Final types of contracts- different types of contracts

Contract is defined as a mutual relationship between parties.
It is an agreement between two or more parties which is
intended to be enforceable at law and is constituted by
acceptance by one party of an offer made by the other party
to do or abstains from doing an act.

Item Rate Contracts
Percentage rate contracts
Lump sum Contracts
Cost Plus Percentage Contracts
Cost Plus Fixed Fee Contract
Cost plus fluctuating fee contract
Incentive Contracts
Mode of execution
PPP
EPCC.
Classification based on purpose

Nature of Agreement :
An item rate contract is one in which the contractor agrees to carry out
the work as per drawings, bills of quantities and specifications in
consideration of a payment to be made entirely on measurements taken as
the work proceeds, and at the unit – prices tendered by the contractor in
the bill of quantities.
A bill of quantities is prepared giving, as accurately as possible, the
quantities of each item of work to be executed and the contractor enters
the unit rate against each item of work.
The basis of agreement in thus the unit-rate of each item, certain
reasonable variation in the quantities being accepted by both parties.
The two parties are not bound by the total value of work. They are bound
by each individual rates
Payment is based on actual measured quantity of work

The schedule with item description and quantities is given with bid form.
The bidders fill in the rate column for each of the item.
The rate or unit price includes the contractor’s overheads and profits.
By totaling all the arithmetic products (Quantity x Rate), the estimated
total cost of the project is obtained.
The project is awarded to the lowest responsible and responsive bidder;
i.e. the bidder with lowest estimated cost who satisfies all pre-conditions.
As the actual work progresses, the payment is made on quantity of work
physically measured.
If no changes are made in nature of work, the quantity of work actually
performed can vary from the quantities in BOQ (subject to limits), without
change in rate.
If the quantity of work changes beyond limits, the rates may be revised.

The final contract price will depend on the actual quantity of work. The
estimated value of contract is not binding.
For new items of work, not in original schedule, the rates need to be
separately negotiated.

Contract Documents :
All the documents as mentioned earlier are in variably included in the
agreement.
Notice Inviting Tender
Instruction to the Bidders
Qualification Criteria
General Conditions of Contract
Special conditions of contract
Project Details
Bill of Quantities
Basic Drawings
Specifications
Details of Bid Bonds

Mode of Payment to Contractor :
The contractor has to take measurements of the work carried out, prepare
and submit the bill periodically ( generally every month ) .
The engineer either accompanies the contractor or his representative
while the measuring the quantities.
If no discrepancy is found recommends the bill for payment.
The amount recommended by the engineer is the cost of the work less
retention money and the cost of material supplied to the contractor by the
owner and actually used on the work during the period under consideration.
If any item occurs during execution which is not included in the bill of
quantities, It is usually possible construct that item by a combination of
other items already in the bill, otherwise It is paid for as an ‘extra’ item as
a specially analysed rate.

Advantage :
(a)The owner can avoid the delay that would be necessary in making a large
number of contract drawings to show details everything that would be
needed as in the case a lump sum contract. The detailed drawings can be
prepared after the contract is awarded but sufficiently advance to enable
the contractor to secure all information in time.
(b) Bill of quantities which forms a part of the contract documents greatly
assists in keeping the tendered sum as low as possible. This is obvious
because in absence of the bill of quantities (e.g. Lumpsum contract) , every
contractor submitting the tender has to assess the amount work involved ,
usually in a very short period, in addition to the normal work . Under these
circumstances the contractor, unless he is in great need of a work, is
almost bound to price high he is in order to allow himself a sufficient
margin of cover for any items which he may have missed.
(c ) This type of contract allows within limits variation in the quantities of
different items. Thus what the owner pays to the contractor is the actual
cost of the work at the agreed rates. This arrangements is fair to both
the parties. Easier to accommodate changes due to differing site
conditions, change in requirements, etc.

(d) Tendering process, Mobilization, etc. can be carried out in parallel
with design & drawing.
(e) Less risk of contractor making error in quantity estimation during
short time period available during bidding.
(f) Less tendency of contractor to bid conservatively.
(g) What the owner pays to the contractor is the actual cost of the
work at the agreed rates. This arrangements is fair to both the
parties.

Disadvantage :
(a) The owner cannot be absolutely sure of the total cost to him , until the
work is completed. In case the quantities mentioned in the bill are found
to be inaccurate the cost of the work will vary considerably from the
estimated cost. If the actual cost increases the owner may be put in the
financial difficulty leading to even suspension of the work.
(b) Both the owner and the contractor have to do considerable computation
and book-keeping during the progress of the work. Both the parties are
required to appoint staff to record the measurements of the work done.
(c ) As the quantities are likely to vary there is a possibility of the
contractor submitting an unbalanced tender on the basis of shrewd
anticipation or perhaps outside information. If the contractor’s
anticipation proves to be correct the owner would stand to lose heavily. A
contract of this nature therefore requires very careful scrutiny and
consideration by a skillful and experienced engineer or architect before it
is entered into.
(d) The ‘extra items’ are often a source of trouble.

(e) Can lead to huge cost escalations
(f) Needs lot of book keeping. Increases overheads
(g) No incentive on contractor to reduce quantity / cost. No scope for
value engineering
(h) Malpractices (Insider trading)
(i)Front loading
Dispute regarding extra items
The contractor invariably presses for higher rates than he would have
tendered in the beginning.
May threaten not to perform the extra items if his demand not made.
Difficult to get the extra items done by another contractor.
In most cases owner has to meet the demands.

Malpractices
The bidder, by bribing an insider, can get information on an item, which
has more probability of increase in quantity.
He may bid high rate for that particular quantity, and bid low for
another which he knows may decrease in quantity.
He may be awarded the contract on becoming L1, and on actual
completion, the payment made may be much more than what would have
been made if project was awarded to the L2 bidder.
Through corruption the quantities can even be intentionally changed to
facilitate such malpractice.
Front Loading
The contractor may put a higher rate for works to be completed
earlier, and a lower rate for ending items.
This ensures that contractor becomes cash rich upfront, and can
manage his working capital better.
However if the bid is heavily front loaded, contractor may run away,
after completing the profitable items.

Suitability of Item rate Contract :
The item rate contracts are widely used in the execution of large works
financed by the public bodies or the government. This form of contract is
suitable for the works which can be split into separate items and the
quantity under each item can be estimated with reasonably accuracy.
With careful scrutiny to avoid acceptance of an unbalanced tender this
type of contract can be conveniently used for the works which are unsuited
to the lump sum contracts.

Another type of measurement contract.
Devised to get rid of unbalanced / front loaded bids.
This form of contract differs from the item rate contract in respect of
the method of tendering the unit rates.
The bills of quantities supplied to all the intending and detailed
description, the unit rate as estimated by the engineer .
While tendering the contractors have not to write the rate of each item
but a percentage figure by which the estimate unit rates are to be
increased or decreased, the same percentage figure being applicable to all
the items.
Rates of all items will be increase/decreased by the percentage quoted by
the bidder.
The bids will be compared based on value of work derived based on the
revised rates.

