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Capital Outlay

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Capital Outlay

Post by riddler on Thu Mar 26, 2009 3:39 pm

wiz' people,

recently, our LGU procured a Heavy Equipment (CapitAL oUTLAY) thru competitive bidding. After evaluation of the LCRB it was determined that there is a 20% (say 1 million pesos) variance of the winning bidder from the ABC. Can the LGU utilize the variance to secure other miscellaneous expenses such as Insurance from the GSIS in relation to the above capital outlay?
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Re: Capital Outlay

Post by engrjhez® on Thu Mar 26, 2009 9:16 pm

tianchon,ruel wrote:wiz' people,

recently, our LGU procured a Heavy Equipment (CapitAL oUTLAY) thru competitive bidding. After evaluation of the LCRB it was determined that there is a 20% (say 1 million pesos) variance of the winning bidder from the ABC. Can the LGU utilize the variance to secure other miscellaneous expenses such as Insurance from the GSIS in relation to the above capital outlay?
I have a little idea on DBM guidelines but I believe you cannot proceed with the idea until the next supplemental budget. Only when all LGU surplus have been determined (as with the savings from that variance) can we proceed to assign another set of budgetary expenditures based on such savings.

So if your supplemental budget for this year is still afloat, and the said equipment already paid off, you may insert a last minute amendment to your APP for that matter. Very Happy
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Re: Capital Outlay

Post by riddler on Fri Mar 27, 2009 10:52 am

engrjhez wrote:
tianchon,ruel wrote:wiz' people,

recently, our LGU procured a Heavy Equipment (CapitAL oUTLAY) thru competitive bidding. After evaluation of the LCRB it was determined that there is a 20% (say 1 million pesos) variance of the winning bidder from the ABC. Can the LGU utilize the variance to secure other miscellaneous expenses such as Insurance from the GSIS in relation to the above capital outlay?
I have a little idea on DBM guidelines but I believe you cannot proceed with the idea until the next supplemental budget. Only when all LGU surplus have been determined (as with the savings from that variance) can we proceed to assign another set of budgetary expenditures based on such savings.

So if your supplemental budget for this year is still afloat, and the said equipment already paid off, you may insert a last minute amendment to your APP for that matter. Very Happy

this is precisely the problem of every LGU engrjhez, if the program holder should wait for suppLEMENTAL budget for this situation, or wait for the budget after surplus is realized, then it's gonna be a long wait for the program holders before they could utilized the delivered Heavy Equipment for public use. I really am confused how the Capital Outlay is defined by our government. Does it includes travelling expenses, per diems, inspection fees that are related to the Outlay? Some Accountants considered all expenses related to the project as capital outlay, while others don't. Ano ba talaga kuya? RA 9184, allows variation (variance) up to 10% for infra, how about dito sa goods/equipments, can we apply it since the action to be made is also project/goods related.
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Re: Capital Outlay

Post by RDV @ GP3i on Fri Apr 10, 2009 10:32 pm

tianchon,ruel wrote:this is precisely the problem of every LGU engrjhez, if the program holder should wait for suppLEMENTAL budget for this situation, or wait for the budget after surplus is realized, then it's gonna be a long wait for the program holders before they could utilized the delivered Heavy Equipment for public use. I really am confused how the Capital Outlay is defined by our government. Does it includes travelling expenses, per diems, inspection fees that are related to the Outlay? Some Accountants considered all expenses related to the project as capital outlay, while others don't. Ano ba talaga kuya? RA 9184, allows variation (variance) up to 10% for infra, how about dito sa goods/equipments, can we apply it since the action to be made is also project/goods related.

I tried looking for some legal basis to answer your question, and finding none, I will try to answer the question logically instead. (I hope COA can help us here.) Expenses related to the capital outlay, more specifically those which add value to the asset or which are necessary for the capital outlay to be completed or to be of use, could or should be capitalized, otherwise, they should be properly treated as expenses. For example, insurance of the asset should be properly treated as an expense because it does not add value to the asset and/or is not necessary for the completion or for the capital outlay to be of use.

