PM 0018 CONTRACTS MANAGEMENT IN PROJECTS

Q1. Fixed price contracts have a pre-set price that the vendor must adhere to in performing the work and in providing materials. There are different types of fixed price contracts. Explain them.
The 5 different types of fixed price contracts are: 1. Firm-fixed-price (FFP): This type of contract requires delivery of a product or service at a specified price, fixed at the time of entering into contract, and not subject to any adjustment. Here, the products are off-theshelf commercial products for which sound prices can be developed. The advantages are Possesses definite design and performance specifications. . Establishes fair and reasonable price Places full responsibility and risk on contractor. Encourages contractor competition, efficiency and economy.

2. Fixed price with economic price adjustment: This type of contract provides upward and downward revision to the contract price within the limits, which are contractually stipulated due to contingencies. The types are adjustment based on established prices , actual cost of labour or material The features of this contract is it eliminates contingency and is applicable if instability of market is expected over an extended period and possesses specific criteria for determining acceptability of wage and material rate fluctuation. 3. Fixed price incentive contracts (FPI): This contract provides incentive for efficiency and economy in performance using the following: High profit for outstanding performance. Modest profit for mediocre performance. Low profit or loss for below average performance. This contract is applied when a firm-fixed-price is not suitable. There is also a possibility of cost reduction. Incentives will likely result in savings and better performance. Achievable incentives must be identified and criteria established for evaluation. 4. Fixed price incentive (Firm Target): In this type of incentive, the parties agree on possible range of cost of performance and negotiate initially. This is applied whenever a firm target and formula for establishing final price is negotiated. This incentive provides a fair and reasonable

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incentive and confidence in achieving high performance. It also helps in identifying technical and cost uncertainties. Contractor has full liability for costs beyond the price ceiling. 5. Fixed price incentive (successive targets): In this type of incentive, the parties agree on possible range of cost of performance and negotiate at outset. The contract includes: an initial target cost, profit, ceiling price, a formula for fixing the firm target profit and a specified production point incident to the contract to apply formula. When the production point is reached, the firm target cost is negotiated, considering experience and cost and then the formula is applied to obtain the firm target profit.

Q.2 Direct contracting is another procurement method that is used under a limited number of exceptional circumstances. Explain the Conditions for adopting direct contracting , requirements and steps for direct contracting
Conditions for adopting direct contracting We should adopt direct contracting when: 1. Extension of existing contracts for works or supply of goods is justifiable on economic grounds. For example, there is an existing contract for the construction of 20 kilometers road by the PWD. While the construction is in progress, PWD decides to construct a bye-pass road of length1.5 kilometres of the same specifications. Rather than inviting fresh bids for 1.5 kilometres of this length of road could be awarded at the same rates as of 20 kilometres road to the existing contractor. 2. We standardise equipments. For example; let us consider that an organisation has 200 passenger cars of specific model of a particular manufacturer. The organisation wants an additional 10 passenger cars for new recruits. If the organisation chooses to go for procurement by open bids for these additional cars, they may end up procuring cars of a different model and different manufacturer. This will lead to maintaining different inventory. 3. Proprietary equipment (those equipments which are known to be manufactured by a single manufacturer only, for example, a scientific equipment of a particular specification which is manufactured by a particular manufacturer only) and spares of that equipment are already with the purchaser. There is a need for early delivery to avoid costly delays Exceptional cases like natural disaster We purchase published data from a Government agency. Contracts awarded to NGOs in the interest of project sustainability
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Requirements for direct contracting Let us now look at the requirements for direct contracting: The requirement of direct contracting should be such that it can be justified on economic grounds. No purpose would be served by inviting quotations as comparison is not possible. Avoid losses in operation of a production unitNon-availability of a competitive market. Existing Cooperative agreement between the parties involved. Steps for direct contracting Now that we are aware of the requirements for direct contracting, let us understand the steps involved in direct contracting: 1. Invite short period quotation/proposal except in the case of natural disaster. 2. Examine quotation/ proposal. 3. Issue work order/purchase order. 4. In case of items on Directorate General of Supplies and Disposals (DGS and D) rate contract and other rate contracts, place orders on the rate contract holder as per terms and conditions of the rate contract.

