CIRCULAR

PROVIDING INSTRUCTIONS ON CONVERSION OF CONSTRUCTION INVESTMENT CAPITAL

Pursuant to the Government's Decree No. 81/2017/ND-CP dated July 17, 2017, defining the functions, tasks, powers and organizational structure of the Ministry of Construction;

Pursuant to the Government’s Decree No. 68/2019/ND-CP dated August 14, 2019 on administration of investment and construction expenses.

Upon the request of the Director of Institute of Construction Economics and the Director of Construction Economics Department;

Minister of Construction hereby promulgates the Circular providing instructions on conversion of construction investment capital.

Article 1. Scope

This Circular provides guidance on contents and methods for converting construction investment capital in investment and construction projects funded by the state budget or extra-budgetary capital for valuation of assets newly acquired from investment under the provisions of clause 1 of Article 32 in the Government’s Decree No. 68/2019/ND-CP dated August 14, 2019 on management of construction investment expenses. Investment projects developed in the public-private partnership form (hereinafter referred to as PPP investment project) shall be subject to laws on PPP investment.

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1. Persons and entities involved in conversion of construction investment capital in investment and construction projects funded by the state budget and extra-budgetary capital.

2. Other entities and persons involved in conversion of construction investment capital in investment and construction projects funded by other capital shall be encouraged to apply regulations laid down herein.

Article 3. Principles of conversion of construction investment capital

1. Conversion of construction investment capital means the act of converting investment costs qualified to be settled into costs falling on a price level determined at the date of commissioning, transfer and operation of an investment and construction project.

2. Project owners shall consult instructions given herein to convert construction investment capital in projects or construction works that are completed for the duration of greater than 02 years (from the commencement date to the pre-operation commissioning date).

3. Conversion of construction investment capital must fully reflect recognized investment costs of investment and construction projects at the date of conversion. In case where post-conversion value is less than realized investment value qualified to be settled, the first shall be used as investment costs qualified to be settled. If investment and construction projects incur loan interest costs during the investment period, these costs shall remain unchanged and be accepted as post-conversion value of an investment and construction project.

4. Reports on conversion of construction investment capital, enclosing final settlement documentation, shall be submitted to persons making investment decisions to seek their approval no more than 9 months from the date of signing of reports on commissioning, transfer and operation of investment and construction projects.

5. Project owners shall be authorized to hire cost management advisory bodies that meet competency requirements in accordance with regulations laid down in Government's Decrees on administration of investment and constructions projects in order to convert construction investment capital. These advisory bodies shall be selected in compliance with regulations.

Article 4. Details about conversion of construction investment capital

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2. Compensation, support and resettlement costs realized each year can be converted due to variation in components of compensation or construction costs or costs associated with cash flows and other related components to those costs falling on a price level determined at the date of transfer and operation of investment and construction projects or works.

3. Convertible construction cost is the gross construction cost realized each year of a construction project (project item) which is converted owing to variance in components of construction costs (including building materials, labor, machinery and other cost-related items or accounts constituting construction costs, e.g. indirect costs and estimated taxable income) under the guidance of the Ministry of Construction on determination and administration of construction investment expenses that is provided at the date of commissioning, transfer and operation of an investment and construction project.

4. Convertible equipment cost is the gross cost, including costs of purchase of building and technological equipment; administrative costs for purchase of building equipment of a contractor; costs of purchase of copyrights of software used for building and technological equipment in an investment and construction project; costs of training and technology transfer; costs of manufacture and production of non-standard equipment (if any); costs of installation, testing and calibration; costs of test runs on equipment conforming to technical requirements; costs of transport and insurance; taxes and other fees or charges realized each year, which is converted due to any fluctuation in both domestic and foreign currency) cash flow and other related factors to the gross cost falling on a price level determined at the date of transfer, handover and operation of an investment and construction project.

