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CHAPETR IV
PROCUREMENT AND CONTRACTUAL MANAGMENT
In this chapter the following section will be covered to some detail.
❖ Procurement and Contract ❖ Types of Construction
• The Project Owners' to acquire the five rights (Counterpart, Cost, Time, Quality and Quantity)
s/he is entitled to
• The Project Financiers' and Regulators' to value market principles and effective utilization of
finance such that lowest qualified bids takes the project , and
• The Project Providers' to get impartial and neutral Opportunity for business.
Obligations and Rights help to allocate appropriate risks among contractual parties and their
remedial rights. That is, their entitlements and provisions are clearly stated and agreed upon.
Project Owners shall consider its own particular institutional and technical SWOT (including
access to financing) before selecting which procurement and contract forms to adopt for its
projects. These include the design source, allocation of coordination responsibilities and the
pricing methods.
Each type of contracting affects, in its own way, the allocation of responsibility & the
demands on the Employer for coordination of the project. Through properly allocating these
responsibilities for the project to reflect the results and recommendations of the SWOT's,
Project Owners' can rationalize the contract price against its exposure to project risks. Project
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Lecture Notes
Owners' are at liberty to use either its own in-house capacity or to allocate them to one or
more other parties (Private and / or Public).
Procurement and Contract management has a strong linkage and relationship with
Construction Process and Stakeholders Management. The delivery system chosen, the
procurement method adopted and the contract types decided upon determine the
construction process involved and the relationships and roles of stakeholders along the
process.
4.1. Procurement & Contract Management Process
Procurement and Contract Management involves three major processes: Contract Planning,
Procurement Management and Contract Management (Figure 4.1).
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Lecture Notes
Procurement and Contract Management processes shall be based upon the approved contract
planning provisions; that is, the contract delivery system, the procurement method and
contract types decided upon. The approved contract provisions can only be changed
following the change process stated in the contract planning document and if and only if:
■ the Environment and Context considered are not correctly analyzed or changed,
■ their application can remarkably affect the objective of the project, and
■ procurement management process justifies change of the Contract Types.
Once the validity of the contract provisions are checked once again and taken for granted or
other provisions are devised; Procurement Management followed by Contract Management
can be initiated, planned, implemented, monitored and closed.
Among the three important contract Planning Provisions, Procurement and Contract
Delivery system is dealt in section 4.2. Procurement Methods will be dealt in the course work
of Contract Specification and Quantity Survey. And Contract Types are covered to some
extent in section 4.3.
> knowing and ensuring the implementation of procurement related National and International
laws, rules and regulations,
> adherence to the provisions made during the contract planning phase including their change
processes that is; with respect to: Delivery Systems, Procurement Methods and Contract
Types,
> establishment of a flexible procurement team, and
> adhering to the principles of Proof of competition, Impartiality, Neutrality, Accessibility and
Formality.
The following issues are necessary for a successful Contract Management phase:
> knowing and ensuring the implementation of contract related National and International laws,
rules and regulations,
> adherence to the provisions made during the contract planning phase including their change
processes, that is; wrt Delivery Systems, Procurement Methods and Contract Types,
> identifying, recognizing and involving all potential or key stakeholders to form a contract
team,
> understanding, mapping and monitoring all contract conditions agreed upon, and
> ability to administer changes, claims and disputes.
Procurement and Contract Delivery system is the way Project Owners together with Project
Regulators and Financiers determine the assignment of responsibilities to Project
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Lecture Notes
Stakeholders along the Construction Process. Procurement and Contract Delivery system is
often determined during the Basic Planning phase of Construction Project.
Generally, there are six types of Procurement and Contract Delivery systems. These are:
Such Procurement and Contract delivery systems are developed overtime and are shown in
Fig. 4.2 below. The development was based on problem solving for the previous type and the
Development of the Construction Industry technologically and management wise.
Figure 4.2: The different Procurement and Contract Delivery Systems and their development overtime
When the Project Owners engage themselves to undertake the project, it is called a force account
delivery system. Often such a system is promoted if the Project Owners believe that there is a
comparative advantage in Cost, Time and Quality issues. Besides, when there is a lack of capacity
from the private sector to undertake very large and technologically new projects, public companies
do undertake such projects using Force account delivery systems.