Q3. Write short notes on Cost plus Fee Contracts

. A cost-plus fee contract, also termed a Cost Reimbursement Contract, is a contract where you pay the contractor for all set expenses plus an additional payment as profit to him. Features: As already told features are to be considered to pick the right type of contract for your project. You need to reimburse the bidders periodically for inputs such as labour, materials, equipment, spare parts and so on with a fee to cover his overheads, management and profit. The fee may be either: A fixed fee that is independent of the total measured costs, or A percentage of the measured costs, or A variable (incentive) fee, which increases if savings are materialised in an agreed estimate of the total contract payments. Conditions for adopting: Now that we know the features of this contract, let us analyse where we can use this type of contracts: They are appropriate for open ended emergency situations such as structural collapse. For example, damage to buildings and bridges due to flood, earthquake, and other natural calamities. They are best suited for works with unquantifiable risks such as

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unknown ground conditions which cannot be foreseen before the project is started. They help to select a known contractor who is very reliable to complete highly remunerative projects They are used in an innovative technical processing and manufacturing plants, which are not completely designed.

Advantages and disadvantages Let us first look at the advantages of the cost plus contracts: Emergency works are mobilised and started almost immediately without finding bidders, calling for tenders, allotting tenders, which will consume lot of time. Payments are made for the actual expenditure incurred and hence can be used for the works that are poorly defined and involve high risks. Final cost may be less than a fixed price contract because contractors do not have to increase the price to cover their risk and give the actual price covered. Works are awarded on sole source basis with negotiations and hence there is no competition. Quality of work may be affected as bidder will have less incentive to produce quality work or timely completion. Bidder who gets the contract may use higher value material to increase his incentives and not make it cost effective. Additional supervisory staff is required to monitor and verify the actual costs.

Q4.The methods of selecting a consultant are designed to achieve the objectives of quality, efficiency, fairness and transparency in the selection process and to encourage competition. Discuss any 2 methods of selecting consultants.
The methods of selecting a consultant are given below: 1. Quality and Cost based Selection (QCBS) QCBS is a method based, both on the quality and the cost of the services Provided. Under QCBS the technical and financial proposals are submitted simultaneously in separate sealed envelopes. Evaluation of the proposals is done in two stages-quality and cost. Where appropriate You should adapt this method when: The type of services required is common and not too complex. You can define the scope of the work with precision and the TOR is clear and well specified.

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You as well as the consultant can estimate with reasonable precision the staff time, the assignment duration and all other inputs with respect to cost. The risks of estimated are quantifiable and manageable. To ensure receipt of responsive proposals, the RFP under QCBS should indicate the level of key staff inputs. Type of assignments You should use QCBS for the following assignments: When the assignment is simple and well defined with proper feasibility study. Preparation of bidding documents and detailed designs. Supervision of the construction of works and installation of equipment. Technical, financial or administrative services of noncomplex nature. Procurement and inspection services. 2. Quality Based Selection (QBS) QBS is based on the evaluation of the proposal quality without any initial consideration of cost. In QBS the quality and technical aspects are very important.QBS is generally more complex and less defined. Where appropriate You should adapt QBS method when: The downstream impact will be very large hence the quality of services is of prevailing importance for the success of the project. The scope, the duration, and the TOR require flexibility because of the complexity of the assignment. There may be significantly different ways to execute the assignments where cost proposals may not be easily or necessarily comparable. You have a need for an extensive and complex capacity building assignment. Type of assignments You should use QBS when the assignment is of: Complex sector for example chemical industry and complex nature for example manufacturing industry. Importance and far reaching strategy studies. Pre-feasibility and feasibility studies or design of large and complex projects. Consultant with different cost structures Strong uncertainty or risk for the project. Selecting consultant through Design Contests (DC).

