Project Contracting & Execution

N.K.Agarwal
 Indian Contracts Act-1872

• Indian Contracts Act codifies

– the way we enter into a contract,
– execute a contract,
– implement provisions of a contract, and
– effects of breach of a contract.
• The Act extends to the whole of India except the
State of Jammu and Kashmir; and came into effect
on 1-9-1872.
 Appointment of Consultant
• Most project owners use services of consultants – an
individual or a consulting firm or a captive consulting
organisation throughout the project duration
• A consultancy can be either
– In an advisory role, or
– In a participatory role
• Types of Consultants
– Technical specialists or functional experts
• An expert in an individual functional area
– Multi-disciplinary generalist
• An individual or a firm of high intellectual ability with
sound professional knowledge
 Appointment of Consultant
• May manage with the help of a team of specialists and
experts from diverse fields or in collaboration with
another firm
– As per World Bank’s guidelines
• The competence and experience of the firm and the
personnel to be assigned, the quality of the proposal,
and the client-consultant relationship are the principal
factors in choosing a firm
• A firm to have at least five full time professionals with at
least five years experience each in the relevant field
 Selection and Appointment of
Consultant
• Steps in Selection Process
– Determination of the consultant’s role (terms of reference)
– Determination of prequalification criteria
– Estimation of the expendable consultancy cost
– Short listing of prequalification of consultants
– Determination of final selection criteria
– Invitation of work proposals and bids from the short-listed
ones
– Evaluation of capabilities on the basis of the work proposals,
data and bids received
 Selection and Appointment of
Consultant
– Selection of one or more consultant/s for the whole project
or for different assignments or work packages
– Negotiation on terms and conditions
– Appointment
 Appointment of Consultant

• Types of consultancy contracts

– Consulting firms retained by owners with the Lending
Institution’s approval
– Consulting firms retained by the Lending Institution playing
the role of executing agency e.g. World Bank acts as
executing agency for some UNDP projects
– Consulting firm engaged as Engineering Firm, acting alone
or in joint venture with one or more other agencies, to
provide the total turnkey package comprising all services
and supplies
– Individual consultants retained by owners
 Terms of Consultancy Contracts

• Man-Month contract providing for time-based rates

and payments
• Lump-sum contract for a specific assignment
• Percentage contract : payment of consultancy
charges as a percentage of project cost
• Cost-Plus-Fixed Fee contract
– Fixed fee for firm’s overheads and profit in addition to the
actual cost incurred by the consultant
 Technical Specifications

• Specification shall mean the schedules, detailed

designs, statement of general requirements,
statement of technical requirements, such as
technical data, performance characteristics values
and all such particulars to be incorporated in the
contracts in the original form without any change
• Executing agency may be a contractor, supplier or
the in-house department itself
 Purpose of Specifications

• To tell in writing all the requirements – general as well

as technical to all the tenderers
• To tell to the tenderers to submit their offers on
uniform basis except for the price
• To discuss with the tenderers for any deviation in the
technical or commercial offers before the submission
of the prices
• To evaluate the technical and commercial offers
submitted by the tenderers
 Contract Finalisation

• Several approaches in contracting

– Entrust total responsibility for engineering, procurement and
construction to a consortium of contractors with an
integrated total responsibility with the consortium dividing the
supplies and work among its members
– Divide the project into
• Engineering and supervision
• Supplies
• Construction
– Entrust engineering and supervision to an
engineering consultant, supplies to one or more
vendors and construction to one or more contractors
 Contract Finalisation
– Break down the total project into several work packages with
or without engineering and design, and give each package
to a competent contractor or a consortium of contractors
– Accomplish a portion of the work departmentally and
contract out the balance to one or more agencies
 Types of Contracts
• Turnkey contract
• Product-in-hand contract
– Turnkey contract with additional obligation for the contractor to run
the completed plant and achieve the targeted production for a
specified period before handing over to the owner
• Remeasurement contract
– Owner prepares a schedule of estimated quantities against which
the tenderer is required to quote as unit rates arriving at a total
price
– On completion, work is paid for on actual measurements based on
the unit rates
• Lump sum works contract
 Types of Contracts
• Item rate contract
• Cost-plus contract
• Piece rate work
– Owner providing all inputs except the labour to be provided by the
contractor who gets paid at the rate agreed upon for individual item
• Labour supply contract
• Hybrid contract
– Different types of consideration in the same contract for different
items of work e.g. lump sum payment for one service and other
types of rate and payment for other services or supplies
– Examples: feasibility study, engineering etc. on lump sum basis
 Types of Contracts