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Lecture Notes
These days this type of delivery system is often used when projects are small and places are remote
such that reaching them is difficult and in general they are not attractive enough to call the
attention of Bidders. Besides when projects are spatially scattered and maintenance are to be done
for schools, colleges, health centres etc., such cases can be applied.
This is the most practiced type of delivery system in the Construction Industry of Ethiopia since
the 1987. After project owners did prepare the Basic Planning that identifies construction
project programs, they call upon the participation of Design and / or Supervision Consultants
either by tender or by negotiated contracts. This consultant will carry out the design together
with the necessary tender documents which will be the bases for tendering to select
contractors. These process is called Design - Bid - Build and hence the name for such delivery
system.
In this type of delivery system, projects are divided into different packages interfacing to
each other. Though the design and supervision consultant will be the prime professional on
behalf of the owner and largely the administrator of the construction contract; the
employer takes the responsibility of coordinating the various project packages and their
respecting interfaces.
Besides, designers have not been required to guarantee results but rather methods. That
is, they are held accountable on the basis of their superior knowledge and sufficient
competency and ability to design with a reasonable degree of technical skills. As a
result, contracts and courts focused on professional duty of care, not results or project
goals. Contractors are also responsible to construct works with due care and diligence
and complete them in accordance with the contract, but they are not held responsible
for design deficiencies.
Since the 1980s, this traditional approach becomes less popular due to the following
factors:
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__________________________________________________________________________________________Lecture Notes
• Severe Adversarial relations between the design and contract administration consultant and the
contractor
• Fragmented contract for the project owner
• Project owner responsibility for risks associated with the design and contract administration
• Non - Impartiality of the Design and Contract Administration services
• The inability of design and contract administration consultants to cope up with new
construction technologies and constructability issues of their designs
• Severe adversarial relationships between Urban Planners and Architects on the one hand; and
Architects and Engineers on the other hand on building projects
• The indirect contractual obligation assigned for the Design and Contract Administration
consultants
• The incompatibility of consultancy fee to the desired activities they are required to provide, etc.
The following standard forms of DBB Conditions of Contract are known for use for such
delivery system:
■ FIDIC White Book for Consultancy Services (Design and Supervision) and Red Book for
Construction Works
DB delivery system is common worldwide specifically for Private projects. This led lead
contracting firms to form a team or consortium of designers and specialty contractors who work
together to meet the entire demand. Such services are initiated after the Project Owner built
the project concept during the basic planning phase and brought to the DB Contracting Firms.
The project concept should clearly define the performance criteria such as output, input, waste
and any other performances the employer may desire. This makes an additional responsibility
to the contractor which is "fitness to purpose" according to the Orange Book of Fidic. Fitness to
purpose is beyond the professional duty of care and places liability on the contractor for any
failure of the design to perform the standards required.
For this type of delivery systems, either joint ventures or firms with large design and
construction capabilities were able to participate.
The disadvantage of this delivery system is loss of control, cost of tender and cost of risks.
■ Since limited supervisory role by the employer representative is practiced; which is relatively
flexible and makes the employer distanced from the whole process, the employer has little
chance to understand what is developed and entertain variations in requirements implying loss
of control.
■ Contractors in order to provide reasonable offer, their tender cost is higher than in the case for
DBB delivery system. This is because they need to carryout acceptable design for project cost
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__________________________________________________________________________________________Lecture Notes
offers. Though it was not practiced often, employers who shared costs related to tendering are
informed to get seriously considered offers. World Bank suggested a Two staged procurement
method based first on technical merit and followed by financial competition and not for more
than six bidders.
■ The increase in risk transferred onto the contractor will be counterbalanced by the increase in
contract prices which can be taken to include these costs of risks.