Installation costs for goods are added to the cost/value of the goods; hence, capitalized. The reason, is because those are necessary for the goods to be of use. In the case of travelling expenses, per diems, inspection fees, if they are necessary for the completion of the capital outlay, I would argue for their capitalization, just as those so-called expenses are included in the project cost when you estimate its cost or when bidders bid on the project.

Just like infra, variation order is also allowed for goods/equipment in IRR-A of the GPRA. (Please see Annex D of IRR-A.) Variation in goods is called “Amendment to Order,” but it may be issued only in case of emergency or fortuitous events requiring necessary adjustments in the scope of the contract. The value of amendment to order should not exceed 10% of the original contract cost.

I hope the preceding reply did not confuse you more, engr ruel.
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Re: Capital Outlay

Post by riddler on Sat Apr 11, 2009 4:59 pm

RDV wrote:
tianchon,ruel wrote:this is precisely the problem of every LGU engrjhez, if the program holder should wait for suppLEMENTAL budget for this situation, or wait for the budget after surplus is realized, then it's gonna be a long wait for the program holders before they could utilized the delivered Heavy Equipment for public use. I really am confused how the Capital Outlay is defined by our government. Does it includes travelling expenses, per diems, inspection fees that are related to the Outlay? Some Accountants considered all expenses related to the project as capital outlay, while others don't. Ano ba talaga kuya? RA 9184, allows variation (variance) up to 10% for infra, how about dito sa goods/equipments, can we apply it since the action to be made is also project/goods related.

I tried looking for some legal basis to answer your question, and finding none, I will try to answer the question logically instead. (I hope COA can help us here.) Expenses related to the capital outlay, more specifically those which add value to the asset or which are necessary for the capital outlay to be completed or to be of use, could or should be capitalized, otherwise, they should be properly treated as expenses. For example, insurance of the asset should be properly treated as an expense because it does not add value to the asset and/or is not necessary for the completion or for the capital outlay to be of use.

Installation costs for goods are added to the cost/value of the goods; hence, capitalized. The reason, is because those are necessary for the goods to be of use. In the case of travelling expenses, per diems, inspection fees, if they are necessary for the completion of the capital outlay, I would argue for their capitalization, just as those so-called expenses are included in the project cost when you estimate its cost or when bidders bid on the project.

Just like infra, variation order is also allowed for goods/equipment in IRR-A of the GPRA. (Please see Annex D of IRR-A.) Variation in goods is called “Amendment to Order,” but it may be issued only in case of emergency or fortuitous events requiring necessary adjustments in the scope of the contract. The value of amendment to order should not exceed 10% of the original contract cost.

I hope the preceding reply did not confuse you more, engr ruel.

I prefectly got it right RDV, it doesn't confuse me now. I asked this query to our City Treasurer, both of you have the same opinion. Insurance of the Outlay for Goods maybe treated as an expense separated from the ABC.

Assuming that a Program holder has an Approriated Budget of one (1) million pesos for the purchase of a Heavy Equipment. During the preparation of the ABC for bidding, the BAC-TWG found out that prevailing market cost of the outlay has been reduced to nine hundred thousand pesos (P 900,000.00) only. Can the program holder make a breakdown of the Appropriated Budget into a) ABC and b) Administrative Expense that would include travelling expenses for inspection, per diems, supplies and expenses, which are all related to the outlay?

I am discussing this kind of Budgeting RDV, because in Infrastructure outlay, we separate the ABC to be Bid from our Administrative Cost which is more less 3.5% of the budget appropriation approved by the local sanggunian. Our Administrative cost covers travelling expenses, per diems of Inspectors assigned to the projects, hiring Job-orders for the project, supplies, and other project related expenses. Please take note that the INSURANCE is also included in the ABC which we required to be fulfilled by the Contractors. ABC plus the Adminstrative Cost is equal to the Approriation Budget approved by the SP.
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Re: Capital Outlay

Post by RDV @ GP3i on Mon Apr 13, 2009 10:41 am

tianchon,ruel wrote:
I prefectly got it right RDV, it doesn't confuse me now. I asked this query to our City Treasurer, both of you have the same opinion. Insurance of the Outlay for Goods maybe treated as an expense separated from the ABC.

