Student Name

: Girish Chawla

Roll No.

: 520928238

Course & Semester

: MBA Semester-IV

Subject Name & Code

: Contracts Management in Projects, PM0009

Assignment No

: SET-I

LC Name & Code

: NIPSTEC Ltd, 01640

Date of Submission

: ________________________

Session

: August 2010 (Fall 2010)

Girish Chawla

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Question 1: Describe the four basic elements of a contract Answer: Contract can be defined in simple words, as an agreement between two or more parties. Legally speaking, a contract is a voluntary agreement between two or more parties that creates a duty on each of them to do or refrain from doing something, which is the subject matter of the contract and a right to performance of the other's duty, in case of breach of that duty. Contracts can be written or oral. While it is mandatory for some types of contracts, like, sale of real property, to be written, others can be oral or written. But, written agreement with the signatures of the concerned parties are always preferred, especially, those crucial contracts that involve hefty amounts. This enhances the legal enforceability of the contract, as there is evidence for the terms and conditions that are agreed upon. From the above mentioned legal definition of a contract, you may be able to identify and describe the basic elements of a contract. For more knowledge about various other legal terms, you may try law terms - glossary of legal terms and meanings. Four Basic Elements of a Contract A contract must have certain basic elements, in order to be legally binding on parties and enforceable before a court of law. The following are some of the basic elements of a deal.

One of the basic elements of a valid contract is the voluntary mutual agreement to form the contract. The decision made by each party must be voluntary and not forceful or coercive. In other words, there must be a meeting of minds between the parties to a contract. Another basic element of a contract is the definite offer from one party and the acceptance of the offer by the other party. Without an offer and acceptance, a mutual consent is not possible. Consideration is one of the important factors of a contract. It can be defined as the profit of gain of one party or the loss or the disadvantage or cost incurred by the other, through the implementation of the contract. A consideration can be monetary (in terms of money) or some other benefit. Legality of the subject matter of the contract is also one of the element for a valid contract. In other words, a contract cannot be made on an activity that is illegal in that region.

According to contract law, competency of the parties to a contract is very important. In general, people above the age of eighteen are considered to be competent for entering a contract. The above said is a brief overview of the basic elements of a contract. There can be mild variations as per the laws of different regions or with different fields of law. Apart from the above said, it is always better to have a written agreement that states all the terms and conditions of the contract. It must also state the remedy for the injured party, in case of breach of contract. In case of breach of contract, the aggrieved party can approach a court of law seeking remedy. The aggrieved party can prove that the contract is valid, as all the basic elements are there in it. He/she must also prove the breach of contract elements. If there is a written contract, then, Girish Chawla 520928238 PM0009

it will be easier for the aggrieved party as well as the court to enforce the contract. However, there are various other factors that are applicable, while, deciding the enforceability of a contract. Presence of all basic elements of a contract is only one among them. Others include laws that are applicable to that contract, type of contract, etc.

Question 2: Describe the characteristics and legal issues of Lump-Sum Turn Key type (LSTK) contract Answer: Lump-sum turnkey (LSTK) EPC contracting is now popular world-wide as a project delivery system for large process and power facilities. Examples are steel mills, LNG facilities, petroleum and petrochemical facilities, power plants. It is also being adopted for large infrastructure developments such as airports, water treatment facilities and telecommunication systems. While the term LSTK implies a fixed price for the whole contract, one must understand that several variations of the EPC mode of contracting are in vogue. The contract price issue can however vary from fixed price to a hybrid price. Characteristics and legal issues of LSTK EPC contracts: We now review a few of the noteworthy characteristics and legal issues concerned with LSTK EPC contracts, the understanding of which is necessary in order to reap the benefits that this project delivery system can provide: Design In a LSTK EPC contract, the responsibility for basic and detailed design rests with the contractor. Owner gives the design criteria and contractor gives his price based on his basic and detailed design, which in turn are based on owners design criteria. In practice, the design criteria can vary from generic through broad to very detailed. If owner gives very clear design criteria, he becomes responsible for design deficiencies. If owners design criteria are ambiguous, then the contractor should clarify this ambiguity prior to submitting his price. If the design criteria are critical to the project, he should ensure that it is made part of the contract. Otherwise, different interpretations of the design criteria by owner and contractor can lead to disputes affecting both the schedule and cost of the project. This can only be prevented by pre-contract negotiations, scope review and clarification sessions, agreement on preliminary P & I d s (Process and Instrumentation diagrams) and design drafts. Such pre-contract discussions should not be restricted to project personnel only, but should include end users of the project like operation personnel. Changes or Variations Even when design criteria are clear, EPC contracts allow for variations (see note on FIDIC in this section). The impact that a change will have on the project will depend on the timing of the change e.g. a change in the P & I d at the design stage will have less adverse impact than at the construction stage. This means that changes should be addressed early. Schedule delay

