PM0018 CONTRACTS MANAGEMENT IN PROJECTS

Q1. Fixed price contracts have a pre-set price that the vendor must adhere to in performing the work and in providing materials. There are different types of fixed price contracts. Explain them.
The 5 different types of fixed price contracts are: 1.Firm-fixed-price (FFP): This type of contract requires delivery of aproduct or service at a specified price, fixed at the time of entering intocontract, and not subject to any adjustment. Here, the products are off -the-shelf commercial products for which sound prices can be developed. The advantages are Possesses definite design and performance specifications. Establishes fair and reasonable price Places full responsibility and risk on contractor. Encourages contractor competition, efficiency and economy.. 2.Fixed price with economic price adjustment: This type of contract provides upward and downward revision to the contract price withinthe limits, which are contractually stipulated due to contingencies. The typesare adjustment based on established prices , actual cost of labour ormaterial The features of this contract is it eliminates contingency and isapplicable if instability of market is expected over an extended period andpossesses specific criteria for determining acceptability of wage and materialrate fluctuation. 3.Fixed price incentive contracts (FPI): This contract providesincentive 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 alsoa possibility of cost reduction. Incentives will likely result in savings andbetter performance. Achievable incentives must be identified and criteriaestablished for evaluation. 4.Fixed price incentive (Firm Target): In this type of incentive, theparties agree on possible range of cost of performance and negotiateinitially. This is applied whenever a firm target and formula for establishingfinal price is negotiated. This incentive provides a fair and reasonable incentive and confidence in achieving

high performance. It also helps inidentifying technical and cost uncertainties. Contractor has full liability forcosts beyond the price ceiling. 5. Fixed price incentive (successive targets): In this type of incentive, the parties agree on possible range of cost of performance andnegotiate at outset. The contract includes: an initial target cost, profit,ceiling price, a formula for fixing the firm target profit and a specifiedproduction point incident to the contract to apply formula. When theproduction point is reached, the firm target cost is negotiated, consideringexperience and cost and then the formula is applied to obtain the firm targetprofit.

Q.2 Direct contracting is another procurement method that is used under alimited number of exceptional circumstances. Explain the Conditions for adopting direct contracting , requirements and steps for direct contracting
Conditions for adopting direct contractingWe should adopt direct contracting when:1. Extension of existing contracts for works or supply of goods is justifiable on economic grounds.For example, there is an existing contract for the construction of 20kilometers road by the PWD. While the construction is in progress, PWDdecides to construct a bye-pass road of length1.5 kilometres of the samespecifications. Rather than inviting fresh bids for 1.5 kilometres of thislength of road could be awarded at the same rates as of 20 kilometresroad to the existing contractor.2. We standardise equipments.For example; let us consider that an organisation has 200 passenger carsof specific model of a particular manufacturer. The organisation wants anadditional 10 passenger cars for new recruits. If the organisation choosesto go for procurement by open bids for these additional cars, they mayend up procuring cars of a different model and different manufacturer.This will lead to maintaining different inventory.3. Proprietary equipment (those equipments which are known to bemanufactured by a single manufacturer only, for example, a scientificequipment of a particular specification which is manufactured by aparticular manufacturer only) and spares of that equipment are alreadywith the purchaser.There is a need for early delivery to avoid costly delays Exceptional cases like natural disaster We purchase published data from a Government agency. Contracts awarded to NGOs in the interest of project sustainability Requirements for direct contractingLet 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 isnot possible. Avoid losses in operation of a production unitNon-availability of acompetitive market. Existing Cooperative agreement between the parties involved.Steps for direct contractingNow that we are aware of the requirements for direct contracting, let usunderstand the steps involved in direct contracting:

1. Invite short period quotation/proposal except in the case of naturaldisaster. 2. Examine quotation/ proposal. 3. Issue work order/purchase order. 4. In case of items on Directorate General of Supplies and Disposals(DGS and D) rate contract and other rate contracts, place orders on therate contract holder as per terms and conditions of the rate contract.

Q3. Write short notes on Cost plus Fee Contracts

. A cost-plus fee contract, also termed a Cost Reimbursement Contract, is acontract where you pay the contractor for all set expenses plus an additionalpayment as profit to him.Features: As already told features are to be considered to pick the right typeof contract for your project. You need to reimburse the bidders periodicallyfor inputs such as labour, materials, equipment, spare parts and so on with afee to cover his overheads, management and profit. The fee may be either: 1. A fixed fee that is independent of the total measured costs, or 2. A percentage of the measured costs, or 3. A variable (incentive) fee, which increases if savings are materialisedin an agreed estimate of the total contract payments. 4. Conditions for adopting: Now that we know the features of this contract, letus analyse where we can use this type of contracts: 5. They are appropriate for open ended emergency situations such asstructural collapse. For example, damage to buildings and bridges dueto flood, earthquake, and other natural calamities. 6. They are best suited for works with unquantifiable risks such as unknown ground conditions which cannot be foreseen before theproject is started. 7. They help to select a known contractor who is very reliable tocomplete highly remunerative projects 8. They are used in an innovative technical processing and manufacturingplants, 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 immediatelywithout finding bidders, calling for tenders, allotting tenders, which willconsume lot of time. Payments are made for the actual expenditure incurred and hence canbe used for the works that are poorly defined and involve high risks. Final cost may be less than a fixed price contract because contractorsdo not have to increase the price to cover their risk and give the actualprice covered. Works are awarded on sole source basis with negotiations and hencethere is no competition. Quality of work may be affected as bidder will have less incentive toproduce quality work or timely completion. Bidder who gets the contract may use higher value material toincrease his incentives and not make it cost effective. Additional supervisory staff is required to monitor and verify the actualcosts.

