Legal Risks Reduction for Unjustified Maximum Price of

Governmental Contracts

Khusei A. Akhmatov

and Irina A. Astrakhantseva

Department of Information Technologies and Digital Economy of the Ivanovo State University of Chemical Technology,

Ivanovo, Russia

Keywords: contractual system, market analysis, integral method, public contract, maximal price, valuation activities,

correlation and regression analysis, money flow, rate of return method, uniform goods, bill of quantities.

Abstract:

For the time being, the specific adminsitartion and judicial practice in disputes on the formation and

justification of the maximum price of contract in the public order placement system is being formed in each

region. As a rule, breach of legislative norms of pricing in the contractual system are revealed based on the

results of scheduled and unscheduled checks by tax, control and supervisory and executive state authorities.

The most proceedings are related with the incorrect use of methods of formation and justification of the

maximal starting price of contract, with the use of one method, but not several cumulatively. In this paper,

the authors revealed possibilities to use methods, used in professional valuation activities (e.g., the correlation

and regression analysis, and income approach methods) for justification of maximum price of public and

municipal contract.

1 INTRODUCTION

According to the practice of applying standards of the

Federal Law on the contractual system, it was

established that control authorities can hold the

customer responsible for breach of the procedure of

formation and justification of the maximum starting

price of public contract in case of using only one one

the methods specified in Part 1, Article 22 of the

Federal Law dated April 05, 2013, No. 44-FZ "On the

Contractual System in the Field of Procurement of

Goods, Works, Services for Provision of Public and

Municipal Needs" (hereinafter No. 44-FZ) [5].

Therefore, the combination of methods that can

further result in obtaining several values of the

maximum starting price of contract (hereinafter - the

"MSPC"), considerably differing from each other,

forces the customer to make an independent choice

preference of one of them, or create a private integral

method of the public contract price justification, with

regard of the individual procurement specifics [19].

In connection with continuous monitoring of

financial relevancy and efficiency of expenditure of

https://orcid.org/0000-0002-9428-1450

https://orcid.org/0000-0003-2841-8639

budgetary funds from the side of controlling

authorities, issues of justification of the maximum

starting price of the public and municipal contract

always remain the most sought-after discussion

subject among the procurement members [6, 17]. The

specific law enforcement practice on forming the

maximum price of contract, that increases the

customer's responsibility and the amount of

labor when forming the procurement plan schedule,

may be formed on the regional level. In connection

with this, it becomes necessary to have knowledge not

only in the field of regulatory requirements under No.

44-FZ, but in practice of interpretation of

requirements of statutory instruments related to

justification of the maximum starting price of the

public and municipal contract [7, 12] and appraisal

law by controlling and judicial authorities.

2 MATERIALS AND METHODS

For the purposes of this study, the authors used

statutory materials, relating to the contractual system

Akhmatov, K. and Astrakhantseva, I.

Legal Risks Reduction for Unjustiﬁed Maximum Price of Governmental Contracts.

DOI: 10.5220/0010662600003224

In Proceedings of the 1st International Scientiﬁc Forum on Jurisprudence (WFLAW 2021), pages 99-103

ISBN: 978-989-758-598-2

in the field of procurement of goods, works, services

for provision of public and municipal needs, orders of

collegial body of executive powers, orders and

decrees of executive authorities. The analysis of

judicial practice of hearing cases on incorrect

justification of the initial maximal contract price in

the public order placement system was performed.

Legal trends in settlement of disputable situations of

setting the maximum starting price of public and

municipal contract were revealed.

Partially scientific methods, such as the rather-

legal analysis, the formally logical approach, the

method of comparative law and law enforcement,

analysis and synthesis, wer used as a methodological

base.

3 RESULTS AND DISCUSSION

The use of method of forming the maximum starting

price of contract, different from those established by

law, is allowed according to Part 12, Article 22,

No.44-FZ. In this case, the customer is obliged to

prepare the justification of the need to use a different

method of forming the maximal price of the public

and municipal contract [13]. For example, in the field

of urban planning, the Ministry of Construction,

Housing and Utilities of the Russian Federation

provides official explanations [4], specifying the need

to use the aggregate methods of justification of the

initial maximal price of the public and municipal

contract at the use of design documentation, the

development of which requires involving the costing

standards database [16].

As is known, the estimated construction

cost indices, current as of the date of justification of

maximum price on contract are used with the purpose

of bringing types of work, established by the bill of

quantities, to current value. Price deflator values are

used when calculating the anticipated inflation index

that is used for forming the maximum price of

contract in contractor's work paid for by subsidies for

state job performance. The Webpage of the Federal

State Statistics Service (hereinafter - "Rosstat")

provides methodical recommendations for definition

of values of price indices, calculation of anticipated

and actual inflation indices, and the deflator.