• No scope for
– Unbalanced bids
– Front loading
– Malpractices through insider tips
• used in preference to the item rate contract for the works where the
estimated quantities are uncertain and likely to change considerably.
• Documents
– Same as item rate, only rate column of BOQ filled by owner and not
bidder
• Mode of payment
– Same as item rate

Nature of agreement :
In a lump sum contract the contractor agrees to carry out the entire work
as shown in drawings and described by specifications, supplying labour and
materials, all for a specified lump sum.
The value of the works is estimated by the contractor based on the
drawings and specifications provided.
The lump sum amount can be decided by negotiation or competitive bidding.
Sometimes the agreement makes provision to adjust the ‘fixed sum’
allowing for the cost of extra work, variation , omission, etc.
The main features of the agreement is that the contractor agrees to
fulfill all his contract obligation for the stipulation payment no matter
what trouble and expenses he encounters in doing so.
Fixed price contract needs complete and accurate set of drawings and
specifications.
Even with complete drawings, estimation of the fixed price in short time
available for bid preparation becomes difficult.
Contractor may quote very conservatively

Deviation schedule
The work is broken into a no. of items, as in a BOQ
Gives a complete break-up of the fixed price, including item
description, quantity and rate
In case of variation, the amount payable for that particular item is
decided based on the deviation schedule.
Even though the fixed price is for the total completion of job, working
capital management becomes difficult if there is no interim payment.
Milestones are decided.
Payment is linked with completion of milestones.
Payment schedule is mostly back loaded.
In case the contractor abandons midway, he can only receive payment for
completed milestones and not the actual portion of work done.
The engineer’s interim certificates form the basis of part payments to the
contractor by the owner

Contract Document :
All the documents as outlined below except, ‘bill of quantities’ form the
basis of agreement.
A deviation schedule of rates is sometimes included to work out the cost
of extras or omission.
Notice Inviting Tender
Instruction to the Bidders
Qualification Criteria
General Conditions of Contract
Special conditions of contract
Project Details
Complete set of Detailed Drawings & site investigation data
Specifications
Details of Bid Bonds
Deviation Schedule
Payment Schedule

Mode of Payment to Contractor :
A lump sum contract is usually an ‘entire’ contract and as such no payment
can be recovered by the contractor until the whole of the work is
completed.
But invariably the agreements include a special provisions for series of
partial payments to contractor as work progresses, rather than final
settlement after acceptance of the work by the owner.
In case the contractor abandons the work he is not entitled to payment for
the portion of work already done, however substantial it should be done.
The engineer’s interim certificates form the basis of part payments to the
contractor by the owner.

Advantages :
(a)If no extras are contemplated the tenders tell him exactly what the
project will cost him. This is a sound footing on which he can take the
decision whether to start the project or abandon the same.
(b) He need not employ the staff to keep periodical accounts of the
contractor’s materials, labour and output. All that the engineer has to
do on his behalf is to see that the work is being executed exactly
according to the terms of the contract and issue interim certificates to
the contractor.
(c ) From the contractor’s standpoint the greatest advantage of this form
of contract is that whatever benefits the contractor can gain by
excellent planning and efficient management on the site of work are his
own.

Drawbacks :
(a) Before a contract is let out the project has got to be thoroughly
investigated and all the contract documents kept ready in every respect.
This entails costly and time consuming work and which is often difficult to
accomplish.
(b) If the nature , extent, and details of the work are not properly defined
by the contract documents, many additional features may have to be
determined and provided for as the work progresses. These features not
being part of the original agreement give opportunity to the contractor for
claiming payment at abnormal rates.
To overcome this drawback a schedule of rates covering items not
included but likely to be provided for in the contracts is agreed to by the
owner and the contractor.
(c) The Contractors may submit high tenders , to protect themselves from
the uncertainties of the work.

Suitability of this form of Contract :
A lump sum contract can be used successfully for the construction of
works with which the contractors have had considerable experience and
whose cost they can predict with reasonable accuracy. Examples of such
works are public and private building, warehouses, workshops , etc.
This type of contract is not suitable for works of which extent and nature
cannot be predicted in advance. It is then unfair to make the contractor
assume all risks and uncertainties. Example of works unsuited to a lump
sum contract are :
( a) Works involving difficult foundations : Where it is no possible to know
in advance the characteristics and quantity of excavation, dewatering of
foundations, shoring etc.
(b) Emergency projects that have to be rushed through without time to
prepare complete set of contract documents.
(c )Works, such as additions and alterations to existing structure which
involves the maintenance of operations while the work is being performed.
(d) The works subjected to unusual and unpredictable hazards such as
floods beyond the control of contractors.

Cost Plus Percentage Contracts

Nature of Agreement :
In a cost-plus percentage contract, the owner agrees to pay to the
contractor the actual cost of the work plus an agreed percentage of the
actual or allowable cost cover overheads, profits , etc.
The items, expenses under which will constitute actual cost, are to be
carefully defined in the agreement.
Ordinarily, the percentage to be paid to the contractor should not be
applied on the costs of the following :
Salaries of the contractor’s supervisory staff.
Contractor’s general office expenses such stationery, postage ,
telephone accounts etc.
Salaries or portion of salaries or traveling expenses of the officials
of the firm who may visit the work.
Charges for the use of any equipment that the contractor would
not normally use for the performance of the work.

Contract Documents :
Out of the various contract documents mentioned the bill of quantities ,
drawings and specifications are seldom ready when the contract is entered
into.
The contractor agrees to execute the work in accordance with the
drawings, specifications and other necessary information that will be
supplied to him from time to time during the progress of the work.
Mode of Payment of Contractor :
The Contractor generally keeps all records of costs, and presents them
periodically to the engineer ( who also maintains similar accounts ) for
checking and approval .
The owner, on the advice of the engineer , makes the payments to the
contractor as the work proceeds.

Advantages :
Early completion of the work : The work can be started even before the
drawings, designs, estimates and specifications are prepared; these being
prepared as the work progresses. The decisions can be taken speedily.
These factors lead to the rapid execution of the work.
Quality of Work : The contractor is assured of a reasonable amount of
profit even though the prices of materials and the labour charges are
subjected to fluctuations . Similarly , the use of inferior type of materials
than specified and hurried completion resulting in poor workmanship do not
increase the contractor’s profit. This induces him to perform the work in
the best interest of the owner. The final result is therefore a better
quality work.
Extra Works : No work or a portion thereof that the contractor is
directed to perform can be called an “extra work”.
This flexibility allows the adoption of alternative ways and methods of
construction from which to choose the most economic one for the work as
a whole. This may reduce the cost of the work.

Drawbacks :
(a ) Lack of Incentive :
There is no incentive for the contractor to complete the work speedily, and
effect economies in the construction cost by proper planning and efficient
management . On the contrary any increase in the construction cost due to
delay, wastage of materials, changes in the drawings and designs result in
increase of his profit.
(b) The Final Cost of the Work :
Like other contracts (except) the lump sum type ) here also the final cost
of the project to the owner cannot be foretold. This may lead the owner
to financial difficulties.
Since profits of the contractor are linked with cost of materials, labour
and equipment, a high cost gives the contractor a higher amount of profits.
This results in waste, inefficiency and extravagance by contractors.
(c) Accounts Keeping : Both the parties have to do a lot of accounts
keeping regarding the materials purchased and used, the labour and plant
employed and other miscellaneous expenses incurred on the work.
(d) Illegal for Public Works :Where the owner happens to be a public
body or government department this form of contract cannot be adopted
except during emergencies.