5. Convertible project administration cost is the gross cost of project management realized each year which is converted due to any variation in factors of construction costs and other related components into the one falling on a price level determined at the date of transfer and operation of an investment and construction project or work.

6. Convertible investment and construction counseling cost is the gross cost of investment and construction consulting activities realized each year which is converted due to any variation in factors of construction costs and costs associated with cash flow and other related factors into the one falling on a price level determined at the date of transfer and operation of an investment and construction project or work.

7. Convertible other cost is the gross other cost realized each year which is converted due to any variation in factors of construction costs and costs associated with cash flow and other related factors into the one falling on a price level determined at the date of transfer and operation of an investment and construction project or work.

Article 5. Approaches to conversion of construction investment capital

1. Construction investment capital shall be converted according to the following methods:

a. Conversion factor approach.

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c. Estimation of costs based on completed workloads and construction costs determined at the date of transfer and operation of an investment and construction project.

d. Combination of the approaches referred to in a, b and c of this clause.

2. Project owners must refer to manners of project implementation and types of value of construction contracts to choose appropriate conversion approaches out of those specified in a, b, c and d of clause 1 of this Article. Details about approaches for conversion of construction investment capital are given in Appendix No. 1 hereto.

3. The sample report on results of conversion of construction investment capital and the sample conversion table are provided in Appendix No. 2 and No. 3 hereto.

Article 6. Transition provisions

Transitional issues shall be dealt with in compliance with Article 36 in the Government’s Decree No. 68/2019/ND-CP dated August 14, 2019 on administration of construction investment capital.

Article 7. Entry into force

This Circular shall enter into force on February 15, 2020.

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PP. MINISTER
DEPUTY MINISTER




Bui Pham Khanh

APPENDIX 1

APPROACHES FOR CONVERSION OF CONSTRUCTION INVESTMENT CAPITAL
(To the Circular No. 18/2019/TT-BXD dated December 26, 2019 of Ministry of Construction)

I. Steps in converting construction investment capital

Step 1: Consolidating compensation, support and resettlement costs (if any); construction costs; equipment costs; project administration costs; construction investment counseling and other costs, all of which have already been realized in a computation year.

Step 2: Determining the factor of conversion of compensation, support and resettlement costs (if any); construction costs; equipment costs; project administration costs; construction investment counseling and other costs, all of which have already been realized each computation year, into those costs falling on a price level determined at the date of transfer and operation of an investment and construction project.

Step 3: Determining and consolidating the value of conversion of compensation, support and resettlement costs (if any); construction costs; equipment costs; project administration costs; construction investment counseling and other costs, all of which have already been realized each computation year, into the value falling on a price level determined at the date of transfer and operation of an investment and construction project.

II. Formulas for conversion of construction investment capital

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(1)

Where:

: Converted construction investment cost;

: Converted construction cost;

: Converted equipment cost;

: Converted project administration cost;

: Converted construction investment counseling cost;

: Converted other cost;

: Converted compensation, support and resettlement cost;

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1. Construction cost conversion

Convertible construction cost is the gross construction cost realized each year which is converted into the one falling on a price level determined at the date of transfer and operation of an investment and construction project owing to any variance in components of construction costs (including building materials, labor, machinery and other cost-related items or accounts constituting construction costs, e.g. indirect costs and estimated taxable income) under the guidance of the Ministry of Construction on determination and administration of construction investment expenses that is provided on the date of commissioning, transfer and operation of that project.

Below are approaches for conversion of construction costs:

1.1. Conversion factor approach

Construction cost is converted according to the following formula:

(2)

Where:

: Convertible cost of construction activities in the construction work i;

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Convertible construction cost of construction work i () is determined according to the formula:

(3)

Where:

m: Number of computation years (m ≥ 2);

VL_THj, NC_THj, MTC_THj: Material, labor and machinery costs of the implementation year j, included in direct costs;

K_VLj, K_NCj, MTC_THj: Factors of conversion of material, labor and machinery costs in the implementation year j into those costs determined at the date of transfer;

, , : Factors of other costs constituting construction costs, including indirect costs and estimated taxable income, determined according to instructions of the Ministry of Construction on determination and administration of construction investment expenses given at the transfer date.