The main method for setting the maximum

starting price of public contract in the conduct of trade

procedures for contractual work is the design and

estimate method [15]. It provides for the use of

special estimate standards, included into the federal

registry. It is allowed to use the other methods in

absence of estimate standards for project design work

and engineering surveying, in the federal registry.

On practice, other methods for justification of

maximum starting price of the public and municipal

contract can be borrowed from directions of

economic and financial analysis [18], that became

common in terms of good business practices, have the

advisory or binding nature of application according to

the requirements of statutory instruments of federal or

regional level. One of such directions can include

valuation activities, providing for the presence of

professional skills for determination of market,

cadastral and other value of the proprietary item. The

results of such assessment are actively used in the

practice of corporate relations, bankruptcy regulation,

privatization, mortgage security, and taxation.

Federal Law dated July 29, 1998, No. 135-FZ "On

Valuation Activities in the Russian Federation" is the

main statutory instrument for regulating valuation

activities, including those in terms of judicial

appraisal and determines legal grounds of regulation

of valuation activities in relation to the appraisal

objects, belonging to the Russian Federation, subjects

of the Russian Federation or municipal institutions,

natural and legal entities, for the purposes of making

transactions with the subject properties, and for the

other goals [2]. Therefore, expressing an opinion on

cost of proprietary items both in terms of cost

assessment and in terms of judicial appraisals belongs

to the field of appraisers' professional activities.

In accordance with the requirements of Article 3

of the Federal Law dated July 29, 1998, No.135-FZ

"On Valuation Activities in the Russian Federation"

(hereinafter No. 135-FZ), federal valuation standards

(hereinafter - "FVS") of value are also used in terms

of valuation activities. The federal valuation

standards are mandatory for use at valuation

activities, and according to Article 20 of No. 135-FZ,

it is specified that FVSs are developed with regard of

international assessment standards.

According to FVS No.1, the price shall mean the

amount of monetary funds that may be requested,

paid and proposed by the participants as a result of

effected or proposed deal [9]. In this case, the

similarity between the terms "price" under FVS No.1,

and "maximum starting price of contract" according

to No.44-FZ is noticeable. The maximum price of

public contract is equivalent to the monetary amount,

proposed by the customer for satisfaction of public

and municipal needs in terms of the proposed deal.

The maximum starting price of the public contract

may be paid to the procurement winner in full amount

in terms of real transaction, if the procurement

procedure was declared void, due to the fact that by

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100

the expiry of the period for application, only one

procurement procedure participant expressed a wish

to become a party to the contract [1, p. 16, p. 66].

Content of appraisal object cost is revealed

separately from the term "price" in FVS No.1. Value

is the most probable calculation value, set for the

specific date of appraisal with the respective type of

value that includes: market, investment, liquidation,

and cadastral [10]. It should be noted that the need for

actualization of the cost of goods, work, or service for

the current date is not directly specified in terms of

No. 44-FZ. According to methodical

recommendations of the Ministry of Economic

Development and Trade of the Russian Federation on

application of the methods for setting the starting

price of the public and municipal contract, price

information, obtained by the customer more than six

months ago before the procurement procedure start

date, shall be subject to actualization [3]. Consumer

price indices are used for this purpose. For the time

being, in procureent of construction work, according

to the requirements of the Ministry of Construction,

Housing and Utilities of the Russian Federation, it is

required to use the anticipated inflation index for

bringing the current value of contract to conformity

with the level of prices by the end of fulfilling the

contract obligations.

The final value in terms of valuation activities is

defined at the use of totality and sequence of

procedures. They are united with common

methodology, and allow establishing the market value

of object based on material information. In forming

the maximum price of contrcat in the public and

municipal order placement system, the law

enforcement practice, and results of checks by control

and supervisory authorities, bind the customers to use

sevral justification methods. The market analysis

method and the design and estimate method (for

example, in case of permanent repair, not providing

that estimate documents should be subject to

mandatory state or private appraisal) are used the

most often simultaneously, together with the rate of

return method and the market analysis method (for

example, when setting the maximum price of contract

for security, cleaning, catering services, etc.).

Therein, materiality of information is limited to the

specifics and rules of use of price sources and

reference information, according to the regulation

requirements. In terms of valuation activities, market

value of object is established based on the totality of

factors that are variative and finite in case of

attracting all material sources of information, based

on professional justified opinions and calculations of

the appraisal object.

