Public Procurement Service Eases Burdens on Small Shipbuilding Industry Including 'Price Fluctuation Risks'

The Public Procurement Service (PPS) is improving "outdated regulations" to reduce the burden on small and medium-sized shipbuilding industries vulnerable to price fluctuation risks.

On the 17th, the PPS announced the "Public Ship Ordering System Improvement Plan" at the Emergency Economic Ministers' Meeting.

The improvement plan includes ▲ improving the contract amount adjustment method considering the characteristics of shipbuilding ▲ improving the price evaluation method to alleviate bidders' price burden ▲ clarifying defect responsibility identification and sharing among bidding participants ▲ revising unfair special clauses favoring authorities.

◆ Changing the "contract amount adjustment method" to reduce inflation risk = According to the PPS, ship contracts are long-term continuous projects that typically take 3 to 4 years from construction to delivery, making the inflation risk relatively higher than in other industries.

Moreover, the shipbuilding industry faces difficulties proving price fluctuations due to the large number of items used in ship construction. For example, the types of materials required to build one 100-ton patrol boat reach about 1,300.

To improve this, the PPS decided to switch the contract amount adjustment method due to price fluctuations from the current "item adjustment rate" to the "index adjustment rate."

The item adjustment rate method calculates the rise and fall of all cost items composing the contract amount "individually" to derive the amount and rate of change.

In contrast, the index adjustment rate organizes the cost items composing the contract amount by "type," forms item groups, and calculates the price fluctuation rate based on the producer price basic classification index for each item group.

The latter method makes it easier to calculate the adjustment rate compared to the item adjustment rate method. It is especially advantageous for the shipbuilding industry, where there are many cost items and frequent adjustments.

The PPS plans to provide the shipbuilding industry and demand agencies with a "standard index table by ship size and type cost items" along with the transition to the index adjustment rate, enabling prompt contract amount adjustments according to price fluctuations.

◆ Innovation of "outdated regulations" that are unilaterally disadvantageous to builders = The PPS will also pursue excluding the "price of major equipment" without the bidder's (builder's) decision rights from the price evaluation process in the qualification review bidding.

Until now, ship demand agencies have integrated orders by bundling major equipment, whose prices were virtually fixed through the "Equipment Selection Committee," with ship construction.

At this time, it was customary for bidders (builders) to bid with a bid price (equipment price + construction cost) close to the bid floor rate (88%) to win the contract. The builder had to bear the difference between the fixed equipment price and the bid rate.

However, going forward, the PPS explained that the price evaluation will exclude the major equipment price confirmed by the demand agency (Equipment Selection Committee) and evaluate only the ship construction cost, reducing the builder's burden of equipment prices.

◆ Specifying responsibility to enable "prompt repair" of ship defects = The improvement plan also includes reducing the builder's burden arising from ship defects. Previously, builders had to bear overall responsibility for defects even if they were not involved in ship design, major equipment selection, or price determination.

Therefore, the PPS will reflect the "defect responsibility sharing principle" in the design contract and form a joint "Defect Response Team" composed of the demand agency, equipment suppliers, builders, and design firms to jointly identify the causes of defects.

The demand agency will take charge of "overall management and coordination," equipment suppliers will bear responsibility for "major equipment defects," builders will be responsible for "equipment installation and integration," and design firms will bear responsibility for "defects due to basic and detailed design errors." This aims to achieve prompt defect repair and prevent legal disputes through prior and voluntary coordination among stakeholders.

Additionally, the PPS plans to improve the dominant ordering practices of public institutions by deleting "unfair special clauses" centered on ordering agencies and establishing standard contract conditions.

Kim Yoonsang, Administrator of the PPS, said, "The improvement plan focuses on innovating and breaking down unreasonable elements that have burdened the small and medium-sized shipbuilding industry. Above all, we will strive to enable the use of public ship ordering and contract systems while maintaining a cooperative and balanced relationship between the public and private sectors."

Meanwhile, the PPS signs contracts for public ships (patrol boats, fishery guidance vessels, marine survey vessels, etc., about 20 types) worth about 550 billion KRW annually.

In the past three years, the total scale of public ship contracts signed was 98 cases worth about 1.4 trillion KRW. Among them, the Ministry of Oceans and Fisheries and the Korea Coast Guard are the main demand agencies, accounting for 80% (1.1225 trillion KRW) of the total contract amount.

The number of domestic small and medium shipbuilding companies supplying public ships to demand agencies is 123 (based on manufacturing registration).

These companies have won contracts worth 690 billion KRW in 86 cases over the past three years, accounting for 88% of the total number of cases and 49% of the total amount. This is possible because small ships under 1,000 tons are "mid-sized competitive products," allowing only small and medium shipbuilders to participate in bidding.

This content was produced with the assistance of AI translation services.