Suitability of Cost Plus Percentage Contract :
(a)When there is an emergency or any other condition that requires
constructing a facility in a hurry without time to develop plans for it,
neither the employer nor the contractor is sure about the cost of
construction, a ‘cost plus percentage’ contract is generally used. There
is a minor risk involved.
(b) Works ( in situations which are no emergencies )Where no one can
foretell with certainty just what troubles would be encountered in the
work, and correct decisions cannot be taken except during the progress
of the work.
(c ) Construction of expensive structures e.g. palaces, where the cost of
the work is of no consequences but the materials to be used and the
methods to be adopted are to suit the choice and taste of the owner.
The owner (through his engineer/architect ) should exercise great care in
selecting a contractor to carry out the work for him. A person or firm
of known integrity , who will not exploit the weakness of this type of
contract to his advantages, will be the best choice

A dam was washed out due to floods in the Naugatuck River Valley in the
U.S.A.
The work of replacement of the dam was awarded in 1955 to a contractor
on a cost plus percentage fee because no one could anticipate the problems
that would arise in the course of reconstruction and decisions could be
taken only as the work progressed.
A normal condition attached to this type of contracts is, that the
contractor has to produce his books of accounts for the employer’s
inspection as and when required.
To make a contract, find out who can and will tackle the job and make an
agreement regarding the percentage to be paid to the contractor.
This contract is also known as “time and lime” (i.e. labour and material)
contract.

In the cost plus fixed fee contract, the contractor is reimbursed the
actual cost incurred by him on materials and labour and is given a fixed
amount of money as his fee.
It is an improved version of the “Cost plus percentage” contract, as in this
type of contract, the profit of the contractor is not linked with the cost.
The contractor receives only the stipulated sum for his part in overseeing
and doing the job, no matter what the cost of the project may be.
The contractor will, therefore, try to complete the job as fast as possible
so that his men can be available for another contract elsewhere.
Under this form of contract, the employer can easily select a reliable
contractor to execute the work. The parties can work in harmony and
accomplish amazingly fine results.

The cost-plus –fixed –fee contract differs from the cost-plus percentage
type contract in respect of determination of the fee to be paid to the
contractor to cover overheads and profit.
The agreement specifies the fixed lump sum to be paid to the contractor
by the owner over and above the actual cost of the work. The fee does not
fluctuate with the actual cost of the work, This factor overcomes the
possible weakness of the cost-plus-percentage type contract.
However, there is no incentive for the contractor to do the work
efficiently and effect economy in the cost of construction of the work.
If the fixed fee is to include the salaries of the contractor’s staff the
contractor will try to complete the work as speedily as possible so as to
make maximum profit.
In respect of all other points this form of contract is similar to the cost-
plus-percentage type contract.

Cost-Plus-Fluctuating Fee Contract

By introducing an element of incentive for the contractor to carry out the
work in the most economic way an attempt is made in this form of contract
to overcome the main drawback of the previous two types of cost-plus
contracts.
This is achieved by suitably changing the nature of the agreement in
respect of the fee is determined by reference to some form of sliding
scale. Thus higher the actual cost, lower will be the value of the fee that
the contractor receives and vice versa.
From owner’s point of view this is one of the best of the ‘cost-plus’ type
contract.

This is an improved version of the guaranteed maximum price contract.
In this type of contract, the target price of the work/finished product is
fixed somewhat below the maximum price.
The contractor is allowed a certain percentage of savings between the
maximum price and the target price.
This works as his incentive.
This type of contract has very often been recommended in cases where
the price is to be determined.

This form of contract is of recent origin. In it are combined the best
features of the cost-plus-percentage and cost-plus fluctuating fee type
contracts.
The contractor is paid on a cost –plus-percentage basis work performed
under the contract, plus or minus a certain amount, which is an agreed
percentage of savings or excess effected against the target value. The
target value is arrived at by measuring the work on completion and valuing
it at the rates agreed earlier.

Contract Documents
Based on the scope of Work/drawings for each specific work, client shall
issue to the Contractor a
• Work Order detailing the scope,
• estimated quantities of work,
• required mobilisation and the time schedule
The Contractor shall at the same time
• prepare an execution plan for the specific work
• detailing the Plant and Equipment,
• Staff, direct material, labour etc., which shall
be reviewed and agreed jointly by client and Contractor.

On mobilisation, the Contractor will create Temporary Facilities such as
those described by clients and listed below
1. Office Building for Site Office and Site Detailed Engineering Activities
including Office Equipment communication equipment , Furniture’s and
Fixtures , Computers (Hardware and Software) and copying equipment
for Site Office and Site Detailed Engineering office.
2. Piping Prefabrication Shop
3. Structural Fabrication Shop
4. Stores and Fuel Facilities
5. Material Testing Laboratory
6. Maintenance Shop
7. Bar Bending Yard
8. Concrete Production Yard

9. Labour Colony inclusive of Land for setting up of Labour Colony for
Unskilled Labour
10.Power and Water (for Construction and Other Uses) distribution lines
and facilities
11.Sewage Distribution Facilities
Contractor shall be permitted free use of these facilities for the entire
duration of the Work.

Payments
Payment to the Contractor will be made on the basis of the Cost Statement
submitted by the Contractor on site-wide basis once a Calendar month.
The Cost Statement of Contractor will be arrived at on the following basis:
a) Staff Salaries.
b) Common Site expenses.
c) Plant and Equipment.
d) Tools and Tackles and Staging materials.
e) Direct labour
f) Material, if any
g) Mobilisation and Demobilisation charges
h) Supply of Material and Sub-contract work to be carried out through
specialised agencies.
i) Engineering and Design fees.

a) Staff Salaries :
Contractor shall in consultation and agreement with client, promptly deploy
at site adequate number of experienced staff and augment same from time
to time.
Any demobilisation of Contractor’s staff also shall be done by Contractor
in consultation and agreement with Client.
Contractor shall notify Client Construction Manager(s) the actual date of
mobilisation and demobilisation of each staff within 2 days of such
mobilisation or demobilisation as the case may be.
Further, Contractor shall maintain records of all staff deployed at Site
and submit to clients Construction Manager(s) and Chief-of- Construction
a monthly statement of deployment of staff for respective areas and
Common services for verification and obtain counter signature as a token
of correctness of deployment in accordance with clients requirements and
prior agreement between Contractor and client in this regard.
Such approved monthly deployment statement shall form the basis for
billing purposes.

The payment schedule for various categories of workers will be fixed by
Client and will pay staff members deployed at Site at following on man
month rates ( inclusive of all the benefits) :
1. Senior Manager Salaries
2. Manager
3. DeputyManager
4. Officer
5. Junior Officer
6. Clerk
7. Senior Mechanic/ Senior Electrician
8. Mechanics/ Electrician/ Equipment Operator
9. Graduate Engineer Trainee
10. Assistants to Mechanics
11. Graduate Trainee
All of the above shall be payable from the date the Personnel reports to
Site and upto the date the Personnel is demobilised from Site upon
completion of his assignment.

