Contract Analysis

Introduction

The contract analyzed in this case is for Steel Authority of India. The company in discussion
is Government Enterprise involved in steel production and has 5 integrated steel plants in
operation as on date. As on date the company has embarked on a policy to modernize its
plants and also to replace its workforce by contract workers.

Risk Areas

1. Language – The only language allowed is English. Keeping in mind the work
requirement of the job which can be low in terms of skills, it would be prudent to
have the contract written in the local language in addition to writing it in English.
This is keeping in mind the fact that SAIL has more than 2000 contract workers
working on a daily basis.
2. Preliminary Bid Examination - In the contract agreement, section 19 and 20.1
mentions that the bidder is liable to examined. However the procedure is vague with
no mention in the contract about the financial ability of the contractors to carry on
the activity till completion. This so often happens that a contractor partially
completes a project, takes part money and abandons the project. This has been a
key issue at the ground level. In section 22.2 it is mentioned that during the techno-
commercial discussions, the bidders financial, technical and commercial capabilities
should be examined. However there is hardly any quantifiable parameters on which
bid evaluation is done.
3. Payment to Workers – The Contract lacks any concrete information about how the
contractual workers are to be paid. It has often been seen that contract workers are
often not paid their salary by their respective contractors. This has severe impact in
the quality of work at various areas of the plant.
4. Currency fluctuation – The contract or the TS document has no mention of how to
handle currency fluctuation. In section 26 of the document, there is a mention of
currency in which it is stated that all prices are to be paid in rupees. However there
is no mention of action to be taken in case of any wild currency fluctuation. Given
that contracts are long term in nature, often spanning over multiple years, it would
be prudent to include the hedging cost or the party responsible in case of currency
fluctuation.
5. Favoritism given to PSU – In case of bids by competent vendors, it is specified that
first preference would be other PSUs. This is likely to cause a drop in the
performance at execution level.
6. Change in technology – Given that most of the turnkey projects include many years
of gestation period. It is very possible that new technology comes in the market
which would be more economical than the previous one. In such a situation it is
desirable that instead of the products based on old technology, products with new
technology be commissioned. A good example of this would be installation of VVVF
Drives and DC Series Motors.
7. Spare parts – A key issue with a turnkey project is non availability of spare parts. IN
the TS (Technical Specification) document there is only one year performance
 guarantee. After that the duty of maintenance is in the hands of plant management.
A major problem that arises is non availability of spares for repair. The contract
document lacks proper mention of any terms and condition for making spares
available at a specific price as well as the procedure for extension of contracts. It is
important because the technical parts are not generic and any spare part has to be
procured from the particular company. The company executing projects charges a
hefty amount for the spares profiting from what is akin to razor blade strategy.
8. Maintenance – The company winning the contract has to be responsible for smooth
running of the executed projects till a specific time period which is usually one year
as per the Technical Specification document. It is often the case that on occurrence
of a fault the company personnel can take 2-3 days to reach the area of the problem.
This can result in serious consequences it terms of stoppage of work and the
accompanied loss due to stoppage of production.
9. Sub Contracts – The contract has no specific terms on how to approach the quality of
work of the winning party. It is often the case that a big company after winning the
contract sub-contracts it to various local players whose technical capacity to execute
a project is limited. This at times severely impedes the progress of project resulting
in delay and cost over runs.
10. Transfer of technology/technical know how – After execution of a project, it can
happen that all the relevant information is not passed by the company which is
essential for smooth execution of installed machines. This can be used by the
company which is executing the project to renew the maintenance contract.
11. Labour Union – Another important issue that the contract does not cover
significantly is the presence of labour unions. All contractors are and the role they
12. Price Adjustments – The price adjustments as mentioned under appendix 4, section
2.3 may not represent the actual price as the prices of products under consideration
are subjected to fluctuation which might be different from the actual price variation