Client note: Pricing mechanism for construction projects
In 2015, a new pricing mechanism for construction projects was approved in the Republic of Kazakhstan.
Keeping GRATA’s practice of informing clients on important legal developments that might influence their business, we would like to draw your attention to some important legal changes regarding implementation of construction projects.
1. General Information on the Pricing Mechanisms in Construction
Today, in Kazakhstan construction is one of the fastest developing industries. Various construction projects are implemented through private and public investments. In this respect, the most important issue in construction projects is financing. Below there is a brief description of pricing methods and procedure applicable in construction in the Republic of Kazakhstan.
The cost of construction is generally determined by making an estimate. Thus, in accordance with Article 621.2 of the Civil Code of the Republic of Kazakhstan (Special Part), dated 1 July 1997, the price of the construction contract can be determined by cost estimating. An estimate can be rough and fixed. Unless otherwise is provided in the contract, the estimate is considered to be fixed.
Thereat, the legislation also provides that the terms and conditions of making an estimate.
The Order of the Ministry of National Economy of the Republic of Kazakhstan 'On the Introduction of an Input Method for Determining the Cost of Construction in the Republic of Kazakhstan', dated 24 June 2015 (hereinafter - the 'Order'), set a transition to the input costing method in construction within the framework of the Action Plan for the State Program for the Forced Industrial and Innovative Development of the Republic of Kazakhstan for 2010-2014, the Instruction of the President of the Republic of Kazakhstan, dated 28 January 2015, the Plan of Priority Actions of the Government of the Republic of Kazakhstan for 2015. Pursuant to the Order, the Committee for Construction, Housing and Public Utilities of the Land Resources Management Agency of the Ministry of National Economy of the Republic of Kazakhstan shall ensure approval of the regulatory documents on the input costing method by 1 July 2015.
The input costing method means the method for cost determining by calculation at current prices (prices of construction resources for a specific period - quarter, semi-year, year) and cost tariffs required for the construction project.
Please note that prior to the introduction of the input costing method, a basic index costing method applied in Kazakhstan. The basis index method, in turn, is based on the use of current indexes in relation to the cost determined in the basic price level of 2001. In Kazakhstan, there are technical standards for rates used in determining the cost by the basic index method.
However, in accordance with the Order and pursuant to the Rules for Determining the Cost of Facilities Construction at the Expense of Public Investments and Funds of Quasi-Public Sector, approved by the Order of the Minister of National Economy of the Republic of Kazakhstan dated 20 November 2015 (hereinafter - the 'Rules'), the contractor's estimate must be based on the input method and according to the state standards. Besides, when implementing the input costing method, according to the explanations of 'Gosexpertiza' RSE, contracts concluded before 1 July 2015 shall be based on the basis index costing method, while estimates on contracts concluded after 1 July 2015 shall be calculated using the input method.
2. State Standards for Determining the Cost of Construction
The Order of the Chairman of the Committee for Construction, Housing and Public Utilities of the Land Resources Management Agency of the Ministry of National Economy of the Republic of Kazakhstan dated 3 July 2015 approved the following pricing and estimating standards in order to transit to the input costing method:
1. State Standard for Determining the Estimated Cost of Construction in the Republic of Kazakhstan;
2. State Standard for Determining the Value of Overhead in Construction;
3. State Standard for Determining the Additional Costs Associated with the Solutions of the Construction Organisation Project;
4. State Standard for Monitoring the Current Prices and Calculation of Estimated Prices of Construction Resources;
5. State Standard for Determining the Value of Costs for Transportation of Goods for Construction;
6. State Standard for Developing the Input Estimate Standards and Determining the Estimated Prices for the Operation of Construction Machinery and Vehicles;
7. State Standard for Calculating the Estimated Salary in Construction.
Besides, the Order of the Chairman of the Committee for Construction, Housing and Public Utilities of the Land Resources Management Agency of the Ministry of National Economy of the Republic of Kazakhstan dated 24 June 2015, approved the regulatory and technical documents of the budget and regulatory framework - 2015:
1. STS RK 8.04-07-2015 'Book of Estimated Tariff Rates in Construction';
2. SCEMC RK 8.04-11-2015 'Book of Estimated Prices at the Current Level for the Operation of Construction Machinery and Mechanisms';
3. SCPG RK 8.04-12-2015 'Book of Estimated Prices at the Current Level for the Transportation of Construction Goods';
4. SSC RK 8.04-09-2015 'Book of Estimated Prices at the Current Level for Engineering Equipment of Construction Projects';
5. SSC RK 8.04-08-2015 'Books of Estimated Prices at the Current Level for the Construction Materials, Ware and Structures'.
3. Application of Various Pricing Mechanisms
Thereat, the Rules and the said state standards shall be applied by the entities engaged in architectural, town-planning and construction activities in the Republic of Kazakhstan when developing and implementing investment projects for the construction of facilities at the expense of state investments in construction and funds of the quasi-public sector.
Thus, given the above, the input costing method must apply from 1 July 2015:
1. When constructing facilities at the expense of state investments (funds of the republican and(or) local budgets, including targeted funds aimed at the budget investments and budget lending to the quasi-public sector; targeted funds of non-state loans under a state guarantee; funds of the National Fund of the Republic of Kazakhstan; funds aimed at the implementation of concession projects);
2. When constructing facilities at the expense of the quasi-public sector.
The cost of construction projects implemented at the expense of private funds can be determined on the basis of a previously established basis index method. In this case, pursuant to SNiP RK 8.02-02-2002 'Procedure for Determining the Estimated Cost of Construction in the Republic of Kazakhstan', which regulates the use of the basis index method for determining the cost of construction, the said procedure is obligatory for entities operating in accordance with the Law of the Republic of Kazakhstan 'On Public Procurement'. For other market player this procedure is advisory in nature.
In view of the foregoing, private business entities implementing construction projects through private investments can use the appropriate pricing mechanisms in construction, including determination of the construction cost through estimating based on a basic index method or input method.
THIS CLIENT NOTE HAS BEEN PREPARED AS GENERAL OVERVIEW OF THE LAW AND SHOULD NOT BE TREATED AS A LEGAL ADVICE
Any questions regarding the matters herein may be addressed to: