Contracts and Tenders

Contracts 

Contract is an agreement between two or than two parties in which one is agreed to provide goods and services to other for which he will get the return in the some form. The contract is legal document and binding on both the parties.

2. Types of Contract

The forms in which return for providing goods and services is delivered, are called type of contracts. There are different types of contracts which can be employed in any of the delivery methods.

Owner can pay the money to the contractor, in lump-sum, based on measured work with unit price, based on percentage plus quantity involved. In the following, we shall briefly discuss the different type of contract. 

2.1. Lump-sum contract: 

This is a single fixed price contract. In this contract, contractor agrees to perform specified job for fixed sum. The owner provides the contractor exact specification of the work. In this contract both the parties try to fix the conditions of the work as precisely as possible.
Following are the advantages of the fixed price contract.

1        Owner is aware of the cost of the project before the project construction starts.

2        It avoids a lot of details and accounting by both owner and contractor.

3        Contractor gets free hand to execute the work.

4        If this contract is used with design-construct method of delivery, contractor gets opportunity to use value engineering.

Disadvantage:

1        It is very difficult to accommodate any charge in design and specification.

2        This contract is as good as the accuracy of the contract document. If errors exist in the contract document, the contract need to be renegotiated and hence more risk is involved from the owner ride.

3        In the case of unforeseen hazard during the construction, contractor may be put in adverse situation.

4         

This type of construct is suited for small job, precisely specified job, low risk with construction job. This is generally suited for the job where it is easy to make the measurement. Lump-sum contract should be avoided for underground work.
Lump-sum contract with design construct method of delivery is often called turn key contract.

Payment by the owner can be carried out in lump-sum contract as total amount at time or percentage of total cost after finishing certain amount of work. For example suppose a water tank was awarded as lump-sum contract. It can be said that 15% of amount will be paid after construction of foundation 50 % of total amount will be paid after construction of staging and 80% of the total amount will be after the construction of the tank. Rest will be paid only when the tank becomes operational. Lump-sum contract in often used in sub-contracting for labour contract. In our country many laborers for excavation, plastering work with this method.

2.2 Unit price contract:

In this type of contract, the price is paid per unit of the work carried out. There are different variations of this type of contract. Some of them are mentioned below.

2.3 Bill of quantities contract:

In this type of contract owner provide the drawing, quantities of work to be done and specification. The contractor bid has based on the unit cost of the items of construction. The contractor overhead, profit and other expenses can be included in the unit cost of the item of work. Sometimes contractor quotes the unit price of the work and lump-sum amount separately as profit overhead. The estimated quantities of the work to be done called Bill of the quantities is fixed. Minor variation in the quantities is admissible in this type of contract. The drawing of the work is not suppose to change. Although change and deviations from original drawing could be accepted during construction but even then unit price does not change.

This type of construction is usually followed in government sector for large infrastructure construction. This type of contract provides owner a competitive bid. Disadvantage of the methods are:

1        Owner needs to measure the quantity of work done in the field, hence requires owner presence at the site.

2        Final price of the construction is not known precisely until last price of work is completed. If there is significant difference between the estimated quantities and the reality of the situation, owner is put in adverse situation. Mistaken quantities is called unbalanced bid . Significant unbalanced bid now considered as unethical.
Schedule of rate contract:  Many a time, the quantity of work to be executed is not known before. Contract is signed based on the unit cost of the item of work. Generally more items are inserted in the contract than to be executed because it becomes sometimes difficult to exactly specify all the items. There is no guarantee that all the items mentioned will be used in the construction. This type of contract are widely used in underground work, flood control and road constructions. Advantages and disadvantages of this type of contract in the same as the bill qualities contract. There are other variations of schedule of rate contract where unit price plus profit is charged as the cost which we shall discuss next.

3        Cost plus contract:  In this contract, the payment is made based on the work carried out plus the fee which includes overhead, profit etc. Sometimes a cap is put on the type of contract by provided maximum and minimum cost limit such as guaranteed maximum cost contract. If project cost exceed this limit, contractor is responsible for that.