These charges exclude cost of the following
* Unfurnished accommodation provided at Site
* travel/transfer expenses for initial reporting at site as per Contractor 's
rules
* conveyance at site

b) Common Site Expenses:
Client shall reimburse Contractor the following monthly expenses for
common site operation on actual basis upon receiving the Cost Statement.
1. Electricity/Water
2. Mess Expenses at site
3. Printing & Stationery
4. Books & Periodicals
5. Rates & Taxes
6. Local Conveyance
7. Car Hire Charges
8. Telephone, Postage, Telex & Telegram/Fax/Satellite link Charges
etc. Telephones at the residences of Contractors personnel shall be as
per Company Policy of the Contractor.
9. Travel Expenses ( as per Company Policy of the Contractor )
10.Courier Expenses
11. Codes and Standards for Engineering and Construction.
12. Rent.
13.Repairs and Maintenance of office equipment

14.Repairs and Maintenance of temporary facilities and accommodation.
15.Safety Helmets ,Safety belts & other approved safety items.
16.Security
17.Hotel and Guest House expenses
18.Statutory Charges.
19.Insurance Charges.
20.Unfurnished residential accommodation as per general policy of the
Contractor
Contractor can provide to client (six-monthly budgetary estimate or more
)for such expenses under various items and actual expenses incurred shall
be monitored against the budget.
Client may, at its option, provide any of the facilities for Contractor 's use
and arrange for direct payment to third parties as applicable.
The above will exclude Security Deposit paid by the Contractor in respect
of services and facilities.

c) Plant and Equipment:
Contractor shall, in consultation and agreement with client deploy at site
adequate Plant and Equipment which are in sound and working condition and
augment the same from time to time.
Initially the contractor shall mobilise the minimum equipment list as per
mutual agreement between Contractor and Client.
Any demobilisation of Plant and Equipment shall also be done by Contractor
in consultation and agreement with Client .
Contractor shall notify Clients Construction Manager(s) the actual date of
mobilisation and demobilisation of each item of Plant and Equipment within
2 days of such mobilisation or demobilisation as the case may be.
Further, Contractor shall maintain records of all Plant and Equipment
deployed at site including expenses on operation and maintenance of each
item of Plant and Equipment .

Contractor shall also meticulously maintain records in regard to:
i) assembling period for the first time after mobilisation and disassembling
period before the demobilisation of Plant and Equipment like Batching
Plants, Cranes, Workshop equipment etc. during which period these items
are not available for use.
ii) period of break down of Plant and Equipment and repair
iii) period during which the Plant and Equipment are at site although the
demobilisation instructions are given by Client in writing.

Contractor shall submit to Clients Construction Manager(s) a monthly
statement of deployment of Plant and Equipment complete with details of
periods during which the Plant and Equipment were not available for use
and hence not chargeable for reasons mentioned above, for verification
and obtain counter signature as a token of correctness of deployment in
accordance with Clients requirements and prior agreement between
Contractor and Client in this regard.
Such approved monthly deployment statement shall form the basis for
billing
It is understood that for each item of Contractor Owned Plant and
Equipment a free maintenance period of 15 hour a month shall be
permitted.
This free maintenance period shall be considered as payable period.

Contractor may also, with the approval of Client, hire certain Plant and
Equipment to augment resources at Site.
All requirements of maintenance of records and certification as stipulated
above for Contractor owned Plant and Equipment shall also apply to the
Plant and Equipment mobilised to site by Contractor on hire basis.
Hire charges will be paid directly by Client.
Contractor shall also periodically submit utilization statement in respect of
Plant and Equipment.
The Operation & Repairs/Maintenance cost of all Contractor owned, and
Client owned Plant and Equipment will form part of Contractor 's cost.
The cost of Repairs/Maintenance of Plant and Equipment shall be
reimbursed at actual ( as already agreed) subject to a ceiling at the rate
of 5 % ( Five Percent ) per annum of Original Purchase Value in respect of
Equipments Owned by the Contractor.

The cost of Repairs/Maintenance of Plant and Equipment owned by Client
shall be reimbursed at actuals.
Client shall pay to Contractor, on a monthly basis, the fixed charges at the
rate of 21% (Twenty One percent ) per annum prorata basis on Original
Purchase Value of Plant & Equipment owned by Contractor.
Contractor shall provide to Client a statement of item-wise Original
Purchase Value of Plant & Equipment deployed at Site duly audited by
Statutory Auditors of the Contractor.
Contractor will endeavour to provide necessary additional Plant and
Equipment, manpower facilities, materials etc. which are required to
execute the work in a compressed time as may be required by Client.
For Hired Plant and Equipment provided by the Contractor, Operation
Charges shall be reimbursed by Client to the Contractor at actuals.
The cost of Repairs/Maintenance, cost of mobilisation or demobilisation if
any of these Plant and Equipment hired / rented by the Contractor shall be
reimbursed by Reliance at actuals or included in the Hire/Rental Rate in
terms of the agreement with the Hirer.

d) Tools and Tackles and Staging materials:
Client shall procure and supply to Contractor all the necessary Tools,
Tackles and Staging materials as described below as Free Issue.
1. Scaffolding Material.
2. Grinding Machines.
3. Hand tools such as Chisels, Hammers , Levels, Measuring tapes, etc.
4. Lifting Belts and Slings.
5. D Shackles , Chain Pulley Blocks , Tun Buckles etc.
6. Files
7. Dumpy levels, Theodolites, etc.
8. Welding Helmets and accessories such as Aprons, Gloves, welding
goggles, Dark
/white glass, etc.
9. Cutting sets, Heating Torches, etc.
10.Spanners , Torque wrenches, etc.
11.Vibrator Needles,
12.Shovels, Pickaxes, Crowbars, etc.
13.Buffing Machines.
14.Pipe Threading Machines , pipe bending machines etc.
15.Meggars, etc.

Contractor shall provide all necessary services related to determining the
requirement, specification and timely procurement of same.
In exceptional cases where Contractor requires urgently to mobilise any
Tools, Tackles and Staging materials to progress the work at site,
Contractor shall, in consultation and agreement with Clients Construction
Manager(s) mobilise such Tools, Tackles and Staging materials to site
through purchase of the same in which case Client shall reimburse to the
Contractor the cost of such Tools, Tackles and Staging Material.
In rare cases where such Tools, Tackles and Staging materials are not
available in the market due to delivery constraints but are available with
the Contractor , then the same shall be mobilised by the Contractor for
the duration until such time the Tools, Tackles and Staging materials
ordered by Client are received.
In case of the use of the Contractor owned Tools, Tackles and Staging
materials at site then Client shall reimburse to the Contractor the charges
for the use of the same.

