COA flags CCMC ‘overblown’ contract price

THE Commission on Audit (COA) has flagged the contract price of Phase 4 of the Cebu City Medical Center (CCMC) construction, saying it is overblown by more than P62 million.

The contract price was supposed to be P845.12 million, but the actual cost ballooned to P907 million.

This was due to errors in overhead, contingencies and miscellaneous (OCM), profit mark-up, and the use of a 12 percent value added tax (VAT) rate.

The Department of Public Works and Highways’ Department Order 197, series of 2016 in relation to the Manual of Procedures for the Procurement of Infrastructure Projects Volume 3 (MPPIP) states that the VAT component should be five percent of the sum of the estimated direct cost (EDC), OCM and profit mark-up.

The state auditor said certain items, including non-civil work items, should not be subject to OCM and profit mark-up. These include mobilization and demobilization, provision of service vehicles, permits and clearances, field/laboratory office and living quarters, furnishing of furniture, laboratory equipment, survey equipment and consumables, assistance to engineers, photographs, health and safety, traffic management, environmental compliance and communication equipment, according to MPPIP guidelines.

But a review of the approved budget for the contract of the City and the bid proposal of the winning contractor showed that some of the items above were subject to OCM and profit mark-up.

The City Government awarded the contract for Phase 4 of the project to M.E. Sicat Construction Inc. (joint venture with Avecs Corp.) on April 6, 2022.

The auditor stated that the City’s review of the Approved Budget for the Contract (ABC) shows that mobilization and demobilization, amounting to P672,807.36, were subject to both OCM and profit mark-up. The contractors’ review shows that engineer’s facilities, office supplies and equipment under OCM amounted to P3.312 million, permits, bonds and licenses under both OCM and Profit amounted to P640,000, and construction safety and health under OCM amounted to P653,176.31.

According to the COA, the guidelines state that the tax base for the VAT component should be the sum of the EDC, OCM, and profit mark-up. If the tax base is overstated due to an overstatement of both OCM and profit mark-up computation, the corresponding VAT will also be overstated.

The City’s computation of ABC showed an EDC of P755,731,981.63, an OCM of P57,734,025.23 and a profit mark-up of P59,3843,249.53, with a total cost before VAT of P873,309,256.39. With a five percent VAT rate amounting to P43,467,956.63, the total cost would be P916,777,213.02.

However, the COA’s audit revealed an EDC of P755,731,981.63, an OCM of P57,061,217.87 and a profit mark-up of P59,170,442.17, with a total cost before VAT of P871,963,641.67. With a five percent VAT rate amounting to P43,402,964.17, the total cost would be P915,366,605.84.

The audit revealed that the City’s OCM and profit mark-up were both overstated by P672,807.36 and the total cost before VAT was overstated by P1,345,614.72. After applying the five percent VAT rate amounting to P64,992.46, the overstatement amount reached P1,410,607.18.

Moreover, the state auditor found that the contractors mistakenly used a 12 percent VAT rate instead of the mandated five percent. As a result, the COA discovered that the contractors’ bid price was inflated by P62,642,909.06.

According to the contractors’ calculations of bid price, the EDC was P699,917,760.38, the OCM was P55,294,505 and the profit mark-up was P55,294,505. This resulted in a total cost before VAT of P810,506,770.38. With a 12 percent VAT rate of P97,260,812.45, the total cost came to P907,767,582.83.

However, the audit revealed an EDC of P699,917,760.38, an OCM of P50,689,328.69 and a profit mark-up of P54,654,505 with a total cost before VAT of P805,261,594.07. With a five percent VAT rate only amounting to P39,863,079.70, the total cost would be P845,124,673.77.

This showed that the OCM was overstated by P4,605,176.31 and the profit mark-up by P640,000, resulting in a total cost before VAT of P5,245,176.31. The total overstatement between 12 and five percent of VAT is P57,397,732.75.

The total overstatement is P62,642,909.06, between the amounts of P845,124,673.77 and P907,767,582.83.

COA noted that the excess in the bid price of P62,642,909.06, which could be attributed to the excessive cost estimates in deriving the project ABC and the failure of the City to prescribe the use of the five percent VAT rate, is disadvantageous to the City Government.

The state auditor also found that the City had applied a 12 percent VAT rate to the computation of about 13 other projects.

COA, in the audit report, said that no written reply was received from the CCMC management. However, during the exit conference, the latter agreed with both the audit observations and recommendations.

Aware of the contract termination of Phase 4 of the CCMC construction, COA recommended that management take into account the impact of the shortcomings when finalizing the contract settlement.

The state auditor also recommended that the mayor instruct the Department of Engineering and Public Works to follow the DPWH’s guidelines when preparing the ABC for future infrastructure projects, including the accurate calculation of the VAT, OCM, and Profit mark-up components, to prevent inflated cost estimates that could put the government at a disadvantage. (AML)