• Fixed price and variable price contract

– In Fixed price contract prices remains fixed throughout the
contract except for changes in statutory levies
– In variable prices contract, prices are subject to variation
according to rate of inflation payable on the basis of some
agreed formula
 Contract Planning
• Involves
– Work breakdown and packaging
– Requirement of resources for various work packages
– Types and number of contracts to be awarded and
approximate volume / value of each
– Financial, technical and operational capabilities of the
contractors to be selected
– Division of contract into three classes, mainly
• Engineered packages involving supplies with services
• Works contracts
• Miscellaneous contracts and small value contracts
– Method of contracting
• Open tender, limited tender etc
 Preparation of Tender Document

• To include complete information on

– Instruction to tenderers
– Model form of tender
– Drawings, bills of quantities and technical specifications
– Schedule of rates
– General conditions of contract
– Special conditions of contract
– Specimens of bank guarantees
 Contract Agreement
• Contract agreement binds
– Both the contractor and the owner to execute the defined
work
• At the agreed upon price
• In the manner stipulated in the contract
• As per details given in various annexure as under
– The tender invitation
– Instruction to tenderes
– The tender
– The tender drawings and specifications
 Contract Agreement

– Bills of quantities and schedule of rates

– General contract conditions
– Special conditions of contract
– Letter of acceptance/intent
– Contractor’s acceptance of letter of intent/allotment
 Performance Guarantee

• Guarantees by which a contractor assures the owner

of specified performance
– Monetary performance guarantee (MPG)
– Performance bond (PB)
• MPG furnished by a banker of the contractor in the
form of a bank guarantee undertaking
– to pay the owner monies to a stated limit
• if the contractor fails to perform, and
• to cover any unsecured advances paid to the contractor
 Performance Guarantee

• PB is a guarantee to fulfill the contract in regard to

– Completion of work,
– Workmanship,
– Defect-free working of the plant till the expiry of the
stipulated defect liability period
– Rectification of defects, and
– Discharge defect liability during the guarantee period
 Force Majeure

• Happenings which are not the creation of either of the

contracting parties shall not give rise to any monetary
claims against each other unless specifically
specified in the contract
– Examples: strike, riots, civil commotion, fire, floods
 Liquidated Damages (LD) and Penalty

• A deterrent contract clause aimed at ensuring that

contractors and suppliers perform their obligations in
time to enable project completion as per agreed
schedule
 Contract Management

• Management of contract important after signing the

agreement.
• System of measurement for payment to be decided
and instituted
• System for acceptance of completed jobs to be
finalised
• QA plan to be mutually discussed and agreed upon
• System of payment
– Stages and milestones to be clearly identified for release of
payments
– System of payment depends upon the type of contract
 Supply contracts

• Payment stages
– Advance with release of order
– Full payment against proof of despatch, or
• Part payment against proof of despatch e.g. for steel
materials, cement etc, and
• Balance against inspection at site ( to cover against
physical damage to supplies)
• Or
• Part payment against proof of destpatch, and
• Balance after testing & successful performance test e.g.
for any equipment
 Supply and Erection Contract-
Major Contract
• Example : Turbine – Generator from BHEL
• Payment stages
– Supply of materials/components
• Advance against placement of order
• Stage payment against completion of design work
• Stage payment against approval of Quality Plans
• Part payment against procurement of bought out
materials/components and on hypothecation to the
purchaser
• Progressive payment over the period of fabrication in the
shops as per agreed milestones
• Stage payment on despatch of fabricated materials/
components/parts to site
Supply and Erection Contract-
Major Contract
– Erection & Commissioning Stage
• Progressive payment as per agreed milestones over the
complete erection & commissioning period
– Testing Stage
• Balance payment less the security/ guarantee money
(generally 10% of the contract value) on satisfactory
testing and performance as per design specifications
– Balance 10% after 1 year of putting the equipment in
successful operation
 Supply cum Fabrication and
Erection Contract
• Examples: Fabrication/Erection of Bridges, steel
structures etc.
• Payment Stages:
– Part payment against placement of order
– Another part payment against purchase of materials on
hypothecation or custody of purchaser
– Progressive payment for fabrication of structures as per
agreed rates
– Progressive payment for erection in position on successfully
completing the job
– Balance 10% after 1 year of completion of job
 Civil Construction Contracts

