“Rather than wait to die, take action and risk death!” Chaos abounds in construction bidding; bosses, hang in there!

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“Rather than wait to die, take action and risk death!” Chaos abounds in construction bidding; bosses, hang in there! Many construction business owners joke that working in the construction industry has now fallen into a dilemma. If you don’t do it, then wait to starve to death ； If you force yourself to do it, you might suffer huge losses; in worst cases, you could even break the law. If we were to use an current popular phrase to describe this phenomenon, it would be: rather than wait for death, one chooses to seek it out! Pain point 1: The dilemma of winning bids at low prices. Winning bids at low prices has always been a major challenge for construction companies; you can’t win bids without offering low prices, but doing so results in losses. Although we all know that winning bids at low prices leads to the downfall of competitors, exhaustion for oneself, and harm to the client, as long as this rule of bidding at low prices applies, there is no bottom line – only lower and lower prices. Secondly, despite the continuous rise in labor costs and material prices over the past few years, the engineering quotas have not been updated. What’s even more frustrating is that the winning bid prices keep dropping. Under such circumstances, it’s quite remarkable to be able to deliver high-quality work, don’t you think? However, once something goes wrong, our construction companies are the ones who come under scrutiny, as in the case of the collapse of a bus stop in Hefei. Pain point 2: The hardships brought about by the replacement of value-added tax with direct tax. When it comes to this change, all construction companies across the country – whether their owners or financial staff – and especially those companies that operate under fictitious names (although such practices are prohibited, they still occur widely) – are all complaining bitterly; there is essentially only criticism. Due to the fierce competition in the industry, many projects have to be won at low prices or even below cost, meaning there is little to no profit, or the project results in a loss once it is completed. Apart from those improper and underhanded practices, basically all companies adopt the method of purchasing materials without issuing invoices. If you go to any building materials market or manufacturer, there is one price when an invoice is issued and another price when no invoice is provided. Under the previous tax system, many construction firms didn’t issue invoices at all. After all, the tax rate was just a little over 3%, a fixed percentage; naturally, one would want to save on any costs that could be avoided. After the tax reform, although VAT deductions are available, if you want to obtain invoices for the materials purchased in order to claim deductions, it will result in an increase in the cost of those materials by 6–10 percentage points or even more. However, it’s not always possible to get it running. Additionally, not only did we get little benefit from the tax relief, but it also caused trouble (requiring the integration of three systems). Secondly, the replacement of value-added tax with a consumption tax has had a significant impact on the construction management and profit margins of contractors, especially subcontractors; however, the pattern of project subcontracting, or even full-scale contracting, is likely to remain unchanged for a long time. Since the budget includes 11% value-added tax, the pressure on the contractor is not particularly high, as he can pass on this burden to subcontractors, who can provide the necessary tax deduction invoices; moreover, the simplified tax rate of 3% applicable to old projects makes it easy to manage the situation. However, for subcontractors, the shift from VAT to GST can be considered the \"last straw that breaks the camel’s back\". After the replacement of business tax with VAT, subcontractors face tremendous challenges. Previously, the tax rate was practically zero; now it has risen to 6%, or even 8% ； Where it used to be sufficient to operate just one company, now it is necessary to manage labor companies, machinery rental companies, material supply companies, and so on; as a result, the daily management and operational costs involved are naturally incomparable to those of the past. So the construction industry is now in a difficult situation: following tax regulations to the letter almost means doing nothing useful, while not following those regulations constitutes a crime that can lead to imprisonment. Where are we supposed to go to seek justice? Pain point 3: Illegal subcontracting. China’s Building Law, Bidding Law, and Contract Law all explicitly stipulate that the main components of construction projects cannot be subcontracted, while any other parts that are subcontracted must obtain the owner’s approval. But that is in an ideal situation; it’s impossible to achieve in reality. Let me give a very practical example. It’s quite evident from the output value and number of employees in certain enterprises. For instance, in 2016, a central state-owned enterprise generated an output value of 1,861.2 billion yuan. The total number of employees at this company was around 250,000, resulting in an average output per employee of about 7.4 million yuan. How could such a high average output per employee be achieved without subcontracting? Therefore, there must be reasons why illegal subcontracting persists for such a long time. We all know that enterprises with top-tier or first-tier qualifications, which are eligible to bid on large-scale engineering projects, although they have advantages in terms of technical management, suffer from weaknesses in terms of labor and mechanical equipment resources. Companies with lower qualification levels often have the advantage of being able to integrate mechanical equipment and labor resources; as a result, it is common for the main construction work, or even the entire project, to be subcontracted on a long-term basis (commonly referred to as \"overall contracting\"). This is done by presenting such arrangements in legal forms through various methods. Whenever quality or safety incidents occur, it is blamed on illegal subcontracting. Thus, a subcontractor who plays a key role in building up the country’s infrastructure is mocked as a \"concubine\". Pain point 4: Excessively high subcontracting commissions. As mentioned above, illegal subcontracting is inevitable. So as long as it is subcontracting, there will definitely be a division of subcontracting benefits (a commission on management fees). In the face of profit, people’s hearts turn selfish. Some companies, in order to make more money, subcontract projects that have already been won at low prices and thus yield little profit, taking a management fee as a percentage of the total amount. These management fees can be