Assuming that a Program holder has an Approriated Budget of one (1) million pesos for the purchase of a Heavy Equipment. During the preparation of the ABC for bidding, the BAC-TWG found out that prevailing market cost of the outlay has been reduced to nine hundred thousand pesos (P 900,000.00) only. Can the program holder make a breakdown of the Appropriated Budget into a) ABC and b) Administrative Expense that would include travelling expenses for inspection, per diems, supplies and expenses, which are all related to the outlay?
I think so, but, generally, it should be limited to 3.5%. Maybe it would be worthwhile to inform you that in the case, for example, of the DPWH budget in the 2009 General Appropriations Act (and even in prior years' GAAs) there is a Special Provision on Engineering and Administrative Overhead, which I quote as follows:

"5. Engineering and Administrative Overhead. In order to ensure that at least ninety-six and one-half percent (96.5%) of the infrastructure fund released by the DBM is made available for direct implementation of the project, any authorized deduction from project funds for administrative overhead, pre-construction activities after detailed engineering, construction project management, testing and quality control, acquisition, rehabilitation and repair of heavy equipment, and other related equipment and parts used in the implementation of infrastructure projects and contingencies, shall not exceed three and one-half percent (3.5%) of the project cost: PROVIDED, That not more than one-half percent (0.5%) out of such authorized deductions shall be used for said acquisition, rehabilitation and repair of equipments and parts: PROVIDED, FURTHER, That engineering and administrative overhead expenditures shall be treated/booked-up as capitalized expenditures and shall form part of the project cost. The DPWH shall submit to the DBM, the Senate Committee on Finance and the House Committee on Appropriations, a quarterly report of such disbursement. Violation of, or non-compliance with, this provision shall subject the government official or employee concerned to administrative, civil and/or criminal sanction under Section 43 of Chapter 5, Section 57 of Chapter 6, and Section 80 of Chapter 7, Book VI of E.O. No. 292."

From the above-quoted Special Provision, the administrative expenses shall form part of the project cost, in other words, should be capitalized. It would be prudent for LGUs to adopt the same guidelines, which I presume you are doing as you also used the same percentage amount in your next question.


tianchon,ruel wrote:I am discussing this kind of Budgeting RDV, because in Infrastructure outlay, we separate the ABC to be Bid from our Administrative Cost which is more less 3.5% of the budget appropriation approved by the local sanggunian. Our Administrative cost covers travelling expenses, per diems of Inspectors assigned to the projects, hiring Job-orders for the project, supplies, and other project related expenses. Please take note that the INSURANCE is also included in the ABC which we required to be fulfilled by the Contractors. ABC plus the Adminstrative Cost is equal to the Approriation Budget approved by the SP.

I think you are doing it right, separating the administrative overhead from the ABC, since the former would also include pre-construction activities separate from the contractor's administrative costs.

We should distinguish between the Insurance taken after the project is completed, from the Insurance which is included in contractor's administrative cost. The insurance included in the ABC is the Contractor's All Risk Insurance (CARI) which the contractor has to take for the duration of the contract (Sec. 14, General Conditions of Contract of the PBDs (http://www.gppb.gov.ph/downloadables/default.asp) ) and included as part of the project cost as it is included in the contractor's bid amount.
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Re: Capital Outlay

Post by riddler on Mon Apr 13, 2009 11:40 am

RDV wrote:
tianchon,ruel wrote:
I prefectly got it right RDV, it doesn't confuse me now. I asked this query to our City Treasurer, both of you have the same opinion. Insurance of the Outlay for Goods maybe treated as an expense separated from the ABC.

