Advantages and disadvantages of materials supplied by Party A after list-based bidding

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Advantages and disadvantages of materials supplied by the client after competitive bidding: To ensure project quality and reduce costs, many construction entities now opt for a system in which the client is responsible for purchasing and supplying the materials. This approach does indeed provide a high level of assurance for the quality of the project, but it also gives rise to several issues: (1) The supplier providing the project materials effectively avoids disputes regarding those materials on the part of the contractor after the project is awarded. If the client fails to specify the prices for various materials or the brands to be used prior to the bidding process, then during the execution of the construction contract, disputes may arise between the client and the contractor if the prices of those materials increase, if the prices determined by the client after market research are higher than the price at which the contractor won the bid, or if the actual amount of materials used in construction exceeds the budgeted amount. The first situation is easier to resolve; the difference in cost can be compensated to Party B according to the agreed range. The second situation is more complicated, as it involves a contradiction in itself. Since Party A has not specified a brand, it seems logical for Party B to purchase the materials on its own. However, when Party B purchases materials, it is generally required that Party A and the supervision unit participate in the inspection process before a material can be selected for purchase. Therefore, the only solution in this case is for both parties to bear part of the costs, with the details to be determined through negotiation between them. In the latter case, especially after the adoption of list-based bidding, the risk associated with the volume of work falls on the client; as a result, it is difficult to determine the price for any amounts that exceed the budget. This is because, in order to win the bid, bidders tend to lower their quotes further, and on top of that, the prices of certain materials can fluctuate significantly. Therefore, although market factors play a role in determining prices that exceed the budget, it is still difficult to determine such amounts. Many of the companies that win the bids have little profit margin in their initial quotes; as a result, when this situation arises, they keep raising their prices during negotiations, failing to reach an agreement and ending up in disputes with the client, which ultimately leads to delays in the project timeline. (2) Party A shall supply the engineering materials to prevent Party B from substituting other materials for those specified by Party A or mixing adulterants into them. Given the high prevalence of fake and substandard products in the current construction market, as well as the fact that some materials come without any manufacturer markings, the client and the supervision agency can only determine the authenticity of these materials based on the available documentation. Although regulations require that all materials be rechecked by the contractor upon arrival at the construction site, most products pass such rechecks. Yet even among products that are deemed qualified, there can be significant differences in their performance. For example, among qualified cables, those produced by a company in Hanzhong became very hot and softened after being used for over ten hours, while the Changtong cables produced in Gansu remained almost unchanged from their condition when first used. Therefore, by ensuring the quality of the materials supplied by the client, it is possible to guarantee the quality of the entire project. (3) Materials supplied by the employer are not deducted from the bid price. The implementation measures for quantity-based pricing in construction projects in our province specify that for materials purchased by the tendering party itself, it is necessary to list the types, specifications, models, quantities of such materials, as well as an estimated unit price for them. This information serves as the basis for the tendering party to determine the bid price for the project, and it also forms the basis for the tendering party to recover the cost of the materials supplied when the project is completed and settled. In other words, although the materials are supplied by Party A, the bidder still needs to include the cost of these materials in their bid price; it cannot be assumed that just because the materials are provided by Party A, the bidder does not need to account for their cost in the bid. Because although the materials are supplied by Party A, the construction is still carried out by the civil engineering contractor. Therefore, construction companies should account for all the costs associated with the relevant materials, such as labor costs, transportation and handling fees, and procurement fees. (4) In tendering based on schedules, the estimated quantities in those schedules often differ significantly from the actual amounts used. When providing the quantity lists, the contractor usually cannot give accurate figures, and frequently fails to act responsibly by merely relying on the quantities stated in the schedules. Why can’t Party B provide an accurate figure? Because there are many unforeseen factors during construction, and the quantities listed are calculated based on the blueprints alone. If the materials are supplied to Party B in one go, then when quoting prices, they should take into account their own capabilities in carrying out the work and include the expected losses in the quoted price. In other words, the actual quoted price = (listed quantity + loss amount) × material price per unit ÷ listed quantity. It’s simply impossible to achieve complete accuracy. There’s also another situation: although Party B provides the quantities for the work, the final determination of those quantities is made jointly by both parties. If the amount of materials needed during construction is insufficient, then it’s unclear who should bear the difference – in theory, it should be Party B’s responsibility, as they were involved in determining the quantities. If the quantity is small, it’s easier to resolve the issue; if the quantity is large, then both parties need to check the quantity again or consult a company (a consulting firm specialized in preparing cost estimates for such projects) to determine the correct quantity, so that the problem can be resolved ultimately. Nevertheless, materials supplied by Party A still result in significant waste; as a result, Party B does not try to save on these materials, but uses as much as is supplied and as little as is necessary. (5) The materials supplied by Party A will be delivered in bulk. If Party A requests the supplier to supply