Types of contracts
- 1. Chapter-5 Contract Management 5.1 Method of Work execution 5.2 Types of Contract 5.3 Tendering Process-Preparation before Tendering; Tender Notice; Tender Document; Conditions of Contract; Prequalification; Tender; Evaluation; Selection and Award
- 2. 5.1 Method of Work execution Broadly any construction work can be executed through two methods: 1.Through amanat 2.Through contract 1.Through amanat: When the works are executed by the owner itself, by hiring workers and supplying materials and equipment, it is known as execution of work through Amanat. The record of labor employed each day and the part on which materials and equipment if any employed is maintained in book keeping. The record will also indicate the progress of work also. It is useful when the work is small and necessary to do immediately, and the expertise are available within the organization. It saves the cost required for making profit by the contractor and VAT also. It also keeps the staff busy in the work.
- 3. 2.Through contract: Contract is an agreement between two or more parties to do or not to do any work. It is legal and time bound. Offer and acceptance must be there. Work Execution through Contract a)sealed competitive bidding i)International competitive bidding(ICB) ii)National/local competitive bidding(NCB/LCB) b)sealed Quotation c)Direct procurement d)users’ committee e)procurement under special circumstances
- 4. a)sealed competitive bidding i) International competitive bidding(ICB): An international competitive bidding shall be invited on any of the following conditions : • Where the goods or construction works as requisitioned by a public entity are not available under competitive price from more than one construction entrepreneur or supplier within country. • In making invitation to national tender for the procurement of goods, construction works or other services, no tender is submitted and same has to be procured aboard.
- 5. • Where foreign goods or construction works have to be procured from foreign assistance under an agreement enter into with a donor party. • Where the public entity certifies the goods or construction works, being of complex and special type, have to be procured by means of an international tender. • Notice on invitation to tender shall be published in English language an all tender or prequalification documents shall be published in English.
- 6. • In publishing a notice a period of at least 45 days shall be given • Notice shall be published in daily newspaper of national circulation and it may also be published in any international communication media. • Notice shall be placed in website of concerned entity or that of the Public procurement Monitoring Office (PPMO)
- 7. ii)National/local competitive bidding(NCB/LCB): Contractors are invited from within the nation or local. For any procurement having cost estimate more than 10 Lakh for goods and other services, and more than 20 Lakh for works for which ICB is not required, NCB shall be preferred. • In publishing a notice a period of at least 30 days shall be given • Notice shall be published in daily newspaper of national circulation and it may also be published in any international communication media. • Notice shall be placed in website of concerned entity or that of the Public procurement Monitoring Office (PPMO)
- 8. b)sealed Quotation: Procurement of works up to 20 lakh and Procurement of goods and other services up to 10 lakh can be carried out adopting sealed quotation. c)Direct procurement:Goods or Consultancy Services or Other services or construction work may be procured by means of direct procurement in the following circumstances: • The value of miscellaneous procurement does not exceed the prescribed threshold. Goods or consultancy service or other service : Up to 3 Lakh Construction work : Up to 5 Lakh
- 9. d)users’ committee: This method is used for executing small labor intensive works where the objective is to: • Provide employment and income directly to persons living in the project area. • Increase the utilization of local know how, appropriate technologies and materials • Hand over the completed works for operation and maintenance directly by persons living in the project area. • When objective of project is to create employment which enhances the economy, quality or substantiality of beneficiary community then this method is used. Works up to 60 lakh may be carried out by community participation.
- 10. e)procurement under special circumstances: • Emergency/ special circumstances. • Depends on contract amount
- 11. 5.2 Types of Contract Types of Construction Contracts Two broad categories: • Price based - lump sum or unite rate contracts - price or rates are submitted by the contractor in his tender • Cost based - cost-reimbursable and target cost contract - actual cost incurred by the contractors is reimbursed(To compensate with payment ; especially, to repay money spent on one’s behalf), together with a fee for overheads and profit.
- 12. Types of Contracts 1. Lump sum contract • A lump sum contract may be entered into for procuring a construction work such as ground water pipeline installation, the quantities of which are difficult to measure or a construction work such as superstructure of a bridge, the quantities of which can be measured. • Such contract shall specify that the construction entrepreneur shall be responsible for all types of risks and liabilities associated with the construction work
- 13. • Provided that if the financial liabilities of the construction entrepreneur increases as a consequence of an order issued by the public entity that involves any change in the construction work after the commencement of work upon making the contract, the public entity shall bear the liabilities. • Sometimes called Drawings and Specifications Contract
- 14. Advantages of Lump Sum Contract • The final price is known, by the owner, before the work commences. • The contractor has more incentive to reduce his cost to increase the profit. • The contractor hopes to complete the job as quickly as possible, to minimize overhead, to maximize profit and to move to the next Job.