Q4.The methods of selecting a consultant are designed to achieve theobjectives of quality, efficiency, fairness and transparency in the selection process and to encourage competition. Discuss any 2 methods of selecting consultants.
The methods of selecting a consultant are given below: 1.Quality and Cost based Selection (QCBS)QCBS is a method based, both on the quality and the cost of the servicesProvided. Under QCBS the technical and financial proposals are submittedsimultaneously in separate sealed envelopes. Evaluation of the proposals isdone in two stages-quality and cost.Where appropriateYou 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 andwell specified. assignment duration and all other inputs with respect to cost. mated are quantifiable and manageable. To ensure receipt of responsive proposals, the RFP under QCBS should indicate the level of keystaff inputs.Type of assignmentsYou should use QCBS for the following assignments: defined with proper feasibilitystudy.

of noncomplex nature. and inspection services. 2. Quality Based Selection (QBS)QBS is based on the evaluation of the proposal quality without any initialconsideration of cost. In QBS the quality and technical aspects are veryimportant.QBS is generally more complexand less defined.Where appropriateYou should adapt QBS method when: importance for the success of the project. because of thecomplexity of the assignment. may not be easily or necessarily comparable.

Type of assignments You should use QBS when the assignment is of: industry. -feasibility and feasibility studies or design of large and complexprojects.

Q5. The contract control process commences right at the beginning stage of bid document preparation inviting contractors to bid, and proceeds through thecontract negotiation, contractor selection, monitoring and controlling of the contractors work and terminating the contract. Explain the areas that need attention for effective control of the contracts in a project.
Core competence of the project manager: The project manager musthave experience in planning and management of similar projects. Whilehe should be ready to refer to the individual specialists, he should be asKnowledgeable as anyone about the economic and regulatory environment,engineering technology, project planning, scheduling andcost accounting, as well as construction.His focus throughout the projectimplementation should be on the key criteria of scope, time, and cost andclient satisfaction. He achieves this by interpreting the requirements to thespecialists and directing their efforts to achieve the best combination of these four key criteria. His core competences will be to resolve conflicts. Hisobjectives on the project are identical to that of the client.Requirements of the working system: For a competent project manager tobe effective, the following components of the working system are necessary: managerial authority toensure response to his requirements from his team. project manager's participation. single formal contact assigned to the project must be competent. ontrol the commitment of funds. Breakdown Structure (WBS): A complex project is mademanageable by breaking it down to smaller group to define task that canbe achieved independently of other tasks. A formalized WBS is essentialfor effective control of contracts. A contract to be awarded on the projectis identified after deciding the work package units.Thumb rules for finalising and controlling work package units are: ss should be monitored and variances can be investigated. to packages so small This schedule should not be changed unless recognising the limitations withflexibility: While the D-B-B mode of contracting enables flexibility to makescope and design changes, it must be constantly ensured that the detaileddesigns with reference to a contract get substantially finalised prior to awardof the contract.

Q6. Explain the need of Procurement law and what are its objectives?
Need for procurement lawThe Public Sector Units of the Centre and the States have issued theirown procurement guidelines, manuals, codes and Standard BiddingDocuments (SBDs). Thus, there is no uniformity across various Ministries,State Departments and PSUs. They could be easily modified as they wereissued by the administrative Central Ministries and State Departments. Anyviolation of the guidelines, manuals and codes does not attract any penalaction except departmental and in most cases are ratified/excused by theadministrative Ministry/Department. The provisions are in most casesinadequate to meet the principles of public procurement and theirenforcement is very weak. It is considered by legal experts that theguidelines, manuals and codes are non-statutory in nature and are generallynot enforceable. It is stated that a policy is not a law. It is also consideredthat guidelines, manuals and codes do not fall into the category of legislation. They have only an advisory role and non-adherence to them isimplicitly permissible.Lot of developmental activity is being undertaken in the country.Procurement of works, goods and services now-a-days accounts for morethan 80% of the public expenditure and the amount involved is very hugewith high stakes. Lack of discipline, loose enforcement of the procurementrules will result in a lot of leakage of government funds and will become afertile ground for corruptive practices. Objectives of procurement law The procurement law regulates the procurement of goods, construction andservices so as to promote the objectives of: Fostering and encouraging participation in procurement proceedings bysuppliers and contractors, regardless of nationality, and therebypromoting international trade. construction or services to be procured. the procurementprocess. procurement. objectives.

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