• All payments to be released on actual measurements

of work completed in terms of agreed units of
measurement & certification by competent authority
• Payment to be released only for the acceptable
quality of work
• Progressive payments over agreed milestones based
on agreed schedule of rates, or
– Full payment less security deposit on completion of entire
job, if the job is of short duration
 New Contract Systems

• Engineering Procurement Construction (EPC)

– A popular contract system followed for large projects like
power
– Single point responsibility with the contractor from supply of
basic engineering, detail engineering, procurement,
construction and commissioning of the plant and handing
over to the owner
– In case expertise in not available with the EPC contractor,
the same can be arranged by him from experts elsewhere
– Single contract for the entire project
 New Contract Systems

• Concessional contracts
– Build Operate Transfer ( BOT)
• Operator builds the project using his funds while the
ownership of the project is of the government
• Operator maintains it, and retains the right to operating
revenues from the assets during the concession period
• Transfers the project to the government at the end of the
concession period
• Example: Various Toll schemes on highways
 New Contract Systems
– Build Own Operate Transfer ( BOOT)
• Physical assets remain with the contractor who invests his
funds
• Contractor maintains the assets, retains the right to operating
revenues from the assets during the concession period
• Transfers the project to the owner at the end of the
concessional period
• Example: Light rail transit system in Bangalore over a 30 years
concession period
– Build Own Operate ( BOO)
• Project is built by the operator who owns it
• Operator maintains it and retains the right of revenues from its
operation
• Franchise scheme is open-ended
 New Contract Systems
– Build Own Operate Sell ( BOOS)
• Same as above but the project is bought back by the
government
• Example: Paradip Port Trust signed an agreement to
contract floating dry-dock in Orissa at Paradip in
collaboration with Standfield of Scotland
– Build Operate Lease Transfer ( BOLT)
• Operator invests in the facility and leases it out on a fixed
rental
• Example: Wagon leasing by railways
 New Contract Systems
• These contracts mostly used for infrastructure projects
• Contractor himself arranges funds to construct the project with
his own design and operates after the completion of the project
• Contractor charges only for the operating cost of the project
after the same has been completed
• Transfer of assets takes place after expiry of the concessional
period as per already agreed terms of MOU between the two
parties
• Another body called Special Purpose Vehicle Pool ( SPVP)
constituted to manage and operate these contracts who
regulates the operation of the contract
 Redressal of Disputes
• Disputes to be redressed by mutual negotiations
• Items of disputes
– Jobs done but not included in the scope of jobs known earlier
– Extra jobs for which rates could be different
– Changes in the jobs already completed
– Revision in the design thereby changing the specifications and
consequently changes in the materials/work content etc
– Revision/escalation in prices of materials/labour rates, other
charges etc., not agreed to in advance while placing the order
– Additional requirement of quality by purchaser not spelt out
earlier
– Time overruns/delays responsibility for which not clearly
identified
• In case of major disputes, a recourse to Arbitration is to
be resorted to e.g. mostly observed in major civil
construction projects executed by HCC, Gammons
 Contract Management

• Contracting is the process of establishing a relation

between the owner and the contractor to execute the
work
• Involves many legal and commercial facets and calls
for specialised knowledge and practical experience
• Type and scope of contract would depend on the
approach adopted by the owner, considering his
relevant circumstances
• A well documented and properly awarded contract is
essential for successful completion of the project
Thank You
 References