The charges for use shall be mutually agreed upon between Client
and the Contractor.
Contractor shall in all such cases notify Reliance Construction Manager(s)
the actual date of arrival at Site and release from Site of each item of
Tools, Tackles and Staging materials. Contractor shall maintain records of
all Tools, Tackles and Staging materials received at site, which are under
use and submit to Reliance
Construction Manager(s) a monthly statement for verification and obtain
countersignature as a token of correctness

e) Direct labour:
Actual cost of Direct labour and Sub-Contract labour will be paid to
Contractor as per Cost Statement to be submitted by Contractor .
The Contractor shall engage Sub-Contract labour for specific jobs only on
explicit authorisation by Clients Construction Manager(s) and not
otherwise.
Contractor shall furnish to Clients Construction Manager(s) a monthly
statement of surplus labour or shortfall thereof under different
categories and proposed plan for additional mobilisation, demobilisation and
utilisation as applicable.

f) Materials:
The Contract is basically a labour contract and Client shall provide all the
material required.
However, for the purpose of executing Contract, if the Contractor has to
procure any material, with prior approval of Client, in such case actual Cost
of Materials and Consumables (other than those provided by Client ) will be
paid to Contractor as per Cost Statement to be submitted by Contractor.
Client at its option may also direct the Contractor to procure such
materials from its designated suppliers. The Contractor shall do so and in
this event the Cost of materials shall be reimbursed by Client and this cost
shall be subject to Compensation as agreed in the Agreement.
It is understood and agreed that the Contractor shall not procure any
Materials or Consumables through their other offices on a Branch transfer
basis.
All Materials required for Site jobs will be procured and paid only from
closest available place from the site .
If there are any exceptions, the same shall be procured with prior
approval of Reliance.

g) Mobilisation and Demobilisation charges:
The expenses for Mobilisation of Contractor owned Plant and Equipment to
Site from Contractors Yards and the expenses for Demobilisation of Plant
and Equipment from Site to Contractors Yard at Mumbai shall be
reimbursed by Client to the Contractor.
Demobilisation expenses comprising of
retrenchment benefits to labour and staff
return travel expenses of staff including transportation of their
belongings
tackles, and other site facilities (dismantling, disposal/transfer of camp
equipment including office stores,
labour hutments, and handing over of site in the required condition)
shall be paid to Contractor at actuals and the same shall be claimed by
Contractor under the individual item head under "Common Site Expenses".

h) Supply of Materials and Sub-contract work to be
carried out through specialised agencies:
Contractor shall, if required by Client, will arrange for specialised Sub-
contract agencies for supply of materials/services who shall be jointly
selected by Contractor and Client.
In this connection Contractor’s Site shall co-ordinate closely with
Client Construction Manager(s) to:
1. Identify from time to time materials/services for which suppliers and
sub- Contractors are required.
2. Finalise Vendor(s)/Sub-contractor(s) list.
3. Evolve procedure/strategy for selection of Vendors/Sub-contractors
for each of the identified specialised materials and services.
4. Select Vendor(s)/Sub-contractor(s).
Contractor, shall be paid cost of such works/services or supplies
(inclusive of all taxes, duties whether payable by the Sub- contractor or
by Contractor and freight charges).

i) Engineering and Design fees:
Client shall pay Contractor all-inclusive expenses incurred towards
Engineering and Design at the following man-hour rates (inclusive of all
benefits).
For Engineering/Design executed at Site : Rs/man-hour
Engineers : Rs. 175/- ( Rupees one Hundred Seventy Five )
Draftsman : Rs. 100/- ( Rupees one Hundred )
In addition to above, expenses towards travel to and from Project site,
boarding, lodging and incidental expenses shall be reimbursed at actuals.

CONSTRUCTION, MATERIALS AND SAFETY.
The Contractor shall deploy experienced personnel to the site in following
categories for effective Construction, Materials Control and Safety in
Construction:
1. Construction Managers for each unit / area duly assisted by qualified /
experienced construction and quality supervisors.
2. Construction Planning Engineer for each unit/area
3. Material controllers for each unit / area duly assisted by qualified /
experienced stores manager and stores officers
4.Safety manager for each unit / area
The Contractor shall submit overall construction organisation chart
along with resumes for Clients Construction Manager’s review and
approval and accordingly take steps to mobilise the personnel. The
organisation chart shall be reviewed from time to time and additional
mobilisation or demobilisation of persons as required shall be effected
by the Contractor.
If in the opinion of Client , any of the Contractor’s staff is found
unsuitable for the assigned job, the Contractor shall take immediate
steps to demobilise and / or replace with alternate person.

DEFECT LIABILITY.
In the event of any defective work, Clients Construction Manager(s) shall
advise the Contractor of the same. Contractor , in turn, shall take
necessary steps to carry out the rectification work by mobilising necessary
resources.
The cost of such rectification work, including cost of any free issue
materials supplied by Client for this purpose shall be recovered from
Contractor .
The recovery of cost of free issue material shall in the aggregate not
exceed 5% ( Five percent ) of the amount of Compensation received by the
Contractor for the relevant scope of work.
However if rectification is necessitated due to reasons not attributable to
Contractor , the same will be recorded and certified by Client in each case
and the costs of such rectification shall be reimbursed by client and the
Contractor shall be entitled to Compensation hereon in terms of Article 8
of this Agreement.

PERMISSIBLE WASTAGE AND LOSSES.
Wastage allowance and weighment/rolling tolerances shall apply to Free
Issue
Cement Non recoverable
Wastage allowance 2%
Reinforcement Non-recoverable
steel wastage allowance 0.5%
Accountable wastage Note :
allowance 2.5% 1) Bar-bending
(less than 2 mtrs length) schedule shall
be approved by
Engineer-in-Charge
2) Cut lengths shall
be segregated
size-wise and
length-wise while
returning to
Clients Stores

Rolling tolerance To be determined
periodically as per IS 1786.
Structural steel Non-recoverable
wastage allowance 0.5%
Accountable wastage
allowance 2.5%
(less than 2 mtrs length)
Rolling tolerance To be determined
periodically as
per IS 2062.
Steel Plates Non-recoverable
Wastage allowance 0.5%
Accountable wastage
allowance As per approved
cutting diagram.
Plate pieces
measuring 1m2 in
area and any side
not less than 200 mm
will be accepted as
good and usable

Electrical cables Non Recoverable 0.5% in peeled-off
wastage condition (Contractor
allowance. to return all cut lengths
to Client’s designated
place)
Sand Non-recoverable Will be decided
wastage allowance mutually.
Aggregate Non-recoverable Will be decided
Paint Non-recoverable Will be decided

In the event Contractor consumes any of above materials in excess of that
required to execute the works including permissible wastage allowances and
tolerances, Client shall recover from Contractor the Weighted Average
Cost of such excess consumption plus 20% charges thereon.
In the event of loss or damage of Free Issue Materials or any Contractor
supplied materials due to negligence on Contractor’s part, the cost of such
lost/damaged materials shall be recovered by client from Contractor on
the same basis as above but only to the extent they are not recovered
from the Insurance Cover to be provided by client.
Deductible/franchise amounts in respect of the insurance covers/policies
executed by client shall not be construed as amounts not recovered from
the Insurance Cover.
The admissible recoveries shall be completed vis-a-vis the reconciliation
statements to be submitted by the Contractor once in a quarter as per
cost verification.
The amount of such recovery shall be withheld from the payment due
under compensation which shall be reconciled every six months.