Factor of conversion of building material, labor and machinery cost (K_VL, K_NC, K_MTC) constituting direct costs shall be determined according to the following methods:

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- Factor of conversion of building material cost in the implementation year j (K_VLj) due to any fluctuation in prices of several major materials into the cost falling on a price level determined on the date of transfer of the construction work shall be calculated according to the following formula:

(4)

Where:

: Price of material t at the transfer date (t=1÷1);

: Price of material t in implementation year (t=1÷1);

: Proportion of material t to material cost of a construction work in the implementation year (t=1÷1) shall be determined according to the following formula:

(5)

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VL_THt: Cost of material t in implementation year (t=1÷1).

- Factor of conversion of the labor cost in the implementation year j (K_VLj) due to any variation in daily wages into the cost falling on a price level determined on the date of transfer of the construction work shall be calculated according to the following formula:

(6)

Where:

: Unit labor cost per a working day t of a worker directly performing construction duties on the transfer date (t=1÷1);

: Unit labor cost per a working day t of a worker directly performing construction duties in the implementation year (t=1÷1);

: Proportion of labor cost t to total labor cost of a construction work in the implementation year (t=1÷1) shall be determined according to the following formula:

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Where:

NC_THt: Labor cost t determined in the implementation year (t=1÷1).

- Factor of conversion of the machinery cost in the implementation year j (K_MTCj) due to any variation in costs of major machines per shifts into the cost falling on a price level determined on the date of transfer of the construction work shall be calculated according to the following formula:

(8)

Where:

: Cost of machinery t per shift determined at the transfer date (t=1÷1);

: Cost of machinery t per shift determined in the implementation year (t=1÷1);

: Proportion of the cost of machinery t to total machinery cost of a construction work in the implementation year (t=1÷1) shall be determined according to the following formula:

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(9)

Where: MTC_THt: Cost of machinery t determined in the implementation year (t=1÷1).

b. Determining the factor of conversion of the building material, labor and machinery cost (K_VL, K_NC, K_MTC), based on the building material, labor and machinery index, which constitute direct costs.

- Factor of conversion of the material cost in the implementation year j (K_VLj) shall be determined according to the following formula:

(10)

Where:

: Building material price index computed at the transfer date;

: Building material cost in the implementation year j.

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(11)

Where:

: Labor cost index computed at the transfer date;

: Building material cost in the implementation year j.

- Factor of conversion of the machinery cost in the implementation year j (K_MTCj) shall be determined according to the following formula:

(12)

Where:

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: Machinery cost of the implementation year j.

- Building material cost index (I^vl), building labor cost index (I^nc), building machinery cost index (I^mtc) computed at the transfer date and determined by month, quarter or year of a construction work according to the Circular providing instructions on determination and administration of construction cost indices. In case where it is impossible to determine construction cost indices, local construction cost indices published by localities where construction works are located may be used.

1.2. Approach for computation of construction cost index

- Convertible investment cost of construction work i () is determined on the construction cost index by using the following formula:

(13)

Where:

m: Number of computation years (m ≥ 2);

T_XDj: Realized construction cost of year j;

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(14)

Where:

I_BG: Construction cost index computed at the transfer date;

I_THj: Construction cost index in the implementation year j.

- Construction cost index at the transfer date (I_BG) and the implementation date (I_THj) shall be determined by month, quarter or year of a construction work according to the Circular providing instructions on determination and administration of construction cost indices. In case where it is impossible to determine construction cost indices, local construction cost indices published by localities where construction works are located may be used.

