Recently, during the audit of the engineering settlement for a government-invested smart transportation project, we found that despite the project not having a large investment scale, the construction content being uncomplicated, and the specialization being singular, there were some “strange phenomena” occurring at various stages from the start of the construction bidding to the completion of the project. These “strange phenomena” were concentrated within a single project, which is quite rare, and the “fog” created by these phenomena can easily mislead our auditing work, severely affecting the quality of the project audit.
In response, based on our long-term experience in auditing government investment projects, we adhere to objective, fair, and legal auditing principles. While comprehensively understanding the true situation of the project, we also consulted with auditing and industry authorities regarding relevant matters and prudently proposed settlement auditing opinions, diligently fulfilling our supervisory responsibilities.
Various “Strange Phenomena” Found in Settlement:
1.1. Non-standard Bidding Process, Improper Gains by Construction Units
Although a lot of preparatory work was done in the early stages of the project, including two rounds of preparation and review for the construction baseline, we believe that the baseline reflects a complete construction content and a reasonable cost level. The total baseline price is 2.56 million yuan, of which: equipment part 1.63 million yuan, installation part 930,000 yuan. However, this project, where the installation part costs account for 36.3% of the total baseline price, did not follow the regulations to conduct the construction bidding in Suzhou’s tangible market using the list model but instead went to the China Tendering Network, which mainly focuses on goods procurement. This significantly affected full competition, resulting in a rare “strange phenomenon” where the bidding limit was 2.56 million yuan, and the winning bid was 2.546 million yuan, with a discount rate of only 0.55%; secondly, the total price of this project was compiled according to the list baseline format, which included a reserve fund of 226,400 yuan. However, in the case of goods procurement, the limit price should not include a reserve fund. Furthermore, the bidding agency did not deduct the reserve fund from the baseline when announcing the total bidding price, meaning the actual bidding limit should be 2.3336 million yuan, artificially inflating the bidding price by 226,400 yuan, which accounted for 8.89% of the contract price. Additionally, the construction unit did not list the reserve fund separately, incorporating that amount into other contents. Although the construction unit was not subjectively at fault, objectively, it still pushed up the bidding price, resulting in their improper gains.
1.2. Unbalanced Bidding by the Construction Unit, Severely Deviating from Market Fairness
While unbalanced bidding is a common pricing strategy for construction units, it is not without merit. However, in this project, the unbalanced bidding content included both equipment and installation costs; the extent of deviation in their quotes was indeed rare. For instance, the baseline unit price for galvanized steel pipes was 111.69 yuan, while the construction unit quoted only 2.10 yuan; the baseline unit price for the 600*600*1400 handhole was 901.33 yuan, while the construction unit quoted only 50 yuan; the total baseline price for galvanized steel pipes and handholes was 757,800 yuan, while the construction unit’s quote was only 46,600 yuan, with the underreported amount totaling 711,200 yuan.
However, the virtual cluster storage management system, which had a baseline unit price of 30,000 yuan per set, was quoted by the construction unit at 180,000 yuan, six times the baseline price. It is evident from the above situation that the 711,200 yuan underreported amount by the construction unit was transferred into the equipment section, including the virtual cluster storage management system. Such severe unbalanced bidding, coupled with changes that occurred on the construction site, set the stage for the construction unit to seek excess profits.
1.3. Chaotic Construction Process Management Leading to Significant Controversy in Engineering Settlement
Audits revealed that the actual construction content of the project underwent significant adjustments, mainly including:
First, the construction content of silicon core pipes, galvanized steel pipes, nylon pipes, and handholes, which were included in the bidding scope, was not constructed by the construction unit at extremely low bid prices. The specific reasons, as initially understood, were that the galvanized steel pipes were embedded by the road engineering construction unit, the nylon pipes were not constructed, and the silicon core pipe HDPE80 was actually constructed as PE40 plastic pipes. These changes did not have any change procedures, which can be understood as the construction unit canceling the above pipeline works without receiving any instructions or written procedures. On the other hand, on the acceptance and material equipment handover forms signed by the construction, supervision, construction, and use units, all the above pipelines were completed and handed over according to the contract quantity, leading to a serious discrepancy between the construction documentation and the actual situation. Since this part of the project used severely low reported unbalanced methods during bidding and the construction unit did not carry out the work, there were obvious disputes about how to reasonably deduct costs for this part;
Second, the virtual cluster storage management system, which was bid as one set, was actually constructed as three sets, and the severe overreporting of the unit price by the construction unit led to significant disputes about how to reasonably account for the costs for this part.
Clearing the Fog:
We believe that as a government investment project, the issues reflected by the above situations are quite serious, and the resulting disputes and settlement differences are also significant. Therefore, our company convened a special business meeting, gathering key personnel to discuss the issues found in the audit practice and form a consensus on handling opinions. At the same time, we dispatched personnel to relevant government departments for consultation, seeking opinions from multiple sources. The main opinions and bases from various parties include:
2.1. The procurement contract for this project did not stipulate prices to be used after changes in construction content
In response to this situation, the opinion of the industry authority is to determine it through negotiation between the construction and construction units based on the principle of seeking truth from facts. Although the construction unit and the construction unit subsequently signed a “Settlement Explanation,” the relevant clauses of this “Settlement Explanation” are typical clauses that apply only to normal bidding price changes and are clearly not applicable to settlements involving severely unbalanced bidding price changes.
