pricing system must be linked with a functional management mechanism.

The new management mechanism will require authorities to review the norms of construction cost periodically, such as yearly or every two years.

The Ministry of Construction has required related ministries and local authorities, especially authorities in Ha Noi and Ho Chi Minh City to quickly build norms of construction costing to have a base for determining the total cost of a project, especially the cost of the forthcoming North-South Highway project.
For example, the norms of labor cost will be reviewed yearly, while the norms of other costs will be reviewed every two years. The authorities have to proactively review and adjust the service costs of using machinery and tools when applying new technology.

When choosing the contractor for the projects, the constructor offering lower cost, shorter construction time and higher quality will be chosen. The constructor with new technology application to cut costs will have advantage in bidding.

We also learn from other countries in building the bidding method to know how to combine quality and price criteria to achieve highest effectiveness.

- The project to complete the system of construction norms and unit prices has been approved by the Prime Minister with the participation of seven ministries and local authorities. To make this project effective and useful in practice, what do the authorities have to do?

- As planned, in 2019-2021 the Ministry of Construction and other ministries have to complete the new system of norms of construction cost.

Over the last year, the Ministry of Construction has removed 1,000 outdated norms, revised 3,000 other norms of construction pricing. The Ministry also added another 2,000 new construction norms to make these norms suitable with the market price. However, the progress of this project in other ministries and with local authorities is slower than expected.

- Thank you very much.

Bich Quyen (Interviewer)

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