materials intermittently based on the construction progress at the site when purchasing the materials, it is generally very difficult to achieve this. For example, materials such as rebar and cement: for a frame structure building with a volume of 250,000 m³, the construction process usually takes 8 to 10 months. It is practically impossible to ask suppliers to supply the construction site at the same price on an intermittent basis throughout those 8 to 10 months. Even if it is achieved, it is based on changes in costs, as the market is volatile and not stable; especially for items like steel and cables this year, where prices change every day. Once there is an increase in prices, the suppliers will definitely demand compensation for the difference. However, if the client tries to save money by asking the supplier to deliver all the materials at once, and there are insufficient storage facilities at the construction site, then the client must provide a storage area. This requires specialized personnel to ensure proper handling of materials when they are taken in and out of storage. Moreover, when the materials are needed on site, they have to be transported again, which can result in varying degrees of damage to the materials. When the employer supplies materials in large quantities, there are many unforeseen factors. For example, for several buildings constructed by our school in 2006, the cement was supplied by the employer; however, problems arose with the kilns at the cement factory, and the materials could not be delivered as required for over 40 days. Since it was not possible to switch suppliers at that time, the construction timeline was delayed by more than a month. The construction company had to file claims against the employer for the delay. (6) When the employer purchases the materials, the contractor is reluctant to cooperate with the supplier and will use various excuses to obstruct the process. Moreover, before it’s time to use that material, he will ask the client to purchase it in advance; yet when the client actually buys the material, they come up with various excuses to refuse to accept it, such as claiming there’s no space on site for storage or that no one is available to receive the goods upon arrival. This causes great inconvenience for the supplier. In the case of sub-contracting, the sub-contractor may face passive resistance from the main contractor, both in terms of access to the site and timing, during construction. For example, in a project where the client has subcontracted the aluminum work, when the sub-contractor tries to start working, the main contractor says it still needs the scaffolding, so the sub-contractor cannot begin work yet, and it demands a certain amount of compensation as payment for this inconvenience. The sub-contractor has no choice but to accept this in order to get the work done as quickly as possible. In fact, for the projects assigned by the client, the client has already paid the main contractor a fee for coordination, which is essentially the general contract service fee. The so-called general contracting service fee refers to the costs required by the project contractor to assist and coordinate with the tenderer in managing project subcontracting as well as in the procurement and storage of materials. (7) When Party A purchases materials, it sometimes ends up acquiring products at higher prices, as the quantity of materials it can acquire is limited. On the other hand, construction companies, due to the nature of their work, generally establish long-term, stable relationships based on mutual support and dependence with local suppliers. Therefore, for reasons related to long-term interests, the same materials are usually available at a lower price to construction companies than to Party A. Of course, this only applies to the situation where the construction entity is an organization responsible for building schools or other facilities, or corporate entities. If the construction entity is a real estate development company, then the situation is different, as both the development company and the construction contractors are involved in activities related to building construction, albeit from different perspectives. Therefore, it is very beneficial for development companies to provide materials themselves, as this helps to reduce costs. (8) When the materials supplied by Party A were audited, there was an issue of evading construction business tax. For several projects at our school that began construction in 2006, the school opted to have the materials supplied by the contractor in order to save money. The prices of materials supplied by the client are determined through rigorous processes such as bidding or negotiation, under the supervision of audit and oversight departments. Since the quantities and types of materials may change during delivery, payment is only made after an audit is conducted by the audit department. However, during the audit conducted by the audit authority, it was pointed out that there were issues with tax evasion regarding the construction materials provided by us. According to relevant regulations, in terms of the total cost of the project, regardless of how the costs of the materials are calculated, the total project cost should include the price of all materials. This is to ensure that changes in the entity responsible for purchasing the materials do not alter the basis for calculating the construction tax or its economic essence, thereby preventing tax losses. In the end, the school made up for the missing building business tax. (9) Materials supplied by the client can pose many hidden risks after the project is completed; when a problem arises in some part of the project and repair is needed, the contractor will immediately claim that it is due to the quality of the materials. For example, in the case of leaks in waterproofing works, it is difficult to determine whether the problem lies with the materials themselves or with the way the work was carried out. If the repair is indeed caused by a material issue, Party A still has to purchase the materials, and often only a small amount of material is needed for the part that requires repair; this makes the subsequent invoicing quite complicated and difficult to manage from an infrastructure finance perspective. Suggestion: The employer should supply materials selectively; for those materials whose brands are difficult to determine, it is appropriate for the employer to provide them ； It is best to specify brands when issuing a tender; 2 to 3 brands can be designated. Avoid specifying just one brand, to prevent situations similar to those with cement mentioned earlier ； Materials supplied by the developer are more suitable for real estate development companies ； Party A can issue a tender to select the materials, and Party B will supply them after adding taxes and a certain profit to the original price.