Brief Review of the New Provisions on Construction Projects Subject to Mandatory Bidding

The newly-promulgated Provisions on Construction Projects Subject to Mandatory Bidding (“NDRC Decree No.16”) of March 27, 2018, from the National Development and Reform Commission (“NDRC”) will enter into force on June 1, 2018 and replace the Provisions on the Scope and Threshold of Construction Projects for Bid Invitation (“NDRC Decree No.3”). Both NDRC Decree No.16 and NDRC Decree No.3 address the same subject, which is construction projects subject to mandatory bidding, and they do so in the same “Scope + Threshold” fashion, which means projects that meet both scope and threshold requirements shall be subject to mandatory bidding, unless otherwise exempted.

A. What is Changing?

1. Setting out a Threshold for Government Aid to Trigger Bidding

Generally speaking, the scope of construction projects subject to mandatory bidding in both NDRC Decree No.16 and NDRC Decree No.3 includes (i) projects using state-owned funds or state financing; (ii) projects using loans or aid funds from international organizations or foreign governments; (iii) major infrastructure and public utility construction projects concerning public interest and safety which are not included in items (i) to (ii). In terms of projects using state-owned funds or state financing, NDRC Decree No.16 establishes a new threshold for the amount of funds of fiscal budgets used by a project, which is two million yuan or more AND accounts for more than 10% of total project investment. It will remove the bidding requirement only where an insignificant amount of government funding support is involved.

2. Doubling the Contract Amount Thresholds for Bidding

NDRC Decree No.16 doubles the amount threshold for estimated contract values: (1) from RMB 2 million up to RMB 4 million for a single construction contract; (2) from RMB 1 million to RMB 2 million for a single procurement contract for major equipment, materials, or other commodities; and (3) from RMB 0.5 million to RMB 1 million for a single contract for surveying and prospecting, engineering, supervision, or other services. NDRC Decree No.16 removes the controversial catch-all threshold of NDRC Decree No.3, which states that even if the estimated value of a single contract is lower than the relevant threshold amount specified, it shall also be subject to mandatory bidding if the total project investment is more than 30 million yuan. That provision could lead to an absurd result in which every purchase of a project whose total investment is over 30 million yuan would require a bidding process, regardless of the individual purchase amount.

3. No Higher Local Requirements Any Longer

NDRC Decree No.16 revokes authorizations for provincial governments to impose stricter rules on the scope and thresholds of the projects subject to mandatory biddings in their respective jurisdiction. It will help to streamline the bidding process nationwide.

B. What is Unclear?

It seems that NDRC Decree No.16 is intended to prevent the practice of dividing one contract into several smaller contracts to avoid reaching the mandatory bidding thresholds required in NDRC Decree No.16. It does this by adding a provision stating “if surveying and prospecting, engineering, construction, supervision and procurement of major equipment or materials for project construction in a project can be combined together and the estimated contract value for the combined work in aggregate reaches the above thresholds, such contract work shall be subject to mandatory bidding.” 

The Chinese wording is ambiguous. It seems to say that if the aggregated estimated value of contracts of the same kind of work exceeds the correspondent threshold listed in items (i) to (iii) in Article 5 of NDRC Decree No.16, then such work must be put out to bidding, even if the particular contract in question may have an amount lower than the threshold of that kind.

C. What is Missing?

It is surprising that NDRC Decree No.16 itself does not directly specify the scope of infrastructure public utility construction projects that relate to public interest and safety and which are subject to mandatory bidding, as NDRC Decree No.3 did. Instead, the NDRC has left this area for further separate formulation by itself, stressing that it must be formulated in accordance with the principle that the projects to fall in such scope shall be strictly limited to those truly necessary to be put out for bidding. Given that the need to amend NDRC Decree No.3 has been discussed for many years, it is unclear why all relevant details have not been specified at the same time. The lack of clarity on these matters, if not addressed before the June 2018 commencement, will create significant uncertainty in the bidding requirements for privately controlled projects.

D. What is the Impact?

NDRC Decree No.16 removes the various technical absurdities in NDRC Decree No.3 and increases the thresholds at which mandatory bidding requirements are triggered. Furthermore, it removes any temptation for a local government to exercise regulatory power to alter the mandatory bidding standards for local construction projects.

For state owned or controlled projects, the changes may not be that significant. While the contract value thresholds have doubled, a 1 million service contract, 2 million supply contract or 4 million construction contract represent a small potato, and perhaps just a peanut, in today’s construction market.

For privately controlled projects, the rules are as yet unknown. Nevertheless, NDRC Decree No.16 does suggest that the scope of those projects subject to mandatory bidding must be strictly limited to those that are truly necessary. As for the final details, we will need to wait and see.