extremely high, sometimes reaching as much as 40%. As for issues such as construction costs, project quality, and final inspection, they simply ignore them all. It is precisely because the proportion of management fees taken is too high that it squeezes the costs of subcontractors, forcing them to use low-quality materials at low prices or to make reasonable changes during construction in order to avoid losses. The consequence of using inferior materials is what happened with the Xi’an Metro Aokai project, and the construction companies will also face serious consequences. We all know that in many cases, cost is synonymous with quality; with such high management fees and commissions, how can subcontractors deliver work of satisfactory quality? Some conscientious contractors are lenient when it comes to payment for changes in the project scope, while unscrupulous ones are not; they even take a management fee from the changes that subcontractors manage to secure through their own efforts. How do you say subcontractors can survive? This is simply not allowing for a normal pace of life! Pain point 5: Rising unit prices of materials, yet no price adjustment is granted. As is well known, the cost of materials in construction projects typically accounts for a large proportion of the total project cost, around 60% to 70%. Therefore, changes in the unit price of materials during construction directly determine the survival or demise of construction companies. As we all know, during the construction process, the prices of materials such as steel, concrete, cement, and river sand can change at any time due to external factors. And sometimes, as the owners of certain projects, they don’t take this factor into account at all; even when material prices rise, no adjustment is made. For example, this year in Anhui Province, construction companies jointly submitted a petition for help due to rising material costs that exceeded what they could bear (with losses estimated at 6 billion). Because since 2007, Anhui Province has adopted a fixed-price contract model for investment projects, that is, the price of materials is set in advance. In the construction contract signed with Party A, it is stipulated under the “Price Adjustment” clause that “no adjustments shall be made”. This means that should there be a significant rise in building material prices, the winning bidder will bear substantial risks. Pain point 6: Lifetime quality responsibility. Since the official implementation on August 25, 2014, of the \"Interim Measures for Holding Project Leaders of the Five Parties Involved in Construction Projects Accountable for Quality Issues for Life\", issued by the Ministry of Housing and Urban-Rural Development (hereinafter referred to as the \"Measures\"), many companies have seen a reluctance among their engineers, especially younger ones, to participate in project bidding or take on the role of project manager. This situation has begun to affect the normal operation of these companies. The lifetime quality responsibility system means bearing lifelong responsibility for the quality of the projects under management; if quality issues arise in such projects, one may face penalties such as having their professional license revoked or being fined millions of yuan, and in severe cases, even imprisonment. The project manager is paid only a regular salary for their work on the project (except in cases where they seek extra benefits), yet they bear lifelong responsibility for the quality of the entire project. In other words, the compensation he receives for his work is disproportionate to the responsibilities he may have to bear, as well as the potential career and life risks he might face. This is what’s meant by it: having the money from selling cabbages but thinking like someone who sells heroin – who would be happy with that? Pain point 7: Increased emphasis on civilized construction and environmental protection. Doing construction work these days is completely different from before, regardless of whether it’s useful or reasonable. With just one sentence from the owner, the mixing plant had to have its powder silos sealed off as well; in addition, there were a series of additional requirements for the construction of the project site’s headquarters, including landscaping, sports facilities (basketball courts, football fields), parking spaces, and an attractive overall appearance. Previously, these things were unimportant; as long as the project progressed smoothly and there were no safety incidents, that was sufficient. Of course, we’re not saying that standardization in construction sites is a bad thing; rather, the high demands for standardization these days have led to an increase in construction companies’ costs by 20%-30%. Yet the winning bid price for projects remains unchanged, at the same level as before. So where do these construction companies get their profits from? They can only get them from the construction of the main structure of the project, you know what I mean! The construction industry is a capital- and labor-intensive sector, with capital being particularly crucial. Whether it’s construction projects or various types of infrastructure development projects, contractors are required to deposit substantial amounts of money at the beginning, such as performance bonds, guarantees for workers’ wages, quality assurance funds, and various fees related to obtaining permits from agencies responsible for safety supervision, quality control, environmental protection, community affairs, and urban management. Construction sites are like a feast that everyone wants to get a share of; before work even begins, a lot of money has already been spent. Once construction starts, there are costs related to machinery, materials, labor, and other expenses… none of which are free. After overcoming the initial difficult period, one might finally hope that the client will make the payments as agreed in the contract. Yet then there are various audits and delays, and within one or two months, the money never makes it to the contractor’s account. Don’t think that just because we drive luxury cars every day and frequent various high-end places, it’s out of necessity to meet social expectations. On the surface it seems glamorous, but in reality it’s chaotic: one year you work on projects, the second year on construction, the third year on audits. In less than four or five years, your money will still remain in the client’s pocket. Your constant chasing, demanding, and pleading… People say we like to accumulate debts, but the real source of those debts lies with the client. Once you get involved in a project, it becomes extremely complicated, and troubles follow every day! The intense competition in the construction industry is something that those outside the field simply can’t appreciate. All these restrictions imposed on an industry that’s already facing deteriorating conditions and meager profits are nothing short of self-destructive.