In terms of valuation activities, the certain date for

defining the market value of object should be

specified. This allows taking into account the impact

of events and trends of the appraisal object value. The

public order placement system has no requirements

for specification of the date of determination of the

maximum price of public contract. Methodical

recommendation of the Ministry of Economic

Development and Trade of the Russian Federation

specify only the need for bringing prices of previous

periods, since the date of which more than six months

passed, to the current level of prices [8, cl. 13.4].

Therein, both in the field of public and municipal

procurement, and in valuation activities, it is

permissible to use objects with the similar economic,

material, technical, functional and operation

indicators with an object that is a subject of appraisal

or procurement. The comparative approach, applied

in valuation activities, provides, partially, the same

methods for the object value definition that are used

in justification of the maximum value of the contract

by method of comparative market prices, i.e., by the

market analysis. These methods are used in

conditions of adequacy and reliability of information

on prices and characteristics of the object. It should

be noted that the quantitative indicator of pricing

information sufficiency is fixed in the field of legal

regulation of the contractual system, in distinction

from the appraisal. For example, the customer may

send at least five inquiries to suppliers of identical

goods, and in their absence, study the market of

uniform goods. At least three price offers should be

applied for justification of the maximum price of

public contract. At this, the same as in valuation

activities, it is allowed to use prices for consummated

deals, that are placed in the contract registry. In

valuation activities, the quantitative indicator of

pricing sufficiency is formed from business practice.

However, in the field of placing the pulic order for

the contractual price justification by market analysis,

neither methodical recommendations of the Ministry

of Economic Development and Trade of the Russian

Federation, nor the Law No. 44-FZ itself provides for

the analysis of statistical data, there is no possibility

to adjust for differences of uniform goods in relation

to the procurement object, that are used by a

professional appraiser before determining the

appraisal object value.

When forming the maximum price of public

contract, the use of the rate of return method often

raises questions from control and supervisory

authorities due to the need to justify expenses

inlcuded into the price of goods, work, or service. In

additon, exclusiveness of application of the rate of

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101

return method in the contractual system is established

in the Law No. 44-FZ, and is expressed in its use as

an additional, but not an independent, method.

Therein, it is recommended to separate total expenses

into direct and indirect. In addition, common income

for the specific field of activity is taken into account.

Sources of information about regular income are the

registry of contracts, other public sources, including

informaton and pricing agencies, and public market

research findings. It should be noted that in

justification of the maximum starting price of public

contract by the rate of return method, no possibility

of using the price information by identical or uniform

goods is specified. In terms of valuation activities, the

rate of return approach allows for the item cost

definition not only on the basis of expenses related to

creation of its identical copy, but also the object with

similar useful qualities. Criteria of the object

recognition as an identical copy, confirmation of

comparability of useful properties are established by

federal valuation standards. In addition, when

defining the appraisal object value, the rate of return

method provides for taking factors of wear and tear

and fucntional and economic obsolescence into

account [11].

Due to the fact that the considerable deviation of

deal price from market price can result in the contract

legitimacy contestation through judicial procedures.

During the object valuation, the appraiser can use al

the three approaches, or reasonably select one or two

approaches to appraisal. When calculating total value,

calculation results of the approach that demonstrates

the largest deviation from the other results (as a rule,

over 30%), can be excluded from calculations.

Valuation activities also use the correlation and

regression analysis, which requires solving the issue

of forming the representative sample of analogues

(comparable items). They are used for establishing

the cost of the appraisal object in case of comparing

market data. To build an econometric model, the

market data sample equal to 5–7-fold number of

independent factorial variables is used.

5 CONCLUSION

Thus, the use of the correlation and regression

analysis can be justified and feasible for definition of

the maximum price of contract in the public and

municipal order placement system. The procedure of

justification of the maximum price of the contract is

accompanied by explanation of the order of its

formation, and specification of price factors. The list

of such factors may depend on the procurement

procedure specifics, and count for both production,

state, fiscal, and customer criteria of the procurement

item. Therefore, the customer almost always specifies

the structure of price factors in procurement

documentation, but is not always aware of the share

of each variable in the contractual price structure.

The public and municipal order placement system

does not provide for application of money flow

discounting and money income capitalization

methods. However, their use would allow

establishing the fair maximum starting price of the

procurement object when conducting, for example, an

auction sale for the contract value increase, enabling

a participant, who offered the highest price, to enter

into the agreement.

To reduce the level of precedents of incorrect

justification of the maximum starting price of the

public and municipal contract, revealed by control

and supervisory authorities, in connection with

selective application of one of pricing methods by the

customers, it would be reasonable to fix indication at

the need of complex application of methods of

forming the maximum price of contract in

recommendations of the Ministry of Economic

Development and Trade of the Russian Federation, or

the Federal Law No. 44-FZ.

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