Projects carried out using DB delivery system are often called Turnkey Projects because a single
contractor is responsible to hand over the completed facility and let the Project owner to turn
the key and gets in. Often Turnkey projects use Lump-Sum contract type which will be
discussed in section 4.3. The following standard forms of DB Conditions of contract are known
for use for such delivery systems:
Build - Operate - Transfer is a form of procurement and contract delivery system that promotes
Public Private Partnership (PPP) in which a private company is contracted to finance, design,
construct, operate for a certain period (usually 10 years) and transfer. BOT contractors look to
project financiers for the realization of projects through equity contributions or credits. Such
provisions are different from budgetized finances such that they involve no or limited re -
course which means the project owner is not responsible for any liability other than force
majeure and agreed upon claim adjustments. This obliges that projects should first be viable for
revenue generation in order to payback its depts.
The Typical BOT contract is the process whereby a government grants a concession to a project
development company to develop and operate what would normally be a public sector project,
for a given period of time known as the concession period. BOT project involves a potentially
complex contractual structure. The Operation period between completion and transfer gives
the contractor an opportunity to verify the quality of the output of the services and works, and
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Lecture Notes
train the employer personnel on how to manage the facility afterwards. In some BOT contracts,
defect liability period will be included in order to ensure the quality of the facility during
transfer. This is because, operators in an attempt to save costs, may decrease operating and
maintenance expenditures towards the end of the concession period.
Such delivery system requires appropriate packaging of projects and their definition clearly. It
is advisable to start with small projects and tries to develop experience and expertise to make
such delivery system successful. Most BOT projects failed because of their built up and
engagement in very large projects which is an extremely risky business for contractors.
Consortium of contractors is used to carry out such projects. The increasing popularity of the
BOT project is largely due to a shortage of public funding and the opinion that the facility will
be more efficiently managed by a private entity.
The following standard forms of BOT Conditions of Contract are known for use for such
delivery systems:
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Lecture Notes
Construction Management service in such delivery system include the management activities
related to a construction program carried out during the Basic Planning, Design & Construction
Implementation and its completion process that contributes for the successful completion of
projects. The main difference of this delivery system is that, while all the others involve only
during the implementation phase after major decisions was made during the Basic planning
phase of the construction process, it is involved in the whole construction processes.
The need for constructing quicker, cheaper and to a higher quality of physical infrastructure by
clients and at the same time with very minimized or no dispute questioned fragmentation of
packaging, costs related to wastes and overheads, single staged procurement systems, involving
in less competitive and comparative advantage for services and works and existing stakeholders
relationships. As a result,
which focuses most on management of relationships and value adding to ensure quicker,
cheaper and quality services and products with less disputes are recent developments. These
systems require to overcome cultural and behavioral barriers among interest groups and control
motivated performance based management. These types of delivery systems are often the bases
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Lecture Notes
behind DB, BOT, FM\CM consultancy delivery systems but their at most and recent
developments.
Contracts for the execution of civil engineering works are of following type:
(a) Lump sum contract
(b) Unit rate contract
(c) Lump sum and schedule contract
(d) Cost plus fixed fee contract
(e) Cost plus percentage of cost contract
In this type of contract, the contractor offers to do the whole work as shown in
drawings and described by specifications, for a total stipulated sum of money. Lump
sum contract are typically used for buildings. The qualities of the materials required
can be calculated with sufficient accuracy during the bidding process to allow
contractors to submit a single lump sum price for the work.
There are no individual rate quoted, thus it becomes difficult to make adjustments in
the contract value of any changes are to be made in the work later on.
A lump sum contract is more suitable for works for which contractors have prior
construction experience. The experience enables the contractors to submit a more
realistic bid. This type of contract is not suitable for difficult foundations, excavations
of uncertain charter, and projects susceptible to unpredictable hazard and variations.
Also called a schedule contract, in this contractor undertakes the execution of work
on an item rate basis. The amount to be received by the contactor depends upon the
quantities of various items of work actually executed. The payment to the contractor
is made on the basis of detailed measurements of different items of work actually
done by him.
Unit-price contracts are used for work where it is not possible to calculate the exact
quantity of materials that will be required. Unit-price contracts are commonly used
for heavy/highway work.
