Profit helps them to build and live

State construction contractors, who traditionally have low profits, are asking the government through State Duma deputies to allow them not to reduce the contract amount in case of savings on building materials, equipment, or using more advanced technologies. Now such companies have no motivation to save money, since the excess funds will have to be returned to the customer. Market participants say that the measure is long overdue, but fear its bureaucratization.

At the disposal of “Kommersant” was a letter from the chairman of the committee on construction and housing and communal services of the State Duma, Sergei Pakhomov, sent on July 19 to the head of the Ministry of Construction, Irek Fayzullin, and the Minister of Finance, Anton Siluanov. The deputy asks the government to give the contractors of state construction an opportunity to consider the funds received as the company’s profit if they save on materials, equipment and production under such contracts without compromising quality.

The Ministry of Finance did not respond to Kommersant’s request. The Ministry of Construction told Kommersant that the proposal requires detailed study, and they promise to develop a “proper legal assessment” on this issue.

The current legislation practically does not motivate state construction contractors to use more advanced technologies, improve labor productivity and optimize their own purchases, explains Vladimir Koshelev, First Deputy Chairman of the State Duma Committee on Construction and Housing and Communal Services. According to him, according to existing standards, any cost savings under the state contract – no matter what it would have been achieved – is unprofitable for the contractor, and often “even harmful.”

The estimated profit in construction is calculated on the basis of certain percentages of the total wage fund, that is, the use of more advanced construction technology that reduces the use of workers’ labor is unprofitable, confirms the general director of the Smart Engineers Group of Companies Hussein Pliyev. At the same time, average salaries in this segment are now 20-30% lower than the market ones, construction companies pay this difference from their profits, adds Maria Yarmalchuk, General Director of the National Association of Infrastructure Companies.

In the case of replacing materials and maintaining the operational characteristics of the facility, the saved funds are withdrawn from contractors, while the increase in the cost of work is not paid extra without a re-examination, confirms Evgeny Starodubtsev, general director of Stroykompleks LLC. The initiative to increase profits is long overdue, Hussein Pliev notes.

According to Alexandra Galaktionova, General Director of Sherpa Group, many contractors are now working on the verge of profitability, and sometimes they are unprofitable. Ms. Yarmalchuk explains that the margin in road and bridge construction is at the level of 4%, which is less than in agriculture or mining, while inflation in construction is about twice as high as the average for the economy.

The low level of profit on government contracts is one of the reasons for the reluctance of contractors to participate in such projects. From the appeal of Sergey Pakhomov, it follows that in 2022, out of 107 thousand purchases for construction, reconstruction and repair work carried out by the state, 61 thousand were recognized as failed. Of these, only 41 thousand contracts were subsequently concluded, 19 thousand – and did not find contractors. The main volume of failed auctions falls on purchases up to 100 million rubles. The number of failed tenders will only grow if the approach is not changed, Mr. Starodubtsev insists.

Against this background, in particular, the provision of contracting companies with construction contracts is declining. In June 2023, the figure dropped to 2.7 months, while in February, contractors were loaded an average of 5.1 months in advance (see Kommersant dated July 3).

At the same time, Alexandra Galaktionova believes that even if the initiative is adopted, it will not particularly affect the position of contractors and their profits. If the process to justify the savings is transparent and understandable to companies, this may motivate them to use new technologies, but the effect will not be felt until a couple of years later, she adds. In the case of bureaucratization of the mechanism, the expert concludes, companies will again have to make a lot of efforts to justify the legality and manufacturability of the applied solutions, and they are unlikely to want to use the proposed measure.

Daria Andrianova