COMPENSATION.
Contractor will be paid in addition to the Cost as defined earlier
compensation at the rate of 20% (Twenty Percent).
This rate of compensation shall be applicable on the amount recoverable by
Contractor on items (a) to (i) Out of the above, 18% (Eighteen Percent)
shall be payable within 30 days of submission of monthly cost statement
and R.A.Bill ( statement of work done along with joint measurement sheets
) and reconciliation of Free issue materials and consumables.
Till the submission of R.A.Bill and reconciliation of Free issue material, any
payment released on weekly fund replenishment basis or otherwise shall be
treated as advance to Contractor in clients Books of Accounts.
The Contractor will submit reconciliation of free issue Materials and
Consumables every quarter.
If the Contractor fails to submit Reconciliation Statement and R.A.Bills
for two consecutive quarters, then the compensation payable as above shall
be withheld until such time aforesaid statements are submitted.

The balance 2% ( Two Percent ) will be paid to Contractor at the end of
each calendar year upon submission of a Bank Guarantee of an equivalent
amount valid for One year.
It is clarified that
no compensation is payable to the Contractor on account of the Plant &
Equipment provided by client and any free issue materials and consumables.
· no compensation will be payable on cost of rectification of defective work
attributable to Contractor .
· where it is stated that it shall form a part of Contractors cost and /or it
is stated the that the cost shall be reimbursed at actuals , it is agreed
that this cost shall be reimbursed by client and shall be subject to
Compensation as per the percentage specified in compensation of the
Agreement and paid to the Contractor.
· On the completion of the total work, the compensation shall be adjusted
on the basis of material utilised in the work and no compensation will be
paid on the value of material unutilised and lying in the stock on which
compensation has been paid.

EXCISE DUTY, ENTRY TAX AND OTHER STATUTORY
IMPLICATIONS.
a) Excise Duty, Entry Taxes, Sales Tax and Works Contract Tax, Purchase
Tax, Turnover Tax and any other Statutory levies wherever applicable,
presently and due to subsequent changes in laws, enactments, etc., on the
work performed by the Contractor shall be paid by client into Site
Account. In all such cases, no Compensation as per terms of payment will be
applicable.
Contractor shall not effect any such payments without prior approval from
client which approval shall not be unreasonably withheld.
b) However, compensation is payable on Contractor’s suppliers’ invoices
including Excise Duty, Sales Tax and any other levies which is a part of
Contractor’s cost, so long as the Contractor has exercised due diligence to
minimise their incidence as per law in accordance with the operating
procedure for joint procurement of materials and services.

COST VERIFICATION.
a) To facilitate audit and verification of Cost and material utilisation and
cost at any and all times during the currency of the Project execution,
Contractor shall maintain at Project Site records of all relevant details
of purchase of materials and services, details of materials issued and
utilisation of materials in the aforesaid work, payments to the Suppliers
and/or Sub-contractors and any credits received or recoveries to be
made or made from the Vendors and/or Subcontractors and submit
same to Reliance once in a month.
Contractor shall maintain all information at Project Site in
computerised form and provide full access to client at all times.

The Contractor shall, at clients request, provide all data base in floppy
discs for further use by client.
The Contractor shall give a quarterly declaration along with Cost
Statement that
i) all recoveries & credits received/receivable from their Vendors &
Subcontractors or other Third parties are fully reckoned in the Cost
Statement.
ii) they have not included Service or Management Charge in Cost
Statement on account of any bills from or payment to 3rd parties.
b) The Contractor shall submit monthly material movement statements for
all the materials and consumables along with the monthly Cost
Statement as per format.

c) Contractor shall submit reconciliation statements of Free Issue
Materials and selected Contractor supplied materials as identified below
once in a quarter along with supporting statements showing :
- Material in stock
- Material forming part of work in progress and
- Un-accounted wastage/loss.
-Accounted wastage
d) All scrap, surplus material and salvaged material paid for by client will
be handed over to client by Contractor .
e) If on verification of Costs, it is found that the Contractor has
overcharged client, then the same will be recovered from Contractor
including compensation thereon.
Over and above this, there will be a back charge by client of 50% of
the Amount involved if it is found to be an intentional overcharging by the
Contractor .

• Some organizations specialize in designing and constructing projects.
• Employee signs an agreement with such organizations for planning,
design and construction of the project. This is called a turnkey type of
contract.
•
• EPC 🡺 Engineering Procurement Construction.
• Turnkey 🡺 Ready to be commissioned at turn of a key.
• These projects include design as well as construction (i.e. Combination
of A/E contract & Prime Contract).
• The owner only provides preliminary conceptual drawings (Front End
Engineering) & specifications during bidding. Detailed Design & Working
Drawings (Detailed Engineering) is done by the contractor as per
specifications provided by owner.
•
• A Construction Management Service or a Project Management
Consultant may be employed by owner to check progress and quality of
works.

Such a contract may be made on the basis of the cost plus a fixed fee or
cost plus a percentage of the cost or whatever arrangement is satisfactory
to the parties.
Such combined contracts have been advantageously used in industrial
projects when there are specialists in the particular field of endeavor.
In some cases, they even assist in getting the plant into operation in order
to see that everything functions properly.
Under this type of contract, a manufacturer may also undertake to develop
the designs of any piece of equipment and then manufacture it.
The work can be greatly expedited under such contracts as extensive plans
and specifications need not be prepared by the employer. Further , there
is no division of responsibility.
In most cases specifications lay down the performance criteria only.
Methods decided by the contractor.

• An EPC project can be a complex one-of-a-kind product
development, made up of a large number of
interconnected subsystems and components, requiring
considerable human efforts and financial commitment.
The EPC activities are time phased according to specified
precedence and resource requirements and constraints.
• Engineering and Design (E) is the process by which the
needs, wishes, and desires of an owner or developer are
defined, quantified, qualified into clear requirements
which will be communicated to the builders or
contractors.
• The engineering and design phase has the highest level of
influence of the project, as many key decisions will be
made during the pre-project planning and engineering
phases. These decisions will lead to the commitment of a
large sum of the funds and other resources necessary for
the successful implementation and completion of the
project.

• The engineering and design phase is closely followed by the
procurement (P) phase. A contractor begins to procure project
equipment and construction materials upon receipts of
engineering drawings, specifications and other relevant
documents. The main procurement/logistics activities include
sourcing, purchasing, contracting, and on-site materials
management.
• A contractor begins to construct specified facilities in
construction (C) phase according to work packages prepared
during the engineering phase, and use equipment and materials
obtained in the procurement phase. The sequencing of
construction will be initially planned to reflect the most logical
and cost effective approach to meet start up and handover dates.
• Infrastructure projects are awarded to a single contractor who
undertakes to complete the entire project on a turnkey basis.
This kind of arrangement is commonly known as an engineering,
procurement and construction (EPC) contract.

