Restoring public orders

Each additional day of a 60 km section of motorway incurs costs of app. EUR 130,000–150,000. If this figure is multiplied by the total number of extra days, we are looking at an additional cost of millions of euros. Of course, the shorter the section, the lower the additional expenditure; but as Jan Styliński, the president of the Polish Association of Construction
Employers (PZPB), an association whose members employ the majority of Polish road workers, explains, the amount is not directly proportional to the distance of the section and even on smaller building sites the losses remain high. “Let us consider, for example, the contract for Warsaw’s southern ring road, where the GDDKiA only let the contractor begin work on one of the key sections after an 18-month delay. So the execution of the contract has itself been delayed for more than a year and a half, thus begging the question of who will pay for this,” says Jan Styliński.

What do contractors want?
The president of the PZPB declined to give an answer to what the most common types of contractors’ complaints against the General Directorate are. But he did say that an important group of claims clearly stems from errors in the GDDKiA’s project documentation. These result in an increase in expenses for contractors and delays in carrying out the construction work. “The fact that there are claims is not itself a very worrying phenomenon – these are inevitable in infrastructure projects,” explains Rafał Sebastian Bałdys, a board member of the Polish Association of Employers in Engineering Services, an association of several major engineering companies. “What is actually worrying is the number of legal claims that have to go to court because the ordering party refuses to acknowledge them. In Germany such lawsuits almost never take place, because the claims of contractors are settled on an ongoing basis during the term of the contract. In Poland the courts have, paradoxically, become a third participant of the investment process,” adds Rafał Sebastian Bałdys.
In June six ambassadors, of Austria, France, Germany, Ireland, the Netherlands and Portugal, took the side of contractors from their countries who have been working on Polish projects. In an official letter to Minister of Economy Janusz Piechociński they expressed concerns over whether Polish regulations are compatible with the generally accepted standards of the International Federation of Consulting Engineers (FIDIC) and criticised the Polish system for a number of deficiencies. The Prime Minister and the Minister of Economy, however, took the side of the GDDKiA. Lech Witecki, the acting director of the General Directorate of National Roads and Motorways, offered this defence: “The ambassadors have been misled. The terms of the contracts drawn up by the GDDKiA are in accordance with FIDIC regulations and for a long period have provided the possibility of additional compensation for the contractor, such as in the case of project errors, the lack of access to land, unforeseen ground and weather conditions, and archaeological finds.”
The GDDKiA has calculated that the companies’ claims from the six countries mentioned above amount to PLN 4.1 bln alone. This figure, however, does not include the claims of firms from other countries, such as Alpine (which is claiming PLN 1.2 bln) – probably due to it being under Spanish ownership (the Spanish ambassador was not a signatory of the letter). The analysis provided in response by the GDDKiA rejected most of the claims of the contractors (a total amount of about PLN 3 bln), but was still considering about a quarter of them (almost PLN 1 bln). Those that were accepted only came to around PLN 95 mln (about 2 pct of the total claims). The Directorate also provided documentation to show that during the last six years the GDDKiA has acknowledged claims totalling around PLN 100 mln by signing 300 annexes to contracts increasing their original value.
The road builders, however, believe that this is not enough. “Only the most ignorant investor presumes that the execution of a project will end with the amount originally proposed by the contractor. This approach to contracts might work for the supply of carbonated water to offices, but not for the construction of roads,” argues the PZPB in an article published on its official website. “Even in Germany, where projects are much better prepared than in Poland, the value of contracts increases by an average of 10–15 pct,” adds Rafał Bałdys. These estimates come from a report published in July by the European Court of Auditors, which took a closer look at the contracts executed by the four biggest beneficiaries of the European Regional Development Fund and the Cohesion Fund: Poland, Spain, Germany and Greece. In these four countries the value of contracts increased by 23 pct on average over the course of the project; but the spread, however, is huge: in Greece by 36 pct, compared to only by 1 pct in Poland.

Maintaining discipline
According to Lech Witecki, it was this over-liberal approach to annexes that was one of the reasons why before 2008 the cost of road building in Poland was the highest in Europe. Now the prices are about 30–40 pct lower and close to the European average. “Just a few years ago annexes were signed routinely, a state of affairs that the industry became accustomed to. It is the change in this situation that might be the cause of the current protests. We have now put a stop to this practice, which proved to be very expensive for the state,” insists Lech Witecki. He argues that annexes should not be a lifeline for company directors who are having trouble with the correct evaluation of bids, the quality of the work, or even – to put it bluntly – on-site theft. He claims that companies that have implemented monitoring have already improved their profitability, while it is the remainder who are seeking compensation in the form of additional charges. “If a company has requested an extension for the construction work and is claiming an extra PLN 10 mln because it is faced with 500m of archaeological finds and cannot build the remaining 19 km motorway it signed a contract for, then what is there to talk about?” Lech Witecki contends. Another example he gives of an unjustified claim is the well-known case of a bridge in Mszana which was built by Alpine. According to the head of the GDDKiA, the contractor tried to blame the Directorate for the latter's allegedly defective design that had led to a rupture of the bridge’s elements. Who is right? The court will decide, but it is likely that the technical analysis needed for the case will be time-consuming and difficult. The president of the PZPB refuses to pre-judge the outcome of such cases, but he sees two possible scenarios: either most of these lawsuits will be won by the contractors and then it will turn out that the GDDKiA’s position that it is up to contractors to make savings is a false one, or the General Directorate will win and more construction firms will go bankrupt. For an industry that is still clinging to life removing PLN 10 bln from the market will only exacerbate the situation.

