D E C I S I O N

Records show that on January 16, 1995, a negotiated contract was entered into by and between the City Government of Pagadian and ESR Construction and Supplies for the latter to undertake the construction of Box Culvert along By-Pass Road over Balangasan River Phase II, Project of Balintawak, same City, in the amount of P4,869,802.59. The project was completed within the period specified in the contract, was turned over, inspected and accepted by the City Government, and the contractor was paid the full amount of P4,869,802.59.

On March 25, 1996, the City Auditor of Pagadian City disallowed in audit the said transaction based on the result of the Contract Review conducted by the Technical Service Division (TSD) of COA Regional Office No. IX, Zamboanga City, which disclosed that the Approved Agency Estimate (AAE) is 56.49% or P1,758,056.68 over the COA Estimate, as hereunder shown:

Admitting that a technical error was committed by the Agency Estimator, the City Engineer’s Office (CEO) of Pagadian City submitted a recomputation as to the correct quantity of steel bars used. Engr. Madrangca explained that Item 4014-Reinforcing Steel used was Grade 40 with deformation conforming to ASTM A-305 (fy=40,000 psi) which was of a higher unit cost. He justified that the difference in the Revised AAE and the contract price is only 8% and the same is within the COA’s allowable limit.

The TSD recomputed the final cost discrepancy based on the justification of the CEO to be P1,665,093.95 or 51.95% above the COA Estimate. The TSD maintained that the unit price of P13.14/kg of steel bars corresponds to furnishing only of immediate grade steel bars which is equivalent to Grade 40 with deformation conforming to ASTM A-305 (fy=40,000). The unit price of steel bars adopted in the COA Estimate for this project was based on the AAE of the adjacent project which is the construction of the North Diversion Road Phase II for a 12mm x 6m reinforcing steel bar with a price of P70.00/piece equivalent to P13.14/kg excluding labor and indirect cost as duly approved by the CEO. The price computation was likewise based on the contract review conducted on December 26, 1995 for the construction of the two-storey, ten-classroom academic school building situated at Sta. Maria. Zamboanga City.

Since a disallowance from an overpricing is an adjudication involving conclusions of wrong-doing on the part of the management which a financial recovery is to be exacted trough the amount of disallowance, the evidence to support the disallowance should be such as to establish a reliable degree of certainty. Item 3.1 of the COA Memorandum No. 97-012 dated March 31, 1997, relative to evidence to support audit findings of overpricing provides, thus:

A perusal of the documents reveals that the finding of overpricing was based on a COA canvass dated February 3, 1997 while the project in question was estimated and/or implemented in 1995. In a letter dated November 25, 1997, the Technical Audit Specialist explained that the use of said COA canvass was intended to prove that the steel bars adopted by the Agency at the time of the preparation of the AAE is very high compared with the 1997 prices taking into account that price trends go up year by year.

This justification would be difficult to accept as the basis for an out-and-out rejection of cost estimates in the absence of actual canvass sheets and/or price quotations from identified suppliers at the same period the AAE was prepared and/or at the time of the implementation of said project. This principle was enunciated by the Supreme Court in the case of Arriola vs. COA (202 SCRA 147) and reiterated in the case of the National Center for Mental Health Management vs. COA (265 SCRA 390).

On the matter of indirect cost, the Technical Audit Specialist reasoned that since Phase II Project was awarded through a negotiated contract, the unit cost thereof to include direct and indirect cost component should be based on the Construction of Box Culvert over Balangasan River Phase I pursuant to PD 1594. Phase II is right on the spot where Phase I is located. The indirect cost for Phase I is 13.559912% and for Phase II is 21.5266%.

DPWH Department Order No. 30 dated January 30, 1991 relative to the preparation of agency estimate provides that when the project cost is above P1M to P5M, the total maximum indirect cost percentage allowed is 28%. As in this case, even if a 2% for the cost of mobilization is deducted considering that the project is a negotiated contract, still the questioned indirect cost of said project is way below the allowable percentage under said Order.

Further perusal of the documents reveals that the items used in Phase I were Items 102-Foundation excavation and 504-Grouted riprap; whereas those used in Phase II were Items 404-Reinforcing Steel and 405-Structural concrete, thus, there could be no point of comparison even considering that it was a negotiated contract. It could well be emphasized that the project was undertaken through negotiation because said project has similar or related scope of works (IB 10.4.2. par. 1,c, supra). Moreover, there is merit in the contention/justification of Management that Phase I had a lower indirect cost due to the simplicity of the project compared to that of Phase II wherein the scope of work is more complex.

In light of the foregoing premises, the appeal of Engr. Lorenzo M. Madrangca from audit disallowance in the amount of P1,665,093.95 is given due course. Accordingly, the subject disallowance is hereby lifted.

(Sgd.) CELSO D. GAÑGAN
Chairman