FIDIC RISK DIAGRAM
RED BOOK- YELLOW BOOK – SILVER BOOK
Increased Contractor's
Risk and Increase
Project Price, Time
& Cost Certainty
Increased Employer's
Risk and Increase
Design Control
Design Certainty

Employer
Engineer
Note: Red and Yellow Books use the same DAB
arrangements
Contract
between
Employer &
Contractor
Contractor
Engineer administers
FIDIC Contract on
Behalf of Employer
Contract between Employer
& Engineer (possibly FIDIC
White Book)

Employer
Employer’s
Representative
Contract
between
Employer &
Contractor
Contractor
Silver Book

• Commercial Terms can be
– Lump sum
– Item rate
– A combination of both
– Cost plus
• Mode of payment can be
– Measurement Based
– Milestone Base
– Combination of Both

• In case of LSTK (Lump Sum Turn Key), deviation schedule is mandatory
since in absence of all drawings, it is impossible for bidder to estimate
the final cost correctly.
• Hence the bid documents include a BOQ, which contains rates of all
items and initial quantities (estimated by the bidder), used as a back up
to arrive at the Lump sum. The BOQ is revised after all drawings are
completed, and the lump sum fixed based on previous rate.
• Lump sum includes design fees
• In case of unit price EPC contract, the BOQ contains all items of work,
including design services, escalation, etc.
• The quantities and rates are estimated and submitted by the bidders.
The rates are fixed, but quantities may be changed depending on the
drawing (to any extent)
• The payment is based on actual measured quantity

• In big projects, some portions may have lump sum price, and some other
portions may be item rate (i.e. some related items may be bundled into a
lump sum, other items stay unbundled and are paid on unit price).
• Example: In a highway contract, excavation, earthwork, WMM, asphalt,
may be item rate (paid on per LM) whereas Flyovers, CD structures, Toll
Plazas may be lump sum.
• Invoicing schedule will contain both milestone and measurement.

• Bid Documents
– Notice Inviting Tender
– Instruction to the Bidders
– Qualification Criteria
– General Conditions of Contract
– Special conditions of contract
– Project Details
– Preliminary Drawings
– Specifications
– Details of Bid Bonds
– Invoice Schedule
– Bill of Quantities
– Milestone schedule
– Deviation schedule

• The work can be greatly expedited under such contracts as extensive
plans and specifications need not be prepared by the employer. Project
is fast track since design and construction can proceed in parallel.
• There is no division of responsibility, hence contract management is
simpler.
• Owner needs to employ less no. of professional staff.
• Enables the contractor, with specialized knowledge of his own
techniques, to design so as to produce maximum economy, and therefore
a leaner price, in a way that an architect or engineer without knowledge
of these techniques would not be able to produce.
• More scope and incentive for innovation and value engineering

In these contracts, the essential feature is that that the employer does
not employ professional staff to produce the design of the building or
project which he requires.
Either by negotiation, or by outline specifications to tendering contractors,
the employer makes known his requirements and the contractor produces
the design, in the form of drawings, specifications and sometimes schedule
of rates to cover possible variations. Bills are not usually used in such
contracts.
In some cases, the project is of a “mixed package-deal” character, with
external works and foundations under the design control of the employer in
the usual way, possibly with bills of quantities, and the superstructure
provided under an “industrialized buildings” design of the contractor.
The justification for this system advanced by its advocates is, that it
avoids duplication and the expense of design staff, and enables the
contractor, with specialized knowledge of his own techniques, to design so
as to produce maximum economy, and therefore a leaner price, in a way
that an architect or engineer without knowledge of these techniques would
not be able to produce.

Essential requirements of a package-deal contract are :
i) A warranty of suitability, absolute and independent of fault, expressed
to be available for a substantial period of time, but expecting normal
replacement and maintenance of parts of the building which might
reasonably be expected to have a limited life.
ii) The bonding of this obligation by a substantial surety.
iii) A right of the contractor to object, after giving due notice, to any
variation ordered by the employer which might prejudice his suitability /
obligation, but subject to safeguards to prevent frivolous objections.
iv) Where “mixed package-deal” contracts are involved, a warranty by the
contractor extending to the employer’s work as well as the contractor’s
work, subject to safeguards enabling the contractor to object at the time
to the design of suitability of the employer’s work.

v) In the case of industrial buildings, a totally different system of interim
payment is used, since valuation of work done and materials on site which is
the normal basis in traditional contracts cannot be applied as much of the
work done as of site and a suitable method of checking costing is not
available.
vi) The right of a contractor to be permitted to vary the work, if
necessary for purposes of suitability and safety, subject to financial and
other safeguards for the employer.
vii) A list of any parts of the work intended to be excepted from the
contractor’s suitability obligation, including any work or material of
nominated suppliers or sub-contractors which it is thought appropriate to
exclude from it.
viii) A definition of the precise status and rights of the employer’s
architect (if any), engaged in supervising the work and in regard to the
remedying of defects.
Lengthy negotiations may take place and contract work may be commenced
even before the formal contract has been signed. A contract may be
partly oral and partly in writing or it may be concluded by separate
documents or statements indicating offer and acceptance.

The course of negotiations may produce agreement on successive terms
until ultimately a point of time is reached at which the contract is finally
concluded.
Such an agreement may be concluded provided that the parties intension
from the beginning was to enter into a formal contract.
It is, therefore, perfectly possible , at some time prior to the final
conclusion of the contract, to agree on some of its terms either orally or in
written documents or letter, and these other agreements will form part of
and supplement the remainder of the contract documents.
The principle is “where a preliminary contract of any description whether
verbal or written, is intended to be superseded by one of a superior
character then the latter contract prevails, and the stipulation in earlier
one can no longer be relied upon”.
The party putting forward an earlier collateral agreement therefore
undertakes a heavy responsibility to prove because it is presumed that the
parties will take normally more logical course for suitably amending their
main agreement rather than rely on relatively less formal collateral
agreements.

Contractors frequently seek to qualify their tenders or negotiate some
mitigation or alteration of the contract conditions but the contract
documents are often nevertheless signed without alteration.
It goes without saying that positive agreements – not mere requests,
statements or contentions which are ignore – must be shown in order to
overcome the presumption that the later document supersedes earlier
discussions, negotiations or agreements.

• The contractor undertakes to design, finance , construct , operate and
maintain the works for a concession period.
•
• The contractor recuperates his cost from the collection of charges
levied on the beneficiaries who use the work and in some cases annuity
payment each year.
• The facility is returned back to the government and all rights of
concessionaire cease to exist.
• Depending on the type of ownership, this may be further subdivided into
different formats used in different countries at different times.
• The cost of construction of the project is ascertained in the manner of
a lumpsum or item rate contract.
• The bidder then works out the cost of financing the project and its
recovery from the collection of toll or similar method till the cost of
construction together with the cost of finance and expected profit is
fully recovered.