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Q5. The contract control process commences right at the beginning stage of bid document preparation inviting contractors to bid, and proceeds through the contract negotiation, contractor selection, monitoring and controlling of the contractors work and terminating the contract. Explain the areas that need attention for effective control of the contracts in a project.
Core competence of the project manager: The project manager must have experience in planning and management of similar projects. While he should be ready to refer to the individual specialists, he should be as Knowledgeable as anyone about the economic and regulatory environment, engineering technology, project planning, scheduling and cost accounting, as well as construction.His focus throughout the project implementation should be on the key criteria of scope, time, and cost and client satisfaction. He achieves this by interpreting the requirements to the specialists and directing their efforts to achieve the best combination of these four key criteria. His core competences will be to resolve conflicts. His objectives on the project are identical to that of the client. Requirements of the working system: For a competent project manager to be effective, the following components of the working system are necessary: The project manager must have the necessary managerial authority to ensure response to his requirements from his team. All major technical, cost, schedule, or performance decisions should be made only with the project manager's participation. He must be identified as the authoritative and single formal contact The project manager should have a say in the assembly of the project team, and personnel assigned to the project must be competent. The project manager should have the authority to control the commitment of funds. Senior management must clearly demonstrate support for this concept. Use of Work Breakdown Structure (WBS): A complex project is made manageable by breaking it down to smaller group to define task that can be achieved independently of other tasks. A formalized WBS is essential for effective control of contracts. A contract to be awarded on the project is identified after deciding the work package units. Thumb rules for finalising and controlling work package units are: Progress should be monitored and variances can be investigated. Work packages should be identified 2 to 6 months prior to performing work. A project should not be broken down to packages so small For schedule control, an integrated network should be drawn

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This schedule should not be changed unless recognising the limitations with flexibility: While the D-B-B mode of contracting enables flexibility to make scope and design changes, it must be constantly ensured that the detailed designs with reference to a contract get substantially finalised prior to award of the contract. Q6. Explain the need of Procurement law and what are its objectives? Need for procurement law The Public Sector Units of the Centre and the States have issued their own procurement guidelines, manuals, codes and Standard Bidding Documents (SBDs). Thus, there is no uniformity across various Ministries, State Departments and PSUs. They could be easily modified as they were issued by the administrative Central Ministries and State Departments. Any violation of the guidelines, manuals and codes does not attract any penal action except departmental and in most cases are ratified/excused by the administrative Ministry/Department. The provisions are in most cases inadequate to meet the principles of public procurement and their enforcement is very weak. It is considered by legal experts that the guidelines, manuals and codes are non-statutory in nature and are generally not enforceable. It is stated that a policy is not a law. It is also considered that guidelines, manuals and codes do not fall into the category of legislation. They have only an advisory role and non-adherence to them is implicitly permissible. Lot of developmental activity is being undertaken in the country. Procurement of works, goods and services now-a-days accounts for more than 80% of the public expenditure and the amount involved is very huge with high stakes. Lack of discipline, loose enforcement of the procurement rules will result in a lot of leakage of government funds and will become a fertile ground for corruptive practices. Objectives of procurement law The procurement law regulates the procurement of goods, construction and services so as to promote the objectives of: Maximising economy and efficiency in procurement. Fostering and encouraging participation in procurement proceedings by suppliers and contractors, regardless of nationality, and thereby promoting international trade. Promoting competition among suppliers and contractors for the supply of the goods, construction or services to be procured. Providing for the fair and equitable treatment of all suppliers and

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contractors. Promoting integrity, fairness and public confidence in the procurement process. Achieving transparency in the procedures relating to procurement. The procurement law should cover all aspects of procurement to achieve all the above stated objectives.

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