2.2. The procurement contract grants both parties legal rights and responsibilities, and both parties must fulfill their obligations to enjoy legal rights
The biggest problem with this project is the severely low bidding prices for the construction content of silicon core pipes, galvanized steel pipes, nylon pipes, and handholes (this is the construction unit’s bidding strategy, which they have indeed taken to the extreme), coupled with the procurement contract not stipulating and limiting such special situations, creating a legal blind spot in the settlement, making it easy for the construction unit to exploit loopholes; secondly, the construction unit did not carry out this part of the construction content and did not fulfill the obligations stipulated in the contract. If the construction unit had implemented this part according to the bidding content, there would be no issue regarding how to deduct or bear the costs for this part. Regarding this situation, the opinions of finance, auditing, and industry authorities are that the construction unit, having received high prices for the equipment (including the virtual cluster storage management system, the equipment part has been fully constructed and additionally increased), should either fulfill their obligations and continue construction or bear the costs for this part of the project according to market price levels (baseline).
2.3. Handling of the applicable unit prices for equipment parts (including the virtual cluster storage management system) that are clearly overreported and whose construction quantity exceeds the bidding quantity
In this regard, the usual practice of the industry management department is that if the project quantity changes exceed ±10%, the settlement unit price for the part exceeding 10% should be proposed by the contractor and determined through negotiation with the client based on market price levels. Based on our calculations, we believe that the baseline price level of this project is basically consistent with the market level.
2.4. Another government procurement project handled by our company at the same time had standardized, complete, and detailed contract terms that are worth referencing
(1) In “11 Price Adjustment,” the provision regarding benchmark prices states: If the comprehensive unit price for the changed item in the contractor’s quotation clearly deviates from the baseline price, the client has the right to handle it in a manner favorable to the client: a) If replacing the bid comprehensive unit price with the new unit price, deduct the bid comprehensive unit price and calculate the new unit price (not yet discounted by the winning bid discount rate) as the changed comprehensive unit price based on the discount ratio of the bid comprehensive unit price to the baseline comprehensive unit price; b) If the item is canceled, deduct according to the baseline comprehensive unit price after discounting the winning bid discount rate, and the contractor cannot raise objections.
(2) In “12 Contract Price, Measurement, and Payment,” the special provisions state: When the comprehensive unit price for the contractor’s sub-item exceeds 70%~110% of the baseline comprehensive unit price, if the quantity of that sub-item changes due to changes in project quantity or discrepancies in the quantity list exceeding 15% of the quantity of the listed project, the client has the right to choose either the comprehensive unit price of that sub-item or the baseline comprehensive unit price (after discount) as the comprehensive unit price for that sub-item. When the quantity of the project increases, the lower unit price between the two will be adjusted. If the quantity decreases, the higher comprehensive unit price will be executed for the excess quantity (referring to the comprehensive unit price compiled according to the methods specified by the cost management department and related documents, multiplied by (1 minus the winning bid discount rate), and the higher of the two prices in the winning bid comprehensive unit price), and the reduced portion will be deducted at the higher price. The above contract contents reflect the objective, fair, and reasonable handling principles for changes in project quantities, unbalanced bidding, and other situations.
2.5. Handling of the construction unit’s obvious improper gains
In accordance with the principles of reasonableness and fairness, and in line with the spirit of the Civil Code, as well as the audit examples from finance and auditing departments, improper gains formed due to the mistakes of the bidding unit should also be recovered and adjusted.
Clear Handling Opinions:
1. For the parts of this project with obviously low quotes and no construction, the deduction should be made according to the market cost level reflected in the project bidding baseline. In addition to not counting the bidding quoted part, the difference between the market price and the bidding amount of 711,200 yuan should also be deducted;
2. For the virtual cluster storage management system, one set can be settled at the construction unit’s quoted price of 180,000 yuan; the other two sets should be settled at market price levels. After inquiry, the baseline unit price of 30,000 yuan is appropriate, and the other two sets can only be settled at 60,000 yuan, with the difference of 300,000 yuan between the bidding price and the market price to be deducted. For other equipment with increased quantities, the increase should also be settled at the baseline price * (1 – discount rate) as the settlement unit price.
3. The improper gain of 226,400 yuan formed due to the inflated bidding price by the construction unit should be deducted.
The three parts of construction costs calculated according to the above handling principles differ from the settlement submitted by the construction unit by as much as 1,237,600 yuan. With a highly responsible spirit, we conducted a special report and submitted project settlement audit opinions, playing a positive role in the audit.
Source: Suzhou Construction Cost Association Suzhou Yongzheng Cost Engineering Co., Ltd. Dong Yongge