- 15. Disadvantages of Lump Sum Contract • Changes in drawings and specifications can be very expensive and source of trouble. In other words the contract has very limited flexibility for design changes. • The contractor carries much of the risks. The tendered price may include high risk contingency. • Competent contractors may decide not to bid to avoid a high-risk lump sum contract.
- 16. 2. Unit Price (BOQ) contract • Unit price contract may be entered into where the quantity of a construction work is difficult to be ascertained or where construction work is to be procured on the basis of unit price set forth in the bill of quantity. • The bidder has to include in such unit price the materials, labor and the other matters required to complete the proposed construction work. • In making payment for work done under this contract, the public entity shall make such payment on the basis of the unit of work actually done and measured in the field.
- 17. Advantages of unit price contract • Fair basis for competition. • In comparing with lump-sum contract, Changes in contract documents can be made easily by the owner. Lower risk for contractor. Disadvantages of Unit Price Contract • The exact final price of the project is not known to the owner until the completion of the project. • Upto date account and record keeping is necessary • Possibility of submitting unbalanced bid
- 18. 3.Cost Reimbursable Contract • A cost reimbursable contract may be entered into for procuring a construction work involving high risk and unpredictable conditions, when it is likely that a construction entrepreneur would refuse to, or be unable to, perform the work under a unit price contract. • While making payment to construction entrepreneur for the construction work procured under this contract, such payment may include the costs actually incurred by that entrepreneur, overheads of that work plus profit set forth in the approved cost estimate.
- 19. Advantages of Cost Reimbursement Contract • Start construction without waiting for the whole set of drawings and specifications. • More flexibility for the owner to make changes as work progresses. • Draw the contractor expertise during design. Disadvantages of Cost Reimbursement Contract • It is difficult to predict the final cost and the distribution of it, which may cause financial problems to the owner. • Contractor pays less attention to cost control.
- 20. 4.Design and build contract(turn key contract): • A design and build contract may be entered for procuring the design and build of any construction from the same entrepreneur. • The work set forth in this contract shall commence only after the public entity has through its technician or group of technicians examined and approved the design of construction work. • In a design/build contract, the owner enters into a single agreement by which the design and build contractor agrees to perform both the design and construction of the project. • As well as being responsible for faulty workmanship in construction, the contractor is also liable for any deficiencies in design under this arrangement. • A Design build contract is usually the preferred contracting method under tight schedule circumstances, and it is intended to save time.
- 21. – Advantages • In conventional type of contract, incase of damage/failure of structure, it is often difficult to determine whether such damage/failure is due to design fault or construction (quality) fault; which arises disputes between owner and contractor Such situation is reduced in design/build contract as both responsibility is of contract. • Because the owner warrants the sufficiency of the plans in a conventional construction contract, he is liable for any increased costs because of defective or inadequate plans. But in a design/build contract, the contractor is then unable to look to the owner for additional compensation.
- 22. • In design/build contract the project can often be completed within a shorter period of time than with the traditional three-party arrangement. • Since a design/build project can be designed and constructed in phases, the contractor is able to order necessary materials for subsequent phases ahead of time perhaps at a reduced cost. • Contractor’s control over design details allows the contractor to use familiar construction methods and processes in building the structure, with the result of much more efficient construction. These savings ultimately benefit the owner.
- 23. – Disadvantages • For owner it is often difficult to effectively compare the various preliminary design proposals submitted by design/build contractors. The designs will probably not be uniform because there are usually many different methods of satisfying the owner’s general needs and performance specifications. • The owner’s input on the detailed design of the structure will be limited because the contractor, rather than the owner, is responsible for furnishing the design work. As a result, the finished structure may not be exactly as the owner envisioned. This can lead to later disputes. • The owner may not obtain the lowest cost for the project since the design/build contract is usually entered into by negotiation rather than competitive bidding. • There is only limited scope for the client to make changes to his requirements once the client's requirements (i.e. Inflexibility) and contractor's proposals have been agreed otherwise the cost consequences may be prohibitive. • The client has less control and influence over design matters due to which quality may be impaired.
- 24. BOOT, BOT Contract • BOOT (build, own, operate, transfer) is a public- private partnership (PPP) project model in which a private organization conducts a large development project under contract to a public-sector partner, such as a government agency. A BOOT project is often seen as a way to develop a large public infrastructure project with private funding. BOOT model • The public-sector partner contracts with a private developer - typically a large corporation or consortium of businesses with specific expertise - to design and implement a large project.
- 25. • The public-sector partner may provide limited funding or some other benefit (such as tax exempt status) but the private-sector partner assumes the risks associated with planning, constructing, operating and maintaining the project for a specified time period. • The private partner builds a facility to the specification agreed by the public agency. • Government retains strategic control over the project. • During the specified period called concession period, the developer charges customers who use the infrastructure that's been built to realize a profit.