Sometimes incentive clause is also included if the contractor bring the project before certain specified limit.
The advantage of this type of contract is that considerable overlap is provide between design and construction. Hence the project can be executed in the fast-tract basis. This contract is suitable for the work where it is difficult to define the task to be done before the awarding the contract.

3. Stages of awarding contract

The stage of awarding construction contract is dependent of the methods of delivery of the project. In the tradition way of delivery, contract documents are prepared after the completion of design. Generally designer helps the owner to prepare estimate of the project. If owner maintains an engineering department, an estimate is prepared by the engineering department. Specification of the items used for construction is very important from point of view of quality of design and quality of construction. Specification is generally prepared by the designers. During the design, designer may take owner advice in preparing specification of the items. The drawing and specification prepared by designer form the basis for the awarding contract.

A tender notice is advertised in the news paper depending upon the type of work. It may be in nation newspaper or local news paper. In a large project, tenders are invited from person/company from any country called the global tendering . Sometime this process is carried out in two stages. In the first stage the aim is to select the contractor who has good experience of executing the similar kind of job and have required technical competence. The process is called “pre qualification”. The contract documents are sold to these pre qualified contractors. Many a time designer himself identifying the competent contractor based on his experience.

The contract document is bought by the contract or by paying some fees. Contractor prepares their offer and submit to the owner. The offer by contractor to the owner is called Tender and process is called submitting tender. Sometime owner ask to submit the tender in two separate documents. The first offer provides the specification of the item to be used. This is called “technical bid ”. And price offer is given separate which is “price-bid”.

After getting the tender, owner studies the tender documents, does comparatives studies and awards the contract to the lowest quoted contractor or who has given better technical deal. Sometimes contractor quotes the specifications which are higher or lower than the owner specifications. To get competitive bid, owner may provide this specification to other contractor and ask them to go for price bid. There is scope of using value engineering in this process also.

Thus the complete process of awarding contract can be summarized as follows.

1. Preparation of contract document.
2. Advertising the tender, tender notice.
3. Submitting Tender by contractor.
4. Study of the tender by owner
5. larification regarding conditions or specifications
6. Preparing comparative list
7. Awarding contact

4. Contract documents

Documents related to awarding contract are called contract documents, generally it contains following

a) Drawing    (b)specification of items (c) general conditions of contract (d) general explanation

A tender is the offer by the contractor to the owner to construct and the execute the work according to the drawing, specification (provided by owner or changed by contractor) and general condition of controls. Finally all the parties involved in the project (owner and contract) sign the legal agreement with respect to well defined intentions. If bidding is carried out with internationally, contract document consists of general conditions of site, its location local laws regarding labor, general condition for execution of the work etc.

5. Disputes And Arbitration

During the performance of the contract, disputes may arise between the employer, engineer and contractor for various reasons of default in performance, progress payment, rates, time, etc. Negotiated amicable settlement is the endurable, quick solution, which requires mutual trust, cooperation, give and take policy, flexibility instead of rigidity of one's view, and vision for future relations. Unresolved disputes can conveniently be resolved through arbitration, which bears the stamps of law of natural justice, than resolution in court.

5.1 Why does disputes arise?

1. There are errors, ambiguities and omissions in the drawing and specification. Also, there is lack of proper coordination during construction.
2. Not complying with the intent of the contract or not adhering to the standards in the performance of work(Quality of conformance problem).
3. Incomplete, delayed, inaccurate response to the question by any of the party in the contract.
4. Unforeseen changes in sub surface conditions.
5. If site condition differs from those described in contract documents.
6. Extra work or changed work order
7. Not meeting schedule by the contractor.
8. Inadequate financial strength on the part of the owner, contractor or subcontractor.