Who will go under and who will survive?
Which of these scenarios is the more likely to happen? The latter, according to the GDDKiA’s data, because the Directorate has been winning most of the lawsuits up to now. In 2010/2012, it won 77.73 pct of the cases – PLN 311 mln of claims was then dismissed out of a total of PLN 400 mln. Contractors, however, believe that this is not a reliable indicator because it does not include the latest cases
arising out of the tightening of the GDDKiA’s financial discipline. “It should be borne in mind that today a lawsuit in Poland still takes three to five years. The court judgements that have been made recently concern old contracts or are not yet final. Neither, in fact, allows us to predict future judgements,” says Jan Styliński.
The contractors admit, however, that the law favours the General Directorate, since the latter is able to dictate the terms of contracts from the very beginning. “Such construction contracts have a number of provisions, strongly favouring the ordering party. There is no fair means of protesting against such a contract. Contractors can at best refrain from participating in these tenders,” explains Rafał Sebastian Bałdys. As an example of this unfairness he cites the provisions hidden in the technical specifications. Although the text of the contract contains statements that comply with FIDIC standards, for example that the contractor has the right to demand payment for work that was not included in the contract but the performance of which was necessary to complete all the work, provisions contained elsewhere negate these provisions – for example, where it is stated that the price of a given task (e.g. to build a culvert) ‘includes any other costs necessary to perform the work’. These costs are something that the contractors should have foreseen, according to the GDDKiA, but according to the contractors the inclusion of such clauses is leaving them with no option but to take the route of litigation.
There is also the problem of poorly drawn-up and low-cost designs. “In countries with a developed culture of engineering, such as Germany, the United Kingdom and Spain, the cost of the design can be 3–5 pct or even 7 pct of the expenditure needed for the construction work. In Poland sometimes designs are selected that amount to 0.5–0.7 pct of the project costs,” claims Rafał Sebastian Bałdys. So for projects with small budgets the best consultants and designers cannot be hired, nor can sufficient time and resources be devoted for necessary research and tests. As a result, at the implementation stage the costs are much higher than the apparent savings on the design work. “This phenomenon, combined with other defects in the public procurement process in Poland, such as the tendency not to refuse abnormally low bids, the possibility of ‘borrowing’ references, and the blocking of contractors from influencing the content of the terms of reference of the contract, has resulted in a situation where the ordering parties are often forced to sign contracts with the biggest risk-takers among the contractors.

Changes are coming
The need to change the regulations, and most of all the practices, is in fact now being mooted – and not just by the road builders. “At the moment, three EU directives on public procurement are being negotiated. For orders for intellectual services, such as construction design, it will no longer be possible for price to be the sole criterion,” explains Tomasz Latawiec, the president of the Association of Engineers, Consultants and Experts.
Although the GDDKiA sees the problem as being primarily due to the negligence and mistakes made by contractors (such as in the calculation of costs), it has also announced a number of changes to improve the present level of cooperation: dividing contracts into shorter sections, the introduction of advance payments of a renewable nature, consent to the assignment of receivables and factoring, payments for materials, the reimbursement of costs borne by the contractor due to unforeseen circumstances, and the indexation of unit prices. “The industry recognises that the GDDKiA is ready to restore the provisions that have been deleted from the contracts and the lack of which has caused such a significant deterioration of the construction industry,” says Rafał Sebastian Bałdys. The Directorate has been accused of removing from contracts measures to help contractors instituted five or six years ago. Now, after a failed experiment, we will have to revert to the highest international standards. But whatever the critics say, the GDDKiA is having no problems in finding firms willing to take on contracts. Companies from all over Europe are queuing up to build in Poland. Recently there has been an average of 20 applications lodged for each tender. In June there were even 13 new companies that had not previously taken on GDDKiA contracts submitting bids in four tenders. “There are many companies that are getting on with working instead of talking” – is Lech Witecki’s riposte. He also believes that the market itself will finally find a way to eliminate irresponsible bidders and that in the future the number of disputes will be much reduced.“This sector in Poland was accustomed to the fact that if the GDDKiA, as a public investor, issued aninvitation to a tender, all the banks said that there was no risk and no problem at all, and gave financial guarantees to contractors, even without doing due diligence on the project,” claims Lech Witecki. Now, in his opinion, this is changing. Before financiers can provide guarantees for a given project, they have to check both its profitability and the financial standing of the contractor. According to the GDDKiA, this is the best way to take inappropriate partners out of the equation. “An official should never have enough power to choose between companies X or Y on his personal whim. The big players are already drawing their conclusions. Andin the new financial situation, in which CEOs know the GDDKiA does not favour anyone, we will all come out as winners,” concludes Lech Witecki.