- 26. • At the end of concession period, the private- sector partner transfers ownership to the funding organization, either freely or for an amount stipulated in the original contract (generally to fulfill viability gap). Such contracts are typically long-term; usually 20-30 years. • BOOT is sometimes known as BOT (build, own, transfer). • Variations on the BOOT model include BOO (build, own, operate), BLT (build, lease, transfer) and BLOT (build, lease, operate, transfer), BTO (Build, transfer, operate), LOT (Lease, operate, transfer), DOT (develop, operate, transfer) etc.
- 27. Advantages • The majority of construction and long-term operating risk can be transferred onto the BOOT provider. • The scheme is not constrained through a lack of funding, a lack or expertise or project management capability. Also, there are strong financial incentives for the BOOT operator to complete the construction and get the scheme operational as soon as possible. • Project completes on time. • BOOT operators are experienced with management and operation of infrastructure assets and bring these skills to the scheme.
- 28. • Accountability for the asset design, construction and service delivery is very high given that if the performance targets are not met, the operator stands to lose a portion of capital expenditure, capital profit, operating expenditure and operating profit. • Corporate structuring issues and costs are minimal within a BOOT model, as project funding, ownership and operation are the responsibility of the BOOT operator. These costs will however be built into the BOOT project pricing.
- 29. Disadvantages • BOOT is likely to result in a higher cost to end users. Because the private investor is interested to profit. • Not useful for projects which has low economic return. • Community users may have a negative reaction to private sector involvement in the scheme, particularly if the private sector is an overseas owned company. • Management and monitoring of the service level can be time consuming and resource hungry. Procedures need to be in place to allow users to assess service performance and penalize the BOOT operator where necessary.
- 30. 5.3 Tendering Process-Preparation before Tendering; Tender Notice; Tender Document; Conditions of Contract; Prequalification; Tender; Evaluation; Selection and Award
- 31. What is Tender? -Tender is a written offer/proposal by the tenderer (the person who offer the tender) to perform the work or to supply some specified goods at a certain rate/amount within a fixed time frame under certain agreement. -It is the first step in the formulation of contract
- 32. What is tender notice? -Tender notice is the information inviting bids from competent contractors. -It should be widely published in important daily newspaper
- 34. Preparation before Tendering -Desk study -Survey -Design, Drawing , and Specification -Rate analysis and cost estimation -Approval of budget -Tender document/Bid document preparation -Tender notice publication
- 35. Tender notice • Tender notice is the information inviting bids from competent contractors. Essentials of Tender notice Implementing Agency Project Name Notice No First date of publication Contract No Description of work and location of work Bid security/Earnest money deposit Fee for Bid document Office for buying bidding document and submit tender Last date of submission of bid
- 36. Continue………….. Bid opening date Cost estimate of the project Maximum no of partner in joint venture(JV) Pre bid meeting Date place and time for opening of the tender
- 37. Tender Document Tender document/Bidding document is a document prepared by the owner for submission by bidders by filling up the price or rate. tender document includes instruction to bidders, specifications, drawing, design, terms of reference, schedule of works, evaluation criteria, bill of quantities, condition of contract and similar other document.
- 38. Matters to be stated in bidding documents: Instruction to bidders(ITB) Tender notice Bid data sheet Plan, Drawing of the proposed work Bill of quantities(BOQ) Quantity of goods Work to be done by the bidder Time of supplying goods, completing construction work Provision regarding warrantee and repair and maintenance
- 39. Type and quantity of necessary Training and supervision to be provided by the bidder Provision that the goods or spare parts to be supplied must be new and original Source of financing required for proposed procurement
- 40. Conditions of Contract -Terms and conditions agreed by client and contractor -2 types • General- Internationally accepted • Special –specific to country/project
- 41. Prequalification • Prequalification is carried out in advance of bidding to establish a list of capable firms to be invited to tender while ensuring that a proper level of competition is safeguard. • In order to procure such construction work as determined to be large and complex by the PPMO from time to time or procure goods of high value such as industrial plants or identify qualified bidders, a public entity shall, prior to making invitation to tender, prepare prequalification documents and public invite to proposals for determination of prequalification. • According to PPMO Prequalification is done for the construction works greater than 2 crore.
- 42. Evaluation of bid Substantially Responsive Bid: If all the relevant Documents are present in the proposal/bid, that is called Substantially responsive bid -Clause 25 0f PPA 2063 A. Cost based selection: Lowest evaluated substantially responsive bid is awarded the contract in CBS B. Quality and cost based selection -Quality upto 90% and cost upto 10%
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