5.2 Arbitration Acts

Resolution of disputes through arbitration is an accepted method from time immemorial. The first Indian Act of Arbitration was enacted in 1899; The next was the Arbitration Act 1940; The recent one is Arbitration and Conciliation Act of 1996. Arbitration Act 1996 applies to arbitral proceedings which commenced on or after the Act came into force.

6. Earnest money and security deposit

6.1 Earnest money: The amount of earnest money to be deposited should be sufficiently large to be a security against loss, in the event of contractor failing to under take the work or to furnish the required security within the stipulated time after acceptance of his tender or until such time as the sums due to him for a sufficient guarantee, as the case may be.

The cost of work for computing earnest money will be calculated based on current prevalent rates (1% to 2%). The amount should be notified and collected as a security deposit for the due performance of the stipulation to keep the offer open till such date as may be specified in the tender. The tenderer after submitting his tender will not resile from his offer or modify the terms and conditions. If the tendered fails to observe or comply with the stipulation, the amount indicated aforesaid shall be forfeited. If the tender is accepted this earnest money will be retained by the Deparatment as a part of security for due and faithful fulfillment of contract. The earnest money of the unsuccessful tenderers will be refunded as expeditiously as possible. Tender unaccompanied by the requisite amount of earnest money should under no circumstances be entertained and should be summarily rejected in respect of works contract.

6.2 Security deposit:

Security deposit is to be paid by contractor in token for the due fulfillment of a contract. The amount of security deposit required will be as under:-– (a) Security deposit for each work would be 5% of the contract value. (b) The rate of recovery will be @10% of the bill amount till the full security deposit is recovered. (c) Security deposit will be recovered from the running bill of the contractor and no other mode of collecting security deposit such as BG/FD etc. will be accepted towards security deposit. Performance Guarantee On the acceptance of the Tender, the successful bidder shall submit Performance guarantee amounting to 5% of the contract value before signing of agreement. 

6.3 Engineering Procurement and Construction (EPC) Tenders

In an engineering, procurement and construction (EPC)contract, the EPC contractor (EPCC) agrees to deliver the keys of a commissioned plant to the owner for an agreed amount, just as a builder hands over the keys of a flat to the purchaser. The EPC way of executing a project is gaining importance worldwide. But it is also a way that needs good understanding, by the EPCC, for a profitable contract execution. EPC is being peferred due to its various advantages such as minimum efforts and less stress to owner, one point contract which is easy to monitor and coordinate. Another advantage of EPC includes post-commissioning services and quality assurance to owner. 

Overall EPC contract provides many advantages to both parties. As a result there is great demand for Engineering Procurement and Construction (EPC) Tenders, Tenders from Engineering Procurement and Construction world wide.

6.4 Build-Operate-Transfer Contract

A build-operate-transfer contract is a model used to finance large projects, typically infrastructure projects developed through public-private partnerships.

Under a build-operate-transfer (BOT) contract, an entity – usually a government – grants a concession to a private company to finance, build and operate a project. The company operates the project for a period of time – perhaps 20 or 30 years – with the goal of recouping its investment, then transfers control of the project to the government. BOT projects are normally large-scale, greenfield infrastructure projects that would otherwise be financed, built and operated solely by the government. Examples include a highway in India.

In general, BOT contractors are special-purpose companies formed specifically for a given project. During the project period – when the contractor is operating the project it has built – revenues usually come from a single source, an offtake purchaser. This may be a government or state-owned enterprise. Power Purchase Agreements, in which a government utility acts as offtaker and purchases electricity from a privately owned plant, are an example of this arrangement. Under a traditional concession, the company would sell to directly to consumers without a government intermediary. BOT agreements often stipulate minimum prices the offtaker must pay.

A number of variations on the basic BOT model exist: under build-own-operate-transfer (BOOT) contracts, the contractor owns the project during the project period; under build-lease-transfer (BLT) contracts, the government leases the project form the contractor during the project period and takes charge of operation. Other variations have the contractor design as well as build the project: one example is a design-build-operate-transfer (DBOT) contract.