1.3. Approach for estimation of costs based on completed workloads and construction costs determined at the date of transfer

Convertible investment cost of a construction work shall be determined according to the method of estimation of construction costs under the instructions of the Ministry of Construction on determination and administration of construction investment expenses at the date of transfer, including:

a. Completed workloads are those items of a construction work or project that have already passed the acceptance test;

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c. Construction costs estimated in accordance with regulations at the transfer date.

1.4. In case of using foreign currency for calculation of construction costs, the approach for conversion of construction cost shall be determined on the basis of the factor of domestic/foreign currency exchange rate fluctuation at the transfer date in comparison with the implementation year, taking into account the factor of foreign currency price slide occurring at the transfer date in comparison with the implementation year, (foreign currency exchange rate is determined as published by the Transaction Center of State Bank of Vietnam). This approach shall be applied only to foreign-currency construction costs.

2. Equipment cost conversion

Convertible equipment cost is the gross cost, including costs of purchase of building and technological equipment; administrative costs for purchase of building equipment of a contractor; costs of purchase of copyrights of software used for building and technological equipment in an investment and construction project; costs of training and technology transfer; costs of manufacture and production of non-standard equipment; costs of installation, testing and calibration; costs of commissioning and test runs on equipment according to technical requirements; costs of transport and insurance; taxes and other fees or charges realized each year, which is converted into the gross cost falling on a price level determined at the time of transfer, handover and operation of that investment and construction project.

Equipment cost is converted according to the following formula:

(15)

Where:

: Convertible cost of equipment i;

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Cost of equipment i () is converted according to the following formula:

(16)

Where:

m: number of conversion years (m≥2);

: Converted cost of purchase of equipment of year j;

: Converted cost of manufacture and production of non-standard equipment of year j (if any);

: Converted cost of installation, testing, calibration, and cost of commissioning and test runs in conformance to technical requirements of such equipment in year j;

: Converted cost of transportation and insurance; taxes, other relevant fees and charges of equipment i (if any);

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: Converted administrative costs for purchase of equipment i of a contractor.

: Cost of purchase of copyright of software in use in year j (if any).

2.1. Conversion of equipment purchase costs

a. If a piece of equipment is purchased by paying domestic currency, the equipment cost can be converted with the average interest rate of the implementation year accepted as computation value in the implementation year; or can be determined according to the pricing proposal of a manufacturer or supplier or the price of equipment used in a project with the similar equipment having the same capacity, technology or origin at the transfer date.

The cost of purchase of building equipment in the year j () is converted with the average interest rate of the implementation year accepted as computation value by using the following formula:

(17)

Where:

G_MTBj: Cost of purchase of equipment in the year j;

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m: number of conversion years.

b. If a piece of equipment is purchased by paying foreign currency, the equipment purchase cost can be converted on the basis of the factor of fluctuation in foreign/domestic currency exchange rate at the transfer date in comparison with the implementation year, taking into account foreign currency slide factor at the transfer date in comparison with the implementation year (the foreign exchange rate quoted by the Transaction Center of the State Bank of Vietnam); or can be determined according the pricing proposal of the manufacturer or supplier, or the price of equipment in the project or construction work having the similar equipment having the same capacity, technology or origin at the transfer date.

In case of conversion based on the factor of fluctuation in the foreign/domestic currency exchange rate at the transfer date in comparison with the implementation year, the equipment purchase cost of the year j () shall be converted according to the following formula:

(18)

Where:

G_MTBj: Equipment purchase cost of the year j converted into the domestic currency according to the foreign exchange rate quoted in the implementation year j;

Tg^bg: Factor of fluctuation in the foreign/domestic currency exchange rate quoted at the transfer date in comparison with the implementation year;

h_trg: Foreign currency sliding factor at the transfer date in comparison with the implementation year.

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Conversion value of cost of manufacture and production of non-standard equipment shall be computed like conversion of construction cost stated in paragraph 1 herein.

2.3. Conversion of cost of installation, testing or calibration of equipment, test run or commissioning of equipment according to technical requirements of such equipment.

