2024.06.30. The Fair Economy — The Korea Institute of Aviation Safety Technology was sued by a construction company over the construction of a drone certification center and landing site, with the company claiming it was paid an "absurdly low construction cost." In response, the Board of Audit and Inspection (BAI) confirmed that the institute had unjustifiably reduced the project's base price and demanded disciplinary action against the staff member responsible for mishandling the work.
The Ministry of Land, Infrastructure and Transport recently disclosed the 'BAI Audit Results and Action Request' containing these findings.
In September 2020, to carry out the 'Drone Certification Center and Landing Site New Construction (architecture, civil engineering, landscaping, machinery),' the institute announced a bid with a base price of approximately 7.6 billion won, based on design service results, in accordance with the 'Act on Contracts to Which the State Is a Party (State Contracts Act).'
Company A in Yeonsu-gu, Incheon, was selected as the first-priority bidder in the subsequent bidding process.
KIAST then signed a subcontracting contract with Company A for 6.68 billion won (about $4.7 million), but the contract was terminated due to reasons including the failure to complete the work within the deadline.
Company A argued that "KIAST arbitrarily adjusted the unit price of labor costs for architectural construction and other items without applying standard unit prices, reducing the base price. The project required at least 10.39 billion won (about $7.4 million)," and filed a lawsuit for damages against the institute.
The BAI determined that the institute had improperly prepared the estimated price.
An estimated price is a price determined in advance by the contract officer to serve as the basis for the winning bid price. The procedure for determining the estimated price proceeds in the order of preparing the estimated cost, preparing the design price or survey price, preparing the base price, preparing multiple preliminary prices, preparing the estimated price schedule, and deciding the estimated price.
According to the disposition request, if a construction cost calculation sheet was prepared based on standard unit prices and other cost calculation data through a design service, it is appropriate to issue the construction bid announcement using the amount in the construction cost calculation sheet as the base price, unless there are special circumstances.
However, B, a staff member of KIAST's Drone Safety Headquarters who was in charge of the project, arbitrarily adjusted the total direct material cost of 2.99 billion won (about $2.1 million) aggregated by detailed item in the construction cost calculation sheet to 2.79 billion won (about $1.98 million), citing a lack of project budget without adjusting the quantities or work types in the specification. This amounted to cutting nearly 200 million won (about $143,000).
The total labor cost was also arbitrarily adjusted from 2.5 billion won (about $1.78 million) to 2.33 billion won (about $1.66 million) without proper basis. This amounted to cutting about 200 million won (about $143,000).
B adjusted the base price of the construction from the original 8.28 billion won (about $5.9 million) by reducing it by 682 million won (about $487,000) to 7.6 billion won (about $5.4 million) in this manner, yet requested the contract department to issue the construction bid without informing them of the base price adjustment.
Naturally unaware of this, the contract officer announced the construction bid without disclosing the reason for the base price adjustment, publishing the base price for preliminary price calculation as the arbitrarily adjusted amount.
The BAI determined that B violated the State Contract Act.
According to Article 8-2, Paragraph 1 of the State Contract Act, the head of each central government agency or a contract officer must prepare an estimated price in advance based on the relevant specifications and design documents to serve as the basis for determining the winning bidder and contract amount for bidding or negotiated contracts.
Furthermore, Paragraph 2 of the same article stipulates that when contract officers prepare an estimated price, they must reflect an appropriate amount to ensure the quality and safety of the contract object by considering factors such as contract quantity, performance period, supply conditions, and contract terms.
In addition, Article 9, Paragraph 1 of the Enforcement Decree of the State Contract Act states that if there is no appropriate transaction precedent price due to the specificity of a goods, construction, or service contract, the head of each central government agency or a contract officer must determine the estimated price based on a cost-based price. In this case, the cost-based price must be calculated by including material costs, labor costs, expenses, general management costs, and profit that constitute the goods, construction, or service that is the object of the contract.
Moreover, Article 2, Paragraph 2 of the 'Estimated Price Preparation Standards,' a Ministry of Economy and Finance contract precedent, states that contract officers must ensure that quantities specified in standard unit prices, reference prices and costs under relevant laws and regulations are not unfairly reduced or excessively accounted for when preparing an estimated price. If the price is adjusted due to unavoidable reasons, the reason for adjustment must be explicitly stated in the estimated price schedule.
Based on these laws and regulations, the BAI found that B violated the rules by preparing the estimated price based on a cost-based price without using standard unit prices and other cost calculation data as a basis.
It also concluded that B failed to reflect an appropriate amount to ensure the quality and safety of the contract object by considering factors such as contract quantity, performance period, supply conditions, and contract terms.
Furthermore, it pointed out that B ignored the requirement to prevent unfair reduction or excessive accounting of quantities specified in standard unit prices, reference prices and costs under relevant laws and regulations, and to explicitly state the reason for adjustment in the estimated price schedule if the price was adjusted due to unavoidable reasons.
Accordingly, the BAI instructed the president of the Korea Institute of Aviation Safety Technology to "ensure that, in the future, when preparing estimated prices for construction contracts, the quantities specified in standard estimates and standard prices and costs under relevant laws are not arbitrarily reduced, and that when adjusting estimated prices for unavoidable reasons, such facts are specified in the bid announcement, and to thoroughly manage contract affairs."
In addition, it notified the institute to discipline employee B, who improperly handled the work by arbitrarily reducing the base price citing insufficient budget when preparing the project's base price.
Meanwhile, this audit also revealed that KIAST committed other mistakes in the case, including ▲inappropriate measures to extend the contract period and ▲failure to comply with the deadline for actual progress reporting.
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