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Lecture Notes
The designer may calculate that 1,000 m3 of earth needs to be moved, but the owner
and contractors know that after the work has been completed, the contractor may not
move exactly 1,000 m3. The exact quantity will usually vary.
Contractors submit a price for each item on a unit-price contract. Unit prices are
multiplied by the engineer's estimated quantities and totaled. The low bidder is the
bidder with the low total of the all items. Items whose actual quantity varies from the
estimated quantity by more than 15 or 20%, either above or below the estimated
quantity, are sometimes subject to renegotiation of the unit price.
Bill of Quantity
The unit price contracts are usually presented in the Bill of Quantity. A Bill of
Quantity (BOQ) shows the items present for the construction work with the
associated specification and the estimated quantity with the Unit price for each of the
items.
Item Description Unit QTY Rate Amount
no
A-SUB STRUCTURE
1. EXCAVATION & EARTH WORK
1.01 Site clearing and removing of top 200mm thick
soil
m2
1.02
Bulk excavation in expansive soil to a depth not m3
exceeding 1500 mm.
1.03 Pit excavation for footings in expansive soil to a
depth not exceeding 1500 mm. m3
1.06
Fill under hardcore with brought material from
quarry waste and compact with layers not m3
exceeding 200 mm thick.
1.07
Cart away surplus materials from the site as per m3
the Engineer's instruction.
1.08 m2
250 mm thick basaltic stone hardcore well
rolled, consolidated and blinded with crushed
stone.
Total carried to
Summary ...................................................
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The item rate contract is most commonly used for all type of engineering works
financed by public or government bodies. This type of contract is suitable for works
which can be divided into various items and quantities, under each item, can be
estimated with accuracy.
This is similar to the lump sum contract but schedule of rates is also included in the
contract agreement. In this type of contact, the contractor offers to do a particular
work at a fixed sum within a specified time as per plans and detailed specifications.
The schedule of rates for various items is provided which regulates the extra amount
to be paid or deduced for any additions or deletions made during the progress of
work. Measurements of different items of original work are not required but extra
items are required to be measured for payment. The original work shall however be
checked and compared with the drawings and specifications.
The type of contract is more suitable for construction works for which contractors
have prior work experience and can consequently estimate the project cost more
realistically.
D. Cost plus
Cost plus (cost reimbursable) contracts are used in situations that make it difficult or
impossible for either the owner or the contractor to predict their costs during the
negotiation, bid, and award process.
Factors that may make the calculation of costs impossible include unpredictable and
extreme weather conditions such as would be encountered in the Antarctic, known
transportation requirements to remote locations, combat or war, or contracts where
the amount of effort that will be required depends on another contractor's work.
Cost plus contracts take many forms, the most common being cost plus fixed fee and
cost plus a percentage. Most owners prefer cost plus fixed fee because then the
amount of profit the contractor will earn cannot increase, thereby removing any
incentive for the contractor to be anything less than thrifty, or to produce poor-
quality work.
Cost plus percent contracts may be fair in situations that are very difficult, or when
the time to complete the work is not known with any certainty, but some incentives
to maintain productivity are needed.
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Lecture Notes
Cost plus fixed fee contract is desirable when the scope and nature of the work can at
least be broadly defined. The amount of fee is determined as a lump sum from a
consideration of the scope of work, its approximate cost, nature of work, estimated
time of construction, manpower and equipment requirements etc.
In order to negotiate such a type of contract, it is essential that the scope and some
general details of the work are defined.
The contractor in this type of contract is selected on the basis of merit rather than the
fee alone. In case of cost plus percentage contract, the contractor has a tendency to
increase his profit by increasing the cost of work.
But this drawback is overcome in cost plus fixed fee contract because here the
contractor's fee is fixed and does not fluctuate with actual cost of work. Once this fee
is fixed, the contractor cannot increase the cost of work.
In this type of contract, instead of awarding the work on lump sum or item rate basis,
it given on certain percentage over the actual cost construction. The actual cost
construction is reported by the contractor and is paid to him by the owner together
with a certain percentage as agreed earlier.
The contractor agrees to do the work in accordance with the drawings, specifications
and other conditions of contract. In this type of materials and labor are arranged
between the client and the contractor.