Conversion value of installation, testing or calibration of equipment, test run or commissioning of equipment according to technical requirements of such equipment shall be computed like conversion of construction cost stated in paragraph 1 herein.

2.4. Cost of transportation and insurance; taxes, other relevant fees and charges of equipment

Conversion value of transportation and insurance; taxes, other relevant fees and charges () of equipment i shall be computed according to the following formula:

(19)

Where:

: Cost of transportation and insurance; taxes, other relevant fees and charges of equipment I, qualified for final settlement;

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: Post-conversion cost of purchase of equipment i.

2.5. Conversion of cost of training and technology transfer

If the cost of training and technology transfer is realized in foreign currency, the conversion value of the cost of training and technology transfer shall be computed in the manner similar to the approach for conversion of equipment in foreign currency, specified in paragraph b, 2.1 herein. If the aforesaid cost is realized in domestic currency, the conversion value () of equipment I shall be determined according to the following formula:

(20)

Where:

: Cost of training and technology transfer of equipment i, qualified for final settlement;

: Cost of purchase of equipment i, qualified for final settlement;

: Post-conversion cost of purchase of equipment i.

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Conversion value of administrative cost for purchase of equipment i of a contractor () shall be calculated according to the following formula:

(21)

Where:

: Administrative costs for purchase of equipment i of a contractor, qualified for final settlement;

: Cost of purchase of equipment i, qualified for final settlement;

 : Post-conversion cost of purchase of equipment i.

2.7. Conversion of cost of purchase of copyright of software designed for running equipment

If the cost of purchase of copyright of software designed for running equipment is realized in foreign currency, the conversion value of this cost shall be calculated in the same manner as used in the approach for conversion of cost of purchase of equipment in foreign currency, stated in b, 2.1 herein. If the aforesaid cost is realized in domestic currency, the conversion value () of such cost in the year j shall be determined according to the following formula:

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(22)

Where:

: Converted cost of purchase of copyright of software used for running equipment in the year j;

i_bq: Average interest rate of the implementation year (%) quoted by the State Bank of Vietnam;

m: number of conversion years.

3. Conversion of project administration cost

Conversion value of project administration cost shall be determined by multiplying the project administration cost qualified for final settlement by the proportion of the converted cost of construction or equipment to the settled cost of construction or equipment.

4. Conversion of construction investment counseling cost

Conversion value of construction investment counseling cost shall be determined by multiplying the construction investment counseling cost qualified for final settlement by the proportion of the converted cost of construction or equipment to the settled cost of construction or equipment.

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Conversion value of other cost associated with construction activities shall be determined by cost estimates and may be calculated like conversion of construction cost referred to in 3.1 herein. Conversion value of other cost shall be determined by multiplying respective other cost qualified for final settlement by the proportion of the converted cost of construction or equipment to the settled cost of construction or equipment.

6. Conversion of compensation, support and resettlement cost

Compensation, support and resettlement cost is a general cost, including compensations associated with land, house, fixture or property attached to land, built on water surface and others prescribed by laws; financial support from the state in case of land expropriation; resettlement costs; administrative costs for compensation, support and resettlement activities; land use fees during construction period, etc., which may vary depending on conditions, size and characteristics of a construction project or work. In order to convert this cost properly, it is necessary to classify cost-related items or accounts by the nature of each activity.

The convertible cost of compensation (land, house, fixture, property attached to land or build on water surface, etc., and other compensation costs prescribed by laws) may be determined according to instructions given by competent authorities at the date of commissioning, transfer and operation; or may be determined by referring to or using costs of compensation determined by the locality where the construction work or project is located at the date of commissioning, transfer and operation. Conversion value of other cost-related accounts or items may be calculated by using the aforesaid approaches, depending on the specific nature and requirements of respective compensation, support or resettlement activities.

Thông tư 18/2019/TT-BXD về hướng dẫn quy đổi vốn đầu tư xây dựng do Bộ trưởng Bộ Xây dựng ban hành