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Owner regards schedule as contractors responsibility in a LSTK EPC contract. However, for the owner to claim compensation for schedule delay from the contractor, he must prove that the contractor delayed a work on the critical path of the schedule. Similarly, the contractor will have to keep producing a time-impact analysis of each delay throughout the course of the project in order to claim the right to be given an extension in the project completion schedule as well as any financial compensation he may desire from the owner. Force majeure These are occurrences beyond the control of either owner or contractor e.g. war, terrorism, labor strikes, radiation, changes in the law, natural catastrophes. However, precise terms regarding force majeure conditions also need to be included in the contract. These terms should also address whether only time extension will be given for occurrence of such events or whether financial compensation will also be allowed. Owner controlled activities Notwithstanding the single point responsibility to be owned by the LSTK EPC contractor, the owner is also responsible for his actions, some of which are: adequate site access assurance that basic design issues are addressed. This is usually handled by the protocol of owner formally affixing his signature on the basic design document prepared by the contractor conveying owners formal approval of the same facilities for commissioning like raw material feed, water, power and other utilities as applicable which are usually in owners scope.

Payment and performance assurances EPC contractor is invariably bound for performance by a Bank guarantee for satisfactory performance of the project for a period (usually one to one and a half years) termed as the Defect Liability Period. For the owner, this is a mechanism to cover defective work or even late project delivery. In some contracts, contractor can get his payment assurance for work done by owner agreeing to open a letter of credit in favor of the contractor. However, this is usually for delivery of costly equipment or imported equipment. Insurance Insurance companies offer several options to both owner and contractor. Examples are LD insurance, cost over-run insurance, insurance for even some force majeure items etc. Insurance is an important risk mitigation mechanism adopted by owners and contractors in EPC contracts. However, the fine print of insurance policies must be scrutinized to understand complex policy terms, deductibles, exclusions which limit the coverage etc.

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Question 3: Write short note on the following bidding methods: a. International/Global Competitive Bidding (ICB). b. Limited International Competitive Bidding (LIB). c. National Competitive Bidding (NCB).

Answer: a. International/Global Competitive Bidding (ICB): In ICB, we (as Employer or Purchaser) invite open bids for works and goods (through wide advertisement in electronic as well as print media) from Contractors and Suppliers across the globe, who are eligible to perform the contract. That is why it is also called Global Competitive Bidding. Since it is open for a large contracting and supplier community who have the advantage of scale of operations and high level of expertise, it is expected to result in most economic and efficient procurement. The contractors and suppliers can submit bids in internationally convertible currency and they get paid in that currency. To safeguard the interests of the domestic contractors and suppliers, we usually allow a certain amount of domestic preference. Where best suited We adopt International Competitive Bidding (ICB) when:

The value of the package of works and goods are high in value or the works/goods are complex in nature We expect foreign contractors/suppliers to participate in the bid, thus ensuring competition resulting in economy and efficiency in procurement High degree of mechanization is involved for execution of the work The works are concentrated at a place We have adequate foreign exchange or have financial assistance from an international financial institution to meet the foreign currency payments involved in the contract

Requirements for ICB

i.

Advertisement: we (as Employer or Purchaser)have to publish the Invitation for Pre-qualification of works/Invitation for Bids (IFB) in widely seen websites, and in the Development Gateways dgMarketto attract the attention of the foreign contractors and suppliers. The Invitation for pre-qualification/IFB shall contain details regarding the scope of the ICB, the address and telephone numbers of the officer from whom details could be got (or the/pre-qualification/bidding documents are available), the website where the detailed Invitation for pre-qualification/IFB and pre-qualification/bidding documents are available, the last date and time, the place for submission of the pre-qualification applications/bids. Pre-qualification document (for works): The pre-qualification document shall include sufficient details regarding eligibility, method of
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ii.