The tendency of the contractor to increase the cost of work to earn more profit by
way of percentage of enhanced actual cost is the major demerit of this contract type.
Special Contracts
There are certain special contracts which are used at different occasions. Some of
these contracts are listed below.
• Turn-key Contract
• Package Contract
• Negotiated Contract
• Running Contract
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Lecture Notes
Steps:
• Carry out preliminary technical and non-technical investigations
• Select the most feasible alternative
For all the three procedures, the owner has to prepare the Terms of Reference (TOR)
for the consultancy service that is required to be performed and the evaluation
criteria or guide line set.
Even though the relative importance of these categories may vary with the type of
project in this particular case more emphasis is given for the firm's general experience
in the field of assignment and the qualification and competence of the assigned
personnel.
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Lecture Notes
Planning is a function of devising the cause for future with a vision, formulated for
the future state of the organization or project. Planning leads to organizing and
staffing followed by directing, controlling and coordinating.
Steps:
• Finalize the selected alternative
• Carry out detailed technical investigations
• Prepare detailed designs
• Prepare working drawing and specifications
• Prepare final cost estimates(engineering estimate)
• Prepare construction schedule
• Get the project approved by regulatory bodies
At this stage contractors are invited to offer their best technical and financial offers as
per the conditions and specifications depicted in the contract documents. Usually a
2% of bid bond is required so as not let him disappear.
b. Short listing: in this case certain construction firms are invited to participate
in the tendering.
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Lecture Notes
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Lecture Notes
The first step in the evaluation of bids is the public opening and reading of offers in
the presence of all competitors. At this stage the names of tenderers offering bids are
read out as written and recorded, with a general check on establishing conformity
with instruction to tender, completeness of tenders, validity of tenders, and check on
the bid security. Next to this the client/consultant then starts the formal bid
evaluation process.
Over the years the bid evaluation process has been updated and refined to reflect the
changing trend of the construction industry. In general it can be considered to have
three components. Which are:
After the negotiations have been successful, the contract will be awarded to the
successful contractor.
Steps:
• Write a letter of acceptance
• Write the letter to proceed with the works
• Performance bond: 10% a guarantee that he will do the job as per agreed
There are different methods & types of construction contracts. The owner generally
makes the selection. The type selected depends on the kind of work being performed
and the conditions under which it is being performed.
Here is where the actual execution of the works takes place as per scheduled.
Construction schedule comprises of:
• Performance schedule
• Equipment schedule
• Material delivery schedule
• Manpower schedule
• Financial schedule
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Lecture Notes
Commissioning is a process where by the contractor makes sure that all installed
mechanical or electrical parts are operational. During commissioning, therefore all
such parts are run in the presence of the client or his representative as per the
conditions agreed.
Acceptance:
Acceptance has to stages:
a. Provisional acceptance:
In this acceptance, the client accepts the completed works on provisional basis
for a period one year. During this period all payments except the retention
money are paid. The other option is to release the retention money and
require for a bank or insurance security.
b. Final acceptance:
At this stage the owner completely accepts the works executed and the
retention money is released to the contractor. But if the client found out some
construction default during this period, he can oblige the contractor to work
out that default or the client himself worked it out from the retention money.
The contractor is assumed to have completed his contractual obligation from
this time on.
Formation of Contracts: -
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Lecture Notes
^ Capacity of parties.
^ Written/ Oral form.
The main contract documents are Invitation to tender, Instruction to tender, Form of
tender, The Agreement, Condition of contract( General and Particular), Specification
(General and Particular), Bill of Quantities, Drawings, Addenda and Appendix to
Tender.
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Lecture Notes
4.5.2.4. Agreement
The agreement is the document that represents and reflects the legal contract
between the owner and the contractor. Obviously there is also a contract between the
owner and the designer, and between the general contractor (GC) and the sub-
contractors, or between the contractors and the suppliers for those contracts.
• It is simply a letter that constitutes legal evidence that a contract exists, and
forms the basis for its enforcement.