Assuming that a Program holder has an Approriated Budget of one (1) million pesos for the purchase of a Heavy Equipment. During the preparation of the ABC for bidding, the BAC-TWG found out that prevailing market cost of the outlay has been reduced to nine hundred thousand pesos (P 900,000.00) only. Can the program holder make a breakdown of the Appropriated Budget into a) ABC and b) Administrative Expense that would include travelling expenses for inspection, per diems, supplies and expenses, which are all related to the outlay?

I think so, but, generally, it should be limited to 3.5%. Maybe it would be worthwhile to inform you that in the case, for example, of the DPWH budget in the 2009 General Appropriations Act (and even in prior years' GAAs) there is a Special Provision on Engineering and Administrative Overhead, which I quote as follows:

"
5. Engineering and Administrative Overhead. In order to ensure that at least ninety-six and one-half percent (96.5%) of the infrastructure fund released by the DBM is made available for direct implementation of the project, any authorized deduction from project funds for administrative overhead, pre-construction activities after detailed engineering, construction project management, testing and quality control, acquisition, rehabilitation and repair of heavy equipment, and other related equipment and parts used in the implementation of infrastructure projects and contingencies, shall not exceed three and one-half percent (3.5%) of the project cost: PROVIDED, That not more than one-half percent (0.5%) out of such authorized deductions shall be used for said acquisition, rehabilitation and repair of equipments and parts: PROVIDED, FURTHER, That engineering and administrative overhead expenditures shall be treated/booked-up as capitalized expenditures and shall form part of the project cost. The DPWH shall submit to the DBM, the Senate Committee on Finance and the House Committee on Appropriations, a quarterly report of such disbursement. Violation of, or non-compliance with, this provision shall subject the government official or employee concerned to administrative, civil and/or criminal sanction under Section 43 of Chapter 5, Section 57 of Chapter 6, and Section 80 of Chapter 7, Book VI of E.O. No. 292."

From the above-quoted Special Provision, the administrative expenses shall form part of the project cost, in other words, should be capitalized. It would be prudent for LGUs to adopt the same guidelines, which I presume you are doing as you also used the same percentage amount in your next question.


tianchon,ruel wrote:I am discussing this kind of Budgeting RDV, because in Infrastructure outlay, we separate the ABC to be Bid from our Administrative Cost which is more less 3.5% of the budget appropriation approved by the local sanggunian. Our Administrative cost covers travelling expenses, per diems of Inspectors assigned to the projects, hiring Job-orders for the project, supplies, and other project related expenses. Please take note that the INSURANCE is also included in the ABC which we required to be fulfilled by the Contractors. ABC plus the Adminstrative Cost is equal to the Approriation Budget approved by the SP.


I think you are doing it right, separating the administrative overhead from the ABC, since the former would also include pre-construction activities separate from the contractor's administrative costs.

We should distinguish between the Insurance taken after the project is completed, from the Insurance which is included in contractor's administrative cost. The insurance included in the ABC is the Contractor's All Risk Insurance (CARI) which the contractor has to take for the duration of the contract (Sec. 14, General Conditions of Contract of the PBDs (http://www.gppb.gov.ph/downloadables/default.asp) ) and included as part of the project cost as it is included in the contractor's bid amount.

It is nice to note that the DPWH anchored the use of 3.5% Adminisrative Cost to the GAA. Acutally, I always get into an "academic discussion" with our Accounting Department on the use of Project (outlay) Administrative Cost like fuel and maintenance of vehicles used necessary to inspect the project. Accordingly, from their point of view, such project related cost can be incorporated in the General Fund as MOE of my Department (City Engineering). We pointed out that the outlay budget with its breakdowns were approved by the Local Sanggunian including the Adminisrative cost or the OCM which is the basis of our project expenses.
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Re: Capital Outlay

Post by engrjhez® on Mon Apr 13, 2009 11:45 am

Having discussed some key elements of ESAO and computations for ABC, may I have your indulgence, if you may have time, to reply the posts regarding the ESAO and the VAT.