• Project Management & Control : Narendra Singh

• Total Project Management : P. K. Joy
• Project Management: A Managerial Approach :
Jack R. Meredith & Samuel J. Mantel, Jr.
 Appointment of Consultant
• Most project owners use services of consultants – an individual
or a consulting firm or a captive consulting organisation
throughout the project duration
• Reasons for appointing consultants
– Functional experts of various disciplines in the project team can
concentrate their attention on other important project
responsibilities
– A multi-disciplinary consultant’s deep knowledge, rich experience
and concentrated attention to all important aspects of a project is
expected to boost the project’s efficiency, justifying the consultancy
cost
– An independent consultant views all matters in an unbiased matter
 Consultant’s role

• A consultant can be used either

– In an advisory role, or
– In a participatory role
• Assignments in the Advisory Role
– Pre-investment investigation
– Preparation of Pre-feasibility report, Techno-economic
feasibility report and Detailed project report
– Design and drafting
– Preparation of project specifications and tender document
– Advising on problems referred
 Consultant’s role
• Assignments in the Participatory Role
– Plays the role of a planner, an organiser, an effective coordinator
and an advisor in decision making
– Full involvement in defining project scope, organising project team,
listing, selecting and procurement of critical equipment
– Scheduling of all activities, milestone-networking, resource
assessment
– Selection of contractors and vendors, preparation of contract
documents
– Quality assurance, site management, monitoring and trouble
shooting
– Cost control
– Plant commissioning, streamlining of O&M after the project is
commissioned
– Any other services agreed upon mutually between the owner and
the consultant
 Types of Consultants

• Technical specialists or functional experts

– An expert in an individual functional area
• Multi-disciplinary generalist
– An individual or a firm of high intellectual ability with sound
professional knowledge and a flair for the latest
management techniques and information technology and
committed to high professional standards
– May manage with the help of a team of specialists and
experts from diverse fields or in collaboration with another
firm
 Selection and Appointment of
Consultant
• As per World Bank’s guidelines
– The competence and experience of the firm and the personnel to
be assigned, the quality of the proposal, and the client-consultant
relationship are the principal factors in choosing a firm
– A firm to have at least five full time professionals with at least five
years experience each in the relevant field
• Steps in Selection Process
– Determination of the consultant’s role (terms of reference)
– Determination of prequalification criteria
– Estimation of the expendable consultancy cost
– Short listing of prequalification of consultants
– Determination of final selection criteria
 Selection and Appointment of
Consultant
– Invitation of work proposals and bids from the short-listed
ones
– Evaluation of capabilities on the basis of the work proposals,
data and bids received
– Selection of one or more consultant/s for the whole project
or for different assignments or work packages
– Negotiation on terms and conditions
– Appointment
 Types of Appointments

• Consulting firms retained by owners with the Lending

Institution’s approval
• Consulting firms retained by the Lending Institution
playing the role of executing agency e.g. World Bank
acts as executing agency for some UNDP projects
• Consulting firm engaged as Engineering Firm, acting
alone or in joint venture with one or more other
agencies, to provide the total turnkey package
comprising all services and supplies
• Individual consultants retained by owners
 Importance of Specifications

• Correct specification is the back bone of the projects

• Strong relationship between specification and
– Cost of project
– Time schedule of completion
– Suppliers and supplies
– Process of construction
– Process of operation and operating cost
– Flexibility in future expansion
 Preparation and Finalisation of
Specifications
• Specifications prepared by consultant or in-house
design organisation
• Basis for preparing the specifications
– Past details available
– Experience gained
– Latest developments made in the fields of technology,
know-how, design etc
 Changes in Specifications
• Specifications once finalised in consultation with all concerned
agencies are not allowed to be changed
• Changes may be required under some unavoidable
circumstances like
– Unexpected change in technology
– Outcome of research and development activities, which were under
trial during project sanction stage
– Change in demand pattern necessitating modification of the
production facilities
– Actual construction site condition, necessitating change in the
proposed facilities as envisaged earlier
– Omission in the approved project noticed during execution stage
 Changes in Specifications