4.5.2.5. Conditions of Contract
The condition of contract is a document that states the obligations and highs of the
parties and detail the conditions under which the contract is to be carried act.
It states to what extent should be the relation between the engineer, contractor and
client. It includes General and Supplementary or Special/Particular conditions of
contract.
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Lecture Notes
4.5.2.6. Specifications
They supplement the drawings and provide information that cannot be shown in
graphic form, or information that is too lengthy to be placed within the drawings.
They guide bidders in the preparation of cost proposals as well as field execution of
the work.
They also guide the contractor through the processes of ordering materials and
construction and installation of the facility.
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Lecture Notes
Describe the expected amount of work (measured) in works; it sets out the units of
measurement, the units of work, the unit price and the total cost of the works.
4.5.2.7. Drawings
Drawings are the means by which the designer conveys the physical, quantitative,
and visual description of the project to the contractor. The drawings are a two-
dimensional representation of the physical structure that meets the objectives of the
owner. They are also known as plans or blueprints.
4.5.2.8. Addenda
Any change to the bid documents after they are released for bidding but before bids
are actually received requires the issuance of an addendum.
• This formal document changes the original bid documents and becomes a part
of the bid package.
• At the time of bid opening, bidders must in their bid documents, acknowledge
all addenda.
• Technically addenda may be issued to change the bid opening date, to modify
the original design, to delete or add items, or to correct errors.
• Addenda may not be issued within about five days of bid opening unless the
bid date is also extended accordingly.
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Lecture Notes
Clauses
Maximum amount 10 10 percent of the contract price
Minimum amount of third party insurance 23 Birr 35,000.00 per occurrence with party
insurance number of occurrences, unlimited.
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Lecture Notes
Term of References can have different form. The following term of reference is
prepared for research project proposal preparation.
1. PURPOSE
A project proposal provides a description of the project and how it will be conducted
and thus serves as a planning tool of a project. The purpose of this document is to
provide a framework and to give guidance on the preparation and writing of the
project proposal thus ensuring that proper project planning is carried out and less
time is spent on writing a proposal for a project.
It entails the core structure and technical information that are necessary and crucial
when preparing a proposal. However, this document is not meant to be a blueprint
but it can rather be regarded as a semi-standardized guide. It should therefore be
adapted to suite a particular project needs when necessary.
2. SCOPE
The scope of the work with any additional information shall be provided.
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Lecture Notes
The core structure of the project proposal should at least reflect the following
elements:
* Background * Benefits, Beneficiaries and indicators
* Rationale for the study of the success of the study
* Aims and Objectives *Project Team and Project
* Project principles and approach Management Committee
* Key issues/themes to be considered in * Costs estimation the
study * Project activities and Milestones
* Methods of investigation
Questions around the nature of the problem for investigation should begin to be
asked here. The information provided should be brief but concise and ensuring that
crucial issues ranging from the historical information to key project principles and
agreements as laid down are covered.
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Lecture Notes
Thus, the drawing of sample is necessary to reach conclusion regarding the group of
people under study at lowest cost, using less manpower, and within short period of
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Lecture Notes
In this sub-section a decision will also need to be taken on the techniques that will be
used to administer the questionnaire. Will face-to-face individual, group discussion,
postal and telephonic interviews be used when administering the questionnaire?
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Lecture Notes
The role of the project management committee will amongst others be to:
* assist the project team in decisions regarding key issues to be investigated;
* facilitate communication between the client and the project team; and
* oversee the progress of the project.
Progress report should be submitted to the project management committee on regular
basis.
The project proposal elements that will be discussed in this section are applicable to
outside research consultants who will be requested to undertake a research study for
the procuring agency.
4.1 Ethics
This section entails the drafting of project protocols, and these will cover wide range
of ethical issues and concerns. Protocols would clarify issues such as copyright, as well
as anonymity of respondents.
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Lecture Notes
4.4 Appendices
In this section project proposal compilers can attach any other supporting
documentation or essential references.
5 Concluding note
In order for your project proposal to look good it should:
* be clearly and concisely presented;
* cover most of the essential elements discussed above; and
* Not be too technical and full of jargon.
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