• The cost of maintenance of the project during the period in question
has also to be added to the basic cost.
• Each year’s income will recover the cumulative investment till the net
becomes zero or negative.
• The concession period worked out by each bidder will depend upon the
cost of construction worked out by each bidder and also the rate of
interest considered for financing the project and expected profit.
• The bidder who submits the cash flow projections seeking the minimum
period of concession is generally awarded the contract.
• In some cases the total income predicted over any reasonable
concession period does not adequately cover the total cost (EPC +
O&M)+ interest + profit.
• The authorities can provide some grants to bridge the gap known as
viability gap funding.
• The authority fixes the period of concession and seeks offers on the
basis of grant expected from the client.

The bidder expecting the least grant is generally awarded the contract.
The grant may be in the form of annuity payment or released in a phased
manner as mutually agreed by the parties.
In some cases, the bidders do not need grant, and the cumulative income
from the years of concession fixed by the authority, far exceeds the total
cost.
In these cases, the concessionaire may quote an upfront negative grant, or
a share in revenues to the authority.
The bidder offering maximum negative grant or share in revenues will be
awarded the contract.

• Documents
– In addition to the usual contract documents cash
flow projections giving details of how the
contactor intends to generate finance and use it
till the recovery of his capital, investment cost and
profit during the concession period , forms an
integral part of the contract

• Pros
– public authority is not required to finance the project immediately
– project is made to generate the funds and be self financing to the
extent possible
– greater autonomy for the contractor
– more scope for value engineering and innovation
– quality is assured since poor quality means increased maintenance
cost for the contractor

• Cons
– greater risk on contractor
– Contractor needs expertise in not only construction but other areas
like finance, O&M as well

• Ideal type of contract for highways and expressways, bridge ,
tunnels , electricity power generation and supply etc that save
the cost of operation or time of travel for which users will pay
reasonable charges.
• Not suitable for works that are not likely to generate capital for
self financing eg. rural water supply projects, village roads, city
roads, etc.

Some of the more common and accepted framework for private
participation
Build – Operate Transfer (BOT)
Build-Own – Operate – Transfer (BOOT)
Build-Own-Operate (BOO)
Build-Operate-Lease- Transfer (BOLT)
Build- Transfer – Operate (BTO)
Design-Build-Finance-Operate (DBFO)

BOT MODEL
BOT model is the most commonly used framework for private participation
in infrastructure projects
Build-Operate- Transfer projects involve a private company (also known as
concessionaire) usually a joint venture company or a consortium led by an
international construction company that finances, builds, and operates an
infrastructure system for a fixed time during which the government has a
regulatory and oversight role.
The responsibility of financing the project also lies with the consortium,
which may sometime get financial assistance from the government
depending on the terms of the contract. All debt financing will remain the
obligation of the consortium.
The BOT projects are designed to generate enough revenues to cover the
project company's investment and operating costs plus an acceptable
return on capital.

At the end of the project, which is usually in 15 to 30 years, the system is
transferred back to the government.
BOT projects were originally conceived to transfer commercial risks to the
private sector and free government funds for other uses.
The contractor recuperates his cost from the collection of charges levied
on the beneficiaries who use the work and in some cases annuity payment
each year.
The facility is returned back to the government and all rights of
concessionaire cease to exist

Mega projects such as expressways would require a totally different
approach.
The Government will have to carry out feasibility studies, acquire land,
develop the project to an advanced stage, give some cash-subsidy or low-
interest rate loan and only then can the project become viable for funding
through the private sector route.
Such projects would also require part funding from international lending
institutions, which may give long-term debt at stable and reasonable
interest rates.
These projects could become viable if they are developed as public toll
roads.

II. Build-Own – Operate – Transfer (BOOT): This scheme is similar
other variants to the above described BOT model in all aspects except
that the ownership of the facility until it is transferred to the Government
rests with the private entity.
III. Build-Own-Operate (BOO): Build-own-operate (BOO) are projects
in which, as in BOOT projects, a private entity is engaged for the
financing, construction, operation and maintenance of a given
infrastructure facility in exchange for the right to collect fees and other
charges from its users. However, under this arrangement the private
entity permanently owns the facility and its assets and is not under an
obligation to transfer them back to the host Government.
IV. Design-Build-Finance-Operate (DBFO): Like BOT, DBFO does not
entail ownership of the infrastructure facility by the private sector. In
the DBFO scheme the private sector is given the additional responsibility
of designing the facility apart from its financing, construction, operation
and maintenance.

V. Build-Operate-Lease- Transfer (BOLT): In these type of
projects, in addition to the obligations and other terms usual to BOT
projects, the private entity leases the physical assets on which the facility
is located to the Government for the duration of the agreement.
VI Build- Transfer – Operate (BTO): In these projects there is an
explicit provision stating that the infrastructure facility becomes the
property of the host Government immediately upon its completion, the
project company being awarded the right to operate the facility for a
certain period.
Apart from the above there are also arrangements whereby existing
infrastructure facilities are turned over to private entities for being
modernized or refurbished, operated and maintained, permanently or for a
given period time. Depending on whether the private sector will own such
infrastructure facility, those arrangements are called either "refurbish-
operate-transfer" (ROT) or "modernize-operate-transfer" (MOT), in the
first case; or refurbish-own-operate" (ROO) or "modernize-own-
operate"(MOO) in the latter case.

– The main agreement contains several schedule describing
• the project site
• project facilities
• site delivery schedule
• design requirements
• construction requirements
• operation and maintenance requirements
• cash flow projections
• annuity / grant payment schedule
• performance security
• state support agreement
• substitution agreement
• hand back requirements

ELEMENTS OF A BOT PROJECT
The various elements that are involved in the BOT projects are
identified as,
a. Project Identification
b. Ownership
c. Operation
d. Finance

Project Identification
First and foremost is to identify the projects that can be executed by
using BOT technique.
The work involved in preparing such a proposal is not only more substantial
than for a conventional tender, but depends from the outset on a clear
understanding of the economic viability and commercial prospects of the
project.
Such initiatives are therefore based not simply on the identification of a
requirement for a capital project, but on the evaluation of a revenue
stream which such a project would generate.

Operation
A significant difference between a bid for a BOT franchise and traditional
construction contracts is that the franchise offer must include operating
proposals.
Under the traditional tender, the contractors involvement is to all intents
and purposes to complete shortly after the end of the construction period,
but with a BOT franchise his involvement can be lengthened considerably.

Ownership
A second element for contractors is the potential need to own the assets
they are going to build.
It is difficult to develop robust BOT proposals, which result in private
ownership of assets, which are built without at the same time increasing
the liabilities of the promoting contractors or their parent companies.
Since the contractor will normally wish to minimize his equity commitments,
it is invariably necessary to establish a single purpose company which can
promise returns which are both sufficient and secure enough to reward the
risks being taken (including the speculative business development
commitment required) and also to attract involvement from second other
investors .

Finance
One of the most daunting aspects of developing a BOT project is that of
finance.
The financing plan will have as great an impact on the franchise terms,
which can be offered as the projects physical design or in construction
cost.
A low Construction cost will therefore be no good unless the financing
terms, which accompany it can be just as aggressive.
Aggressive financing terms will only be forthcoming if financiers are
satisfied with the predictability, stability and political acceptability of the
revenue stream.
Ultimately investors and lenders will normally require independent and
expert market analysis to give them comfort on this.

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