• Change in specifications not desirable as it may be

very costly
• Consequences of change would be
– Change in the scope of approved project
– Increase in the project cost
– Delay in completion time
– In case of any major change, fresh approvals may be
needed from the competent authority
– Ultimately it would affect the viability of the project
 Project Planning & Organisation

• Ultimate objective of planning

– Timely and economical implementation of the project making
the most effective use of time and resources
• Failure of plan caused by
– Lack of integration in both planning and implementation
efforts
– Absence of commitment on the part of people engaged on
implementation
– Non-involvement by the top management and administrative
agencies in the monitoring of projects and in trouble
shooting
 Project Organisation

• Project organisation is a formal team engaged in

implementation of the project with clearly defined
responsibilities and commensurate authority of the
individual team members
• Size of organisation depends upon the workload, the
specialisation involved and the complexity of the
project
• Distribution of work between the owner and
contractors also has influence on the owner’s project
team size
 Project Organisation
• Form of organisation depends upon
– Whether the project enterprise is starting its business life with the
setting up of the project on hand
• Each Unit or segment of the project functions as a matrix
organisation under the Director (construction) / General
Manager (Construction)
– Whether the project is undertaken by an ongoing production unit, as
an additional facility or renovation/ modernisation
– Geographical location of the head office, the project site and the
principal project office
• Economy and convenience are considerations here
• If head office and project office are far apart
– Separate head office and field office organisation with a
high degree of delegation of duties, powers and authority
to Project Manager
 Project Organisation
– Management philosophy of the project enterprise
• Management may like to control entire financial authority
and adopt a centralised organisation
• Three forms of project organisation
– Functional organisation
– Divisional organisation
– Matrix organisation
 Functional organisation

• Traditional centralised type of organisation with line

and staff structure
– Heads of various functional departments report to the CEO
for their respective specialised functions in the management
of the project
– Project manager supported by few area project engineers
– Clerical staff functions as coordinator and report daily to
CEO
– May have several Project Managers for different work
segments
• Suitable for pure project enterprises with the CEO fully
attending to the project only without other more important
business
 CEO
PROJECT
PM CONTROL

FINANCE & CONTRACTS PROCUREM

PERSONNEL
ACCOUNTS ADMINISTR. ENT

ADMINIS - SECRETRAIL CONSTRU-

ENGINEERING CTION
TRATION & LEGAL

FUNCTIONAL PROJECT ORGANISATION

 Divisional organisation

• Divisional organisation
– Involves decentralised project management divisions, each
headed by a PM and divided into several sections manned
by qualified and experienced staff of the appropriate levels
– PM concentrates totally on his project without any
responsibility about the general management of the
enterprise
– Project schedules and resources mostly entrusted to the PM
reporting to the top management
• May involve improper and not full utilisation of resources
as it creates watertight compartments
• Suitable for an enterprise with only one project where the
idle resources have no profitable use elsewhere
 DIVISIONAL PROJECT ORGANISATION

HEAD OFFICE

PROJECT PROJECT PROJECT

MANAGER PR ‘A’ MANAGER PR’ B’ MANAGER PR’C’

PROJECT PROJECT ENGG PROC & MATLS CONSTRUCTION

CONTROL DEPT DEPARTMENT MNGMT DEPT DEPARTMENT

PROJECT ADMIN,
FINANCE,HR DEPT
 Matrix organisation
• Matrix Organisation and Project Team
– Two distinct categories of personnel
• At lower level, recruited solely for the project
– Face termination of employment at the end of the project
• Deputed by other functional departments to serve the project
– On completion of project they go back to their functional
parent department
– In the project, they report administratively to the PM but
professionally continue to report to their functional heads
– On the project, they represent the interest of their parent
department
 MATRIX PROJECT ORGN
CEO
Functional Dept Project Mngmt Team

GM Projects

Secretarial dept PM Project A PM Project B

Mgr Plng Mgr Plng

GM Engineering Mgr Est.& Cost. Mgr Est.& Cost.

Mgr Prj Engg Mgr Prj Engg

GM Materials Mgr QA Mgr QA
Mgr Commissiong Mgr Commissiong
GM Finance
Mgr Matls Mgr Matls
Mgr Maintce Mgr Maintce