SIKKIM MANIPAL UNIVERSITY Assignment format

Student Name: Praveen Kumar Mandi Registration Number:1205033442 Subject Name: Contracts Management in Projects

Course: MBA LC Code: LC00023 Subject Code: PM0018

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. (10 marks) Ans: 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-the-shelf commercial products for which sound prices can be developed. The following are the advantages of this contract: Possesses definite design and performance specifications. Establishes fair and reasonable price due to adequate competition. Places full responsibility and risk on the contractor. Encourages contractor competition, efficiency and economy. Possesses minimum administration. 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. There are three general types: Adjustments based on established prices. Adjustments based on actual costs of labour or material. Adjustments based on cost indexes of labour or material. An example of a contingency is the rise or fall in unit rate costs for specified labour or material utilised for the supply item. This pricing helps in extending production life contracts that involves market or labour cost, which can be isolated. These pricings are subject to hourly pay or unit of sale rate fluctuations. One of the constraints of this type of pricing is that it transfers part of price risk to the project, thereby increasing administrative cost and burden to the project. 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 of performance to determine if performance are met. These incentives must be objective. This type of pricing motivates contractor efficiency and economy. As the contractor performance increases, the profit also increases as profit is directly related to contractor performance. In this contract, performance and delivery incentive provisions may be added to cost incentive.
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SIKKIM MANIPAL UNIVERSITY Assignment format

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 incentive and confidence in achieving high performance. It also helps in identifying technical and cost uncertainties. Contractor has full liability for all incurred costs beyond the price ceiling. The benefits of this incentive are as follows: It provides timely and positive incentive to the contractor to control costs. It enables the contractee to obtain material and/or services at a lower cost than what is normally expected. This has several limitations such as it requires establishing realistic target cost where there is equal probability of an under-run or over-run. Within limit of price ceiling, the contractee shares cost of over-run with the contractor. 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 the 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. The formula, including the profit ceiling and floor may then be retired. The original price ceiling set for the initial target price may be sustained or adjusted downward as per negotiation. If the firm target price is considered reasonable and provides normal risk for the contractor, a FFP may be negotiated. If this is felt inappropriate, parties may negotiate a formula for establishing final price (by negotiation on completion of the contract) using the firm target price as a guide. Q2. 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. (10 marks) Ans: Conditions for adopting direct contracting: We should adopt direct contracting when: Extension of existing contracts for works or supply of goods is justifiable on economic grounds. We standardise equipments. 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 (to achieve optimum operation efficiency). There is a need for early delivery to avoid costly delays (as in the case of breakdown of equipment resulting in heavy operational losses). Exceptional cases like natural disaster such as flood, earthquake, and so on occur. We purchase books, periodicals from publishers; software from the developers or producers, and works of art. We purchase published data (such as meteorological data, satellite imageries, and so on) from a Government agency.
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SIKKIM MANIPAL UNIVERSITY Assignment format

Contracts awarded to NGOs in the interest of project sustainability, achieve certain social objectives of project, utilisation of local know-how and materials. 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 unit or a project by making the equipment or material available. Non-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: Invite short period quotation/proposal except in the case of natural disaster. Examine quotation/ proposal. Issue work order/purchase order. 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. (10 marks) Ans: 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. This type of contract is also suitable for works. For example you buy 3 tons of bricks from a contactor who is outside your city. You pay him the manufacturing cost of bricks, transportation cost, labour cost for loading and unloading, labour cost for manufacturing plus an additional amount which is given 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, fuel, 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 or which reduces with cost overruns.

SIKKIM MANIPAL UNIVERSITY Assignment format

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 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 such as hotels, casinos, and so on, where the design and aesthetics are complex and innovative. 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. Let us now look at the disadvantages of the cost plus contracts: 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 two methods of selecting consultants. (10 marks) Ans: Quality and Cost based Selection (QCBS): You understood that the selection method is crucial for a successful implementation of project in the previous section. We will now learn about the features of QCBS. QCBS is a method based, both on the quality and the cost of the services provided. It is the most commonly used method of selection for services. 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. You have to open the technical proposals first and evaluate
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SIKKIM MANIPAL UNIVERSITY Assignment format

and notify the technical scores publicly. The financial proposal of those consultants qualifying the stipulated minimum requirement is then evaluated. 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. Type of assignments for which this method of selection is adopted: 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. The risks of estimated are quantifiable and manageable. Quality Based Selection (QBS): In the previous section you learnt that QCBS is used for common and not too complex project where both technical and financial proposals are considered. 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. Because the TOR of the assignments under QBS is generally more complex and less defined, contract negotiations with the winning consultant may be lengthy and complicated. 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. Hence the need is to select among innovative solutions, or other factors. 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 where this method of selection is adopted: 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 (for example traditional consultants, nongovernmental organisations (NGOs)) are required to compete. Strong uncertainty or risk for the project.
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SIKKIM MANIPAL UNIVERSITY Assignment format

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 contractor s work and terminating the contract. Explain the areas that need attention for effective control of the contracts in a project. (10 marks) Ans: 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 which invariably arise between these four criteria. 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 in dealing with outside parties. 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 within the prescribed limits of the project, for which he liaises constantly with the owners representative. 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 formalised WBS is essential for effective control of contracts. A contract to be awarded on the project is identified after deciding the work package units. Consultants and contractors should confirm their agreement to the work package units for which they are responsible. Thumb rules for finalising and controlling work package units are: It should not be necessary for the project management team to incorporate into the network schedule, information which is more detailed than the work package level. Progress should be monitored at this level and variances can be investigated through field reports. Work packages should be identified 2 to 6 months prior to performing the work, and can only be revised with the approval of the project manager and normally as a consequence of a change order.

SIKKIM MANIPAL UNIVERSITY Assignment format

A project should not be broken down to such an extent, or contain work packages so small, that unnecessary administrative effort is incurred in maintaining the information flow. For example on projects up to, say, Rs.100 crores, a minimum work package value of, say, 0.1% is a good rule of thumb. For schedule control, an integrated network should be drawn to monitor and forecast progress. This schedule should not be changed unless: A formal reprogramming of the entire project or major part takes place. The target schedule and the current schedule become so far apart that recovery is impossible and target objectives become meaningless. Such changes are recognised and approved by top management. 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 its objectives. (10 marks). Ans: 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. 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 contractors. Promoting integrity, fairness and public confidence in the procurement process. Achieving transparency in the procedures relating to procurement.

SIKKIM MANIPAL UNIVERSITY Assignment format