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submission of pre-qualification documents, details of documents/ information to be furnished, qualification criteria to be satisfied, evaluation methodology, preparation of the list of pre-qualified applicants and notification of the list of approved pre-qualified bidders.
iii.

Period for submission of pre-qualification documents: The prequalification submission period, that is the period from the date of publication of the Invitation for pre-qualification in the press or the date of making available the document for sale (whichever is later) shall be sufficiently large, depending on the size and complexity of the proposed contract to enable the prospective applicants to obtain the prequalification document, study the field conditions, collect field data, compile the qualification and other required information and then submit pre-qualification applications. A period between 45 to 60 days depending on the size and complexity of contracts is considered reasonable. Bidding document (for works and goods): The bidding document shall include sufficient details regarding eligibility, method of submission of bids, bid security (amount and currency) to be furnished, period for submission of bids, qualification criteria to be satisfied, evaluation methodology, securities to be submitted, award of contract etc. It shall also include internationally accepted Conditions of Contract. Bidding period (for works): The bidding period, that is the period from the date of issue of the bid document to pre-qualified bidders to the last date stipulated for the submission of the pre-qualification document, shall be sufficiently large, depending on the size and complexity of the proposed contract to enable the prospective bidders to obtain the bidding document, study the field conditions, collect field data, work out reasonable rates and then submit meaningful bids. A period between 45 to 60 days or even more in case of large and complex contracts is considered reasonable. Bidding period (for goods): The bidding period, that is the period from the date of publication of the IFB in the press or from the date of making available the document for sale (whichever is later) to the last date for submission of bids, shall be sufficiently large, depending on the size and complexity of the proposed contract to enable the prospective bidder to obtain the bidding document, study the same, work out the reasonable rates and then submit meaningful bids. A period between 45 to 60 days is considered reasonable.

iv.

v.

vi.

Steps for ICB

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I.

Works with pre-qualification:

Notification and advertising for submission of pre-qualification applications Issue/sale of pre-qualification documents to prospective bidders Submission of pre-qualification applications by the prospective bidders Opening of pre-qualification applications Evaluation of pre-qualification applications Preparation of the list of pre-qualified bidders Issue the bidding document to the pre-qualified bidders Submission of bids by pre-qualified bidders Evaluation of the bids Selection of lowest evaluated responsive bid Contract award and signing of the contract with the Contractor Contract performance by the Contractor

II.

Works and goods without pre-qualification (post-qualification):

Notification and advertising Issue/sale of the bidding document to the prospective bidders Submission of bids by prospective bidders Evaluation of the bids Selection of lowest evaluated responsive bid based on postqualification Contract award and signing of Agreement with the Contractor/ Supplier Contract performance by Contractor/Supplier;

b. Limited International Competitive Bidding (LIB):

In this method of procurement, we (as Purchasers) invite bids for goods from selected Suppliers, who are the only known manufacturers, who can manufacture and supply the required goods. Here we do not issue advertisement through press or any other means. Since the bidding is open for a few selected manufacturers, no domestic preference is allowed. As in the case of the ICB, the bidders can submit bid in any internationally convertible currency and they are paid in the same currency. Where best suited This method of procurement is for goods. It is usually adopted:

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Where the cost of goods to be procured are small (usually less than the equivalent of 200,000 US dollars) It is reliably known that there are limited number of suppliers of particular goods There are other reasons justifying departure from full ICB procedures

Requirements of LIB i. Advertisement: Since we invite the bids from limited number of potential suppliers, advertisement as in the case of ICB is not required. We have to ensure that the list of potential suppliers is broad enough to ensure receipt of competitive bids ii. iii. Bidding document: We have to prepare the Bidding document with all the details as in the case of ICB Bidding period: The requirement of bidding period is the same as that of ICB;