Thanks. Very Happy
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Re: Capital Outlay

Post by RDV @ GP3i on Mon Apr 13, 2009 12:26 pm

tianchon,ruel wrote:
It is nice to note that the DPWH anchored the use of 3.5% Adminisrative Cost to the GAA. Acutally, I always get into an "academic discussion" with our Accounting Department on the use of Project (outlay) Administrative Cost like fuel and maintenance of vehicles used necessary to inspect the project. Accordingly, from their point of view, such project related cost can be incorporated in the General Fund as MOE of my Department (City Engineering). We pointed out that the outlay budget with its breakdowns were approved by the Local Sanggunian including the Adminisrative cost or the OCM which is the basis of our project expenses.

You can now tell them that their interpretation does not juxtapose with generally-accepted accounting principle, considering that they acknowledged that administrative costs are "project related cost" or indirect costs, but would want them incorporated as part of MOOE, instead of the cost of the project; hence, capitalized.
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Re: Capital Outlay

Post by Mikel on Mon Apr 13, 2009 1:39 pm

tianchon,ruel wrote:wiz' people,

recently, our LGU procured a Heavy Equipment (CapitAL oUTLAY) thru competitive bidding. After evaluation of the LCRB it was determined that there is a 20% (say 1 million pesos) variance of the winning bidder from the ABC. Can the LGU utilize the variance to secure other miscellaneous expenses such as Insurance from the GSIS in relation to the above capital outlay?

Capital Outlay as defined in Art. 406 of the IRR of RA 7160 "refers to appropriation for the purchase of goods and services, the benefits of which extend beyond the fiscal year and which add assets to the LGU concerned, xxx."

As correctly pointed out by sir RDV, only those miscellaneous expenses which are necessary for the purchase of the goods or services (e.g. installation cost, freight, handling cost, etc. or EAO for infra) may be capitalized. The premiums for the insurance coverage of the heavy equipment should be charged to the proper item of expenditure under the MOOE or Current Operating Expenditures of the LGU.

While we are on this topic, may i inquire from sir RDV on the nature of the Non-Office item provided in the budget of LGUs, whether this item may be classified as CO or MOOE in their budget or the Non-Office Item should also be 'divided' into CO or MOOE?

There has been a lot of confusion among LGU personnel as to the proper treatment of expenditures under this item. There have been cases of Technical Malversation filed in Sandiganbayan because of the absence of clear-cut definition of this item.

Kindly provide us with the DBM issuance/s on this matter. Thank you very much.

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Re: Capital Outlay

Post by RDV @ GP3i on Mon Apr 13, 2009 2:49 pm

Mikel wrote:
While we are on this topic, may i inquire from sir RDV on the nature of the Non-Office item provided in the budget of LGUs, whether this item may be classified as CO or MOOE in their budget or the Non-Office Item should also be 'divided' into CO or MOOE?

There has been a lot of confusion among LGU personnel as to the proper treatment of expenditures under this item. There have been cases of Technical Malversation filed in Sandiganbayan because of the absence of clear-cut definition of this item.

Kindly provide us with the DBM issuance/s on this matter. Thank you very much.

I am not aware of a DBM issuance on the treatment of "non-office" items in the budgets of the LGUs. DBM may be partly to blame for its use as it is included as an item of expenditure in the old LGU Budget Operations Manual, below that of PS, MOOE, and CO. Apparently, it was included to cover for those lump-sum appropriations which, at the time of budget preparation, could not yet be identified by LGUs as falling either under PS, MOOE, or CO.

I was informed that in the new Budget Operations Manual for LGUs, the term is no longer used, instead the use Special Purpose Appropriations (SPAs) is allowed, still below PS, MOOE, and CO.

But I will still research on it as I got confused also when I asked around. Rolling Eyes
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