Steps for LIB

Issue/sale of the bidding document to the potential suppliers Submission of bids by the potential suppliers Evaluation of the bids Selection of lowest evaluated responsive bid based on post-qualification Contract award and signing of contract agreement with the Supplier Contract performance by the Supplier

c. National Competitive Bidding (NCB): As the name itself suggests we as Employer or Purchaser, invite bids for works and goods (through advertisement in electronic and print media within the country). However foreign firms, if they want can participate in the bidding process provided they accept the bidding conditions. The bidders have to submit their bids in national currency only and payment would also be made in national currency. Where best suited We select NCB method of procurement for works and goods under the following circumstances: Contract values are lower than the threshold fixed for ICB Where the works are spread out geographically (different villages or towns in a district) or spread over time with staggered period of starting, may be because of lack of availability of land or lack of financial resources Where the works are labour intensive (that is deployment of huge labour force is necessary, which may not interest a foreign contractor)

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Where the goods are available nationally at prices below the international market because of high transportation costs Where foreign firms are not likely to be interested to take up the works or make supply

Requirements of NCB i. Advertisement: The Invitation for pre-qualification/IFB shall contain details regarding the scope of the NCB, the address and telephone numbers of the officer from whom details could be got (or the/pre-qualification/ bidding documents are available), the website where the detailed Invitation for prequalification/IFB and pre-qualification/bidding documents are available, the last date and time, the place for submission of the pre-qualification applications/bids. The Invitation for pre-qualification/IFB shall be published in national news paper(s) having wide circulation in metros and principal cities of India and the region where the procurement is being made. We should also publish the Invitation for pre-qualification/IFB in appropriate Trade Journals depending on the value of proposed procurement. These will ensure adequate publicity and we could expect better competition. Pre-qualification document (for works): The pre-qualification document should include sufficient details regarding eligibility, method of submission of prequalification documents, details of documents/ information to be furnished, qualification criteria to be satisfied, evaluation methodology, preparation of the list of pre-qualified applicants and notification of the list of approved prequalified bidders. Period for submission of pre-qualification documents: The pre-qualification submission period, that is the period from the date of publication of the Invitation for pre-qualification in the press or the date making available the document for sale (whichever is later) shall be sufficiently large, depending on the size and complexity of the proposed contract to enable the prospective applicants to obtain the pre-qualification document, study the field conditions, collect field data, compile the qualification and other required information and then submit pre-qualification applications. A period between 30 to 45 days depending on the size and complexity of contracts is considered as reasonable Bidding document (for works and goods): The bidding document shall include sufficient details regarding eligibility, method of submission of bids, bid security (amount and currency) to be furnished, period for submission of bids, qualification criteria to be satisfied, evaluation methodology, securities to be submitted, award of contract etc. It should also include simplified Conditions of Contract, such as those of Institute of Civil Engineers, UK; Bidding period (for works): The bidding period, that is the period from the date of issue of the bid document to pre-qualified bidders shall be adequate, depending on the size and complexity of the proposed contract to enable the prospective bidders to obtain the bidding document, study the field conditions, collect field data and then submit meaningful bids. A period between 30 to 45 days or even more in case of large and complex contracts is considered reasonable. Bidding period (for goods): The bidding period, that is the period from the date of publication of the IFB in the press nor from the date of making available the 520928238 PM0009

ii.

iii.

iv.

v.

vi.

Girish Chawla

document for sale (whichever is later) should be adequate, depending on the size and complexity of the proposed contract to enable the prospective bidder to obtain the bidding document, study the same and then submit meaningful bids. Here also a period between 30 to 45 days is considered reasonable. Steps for NCB
a. Works with pre-qualification:

Notification and advertising for submission of pre-qualification applications by the prospective bidders Issue/sale of pre-qualification documents Submission of pre-qualification applications by the prospective bidders Opening of pre-qualification applications Evaluation of pre-qualification applications Preparation of the list of pre-qualified bidders Issue of the bidding document to the pre-qualified bidders Submission of bids by pre-qualified bidders Evaluation of the bids Selection of lowest evaluated responsive bid Contract award and signing of agreement with the selected contractor Contract performance by the Contractor;

b. Works and goods without pre-qualification (post-qualification):

Notification and advertising Issue/sale of the bidding document to the prospective bidders Submission of bids by prospective bidders Evaluation of the bids Selection of lowest evaluated responsive bid based on post-qualification Contract award and signing of the agreement with the selected Contractor/ Supplier Contract performance by the Contractor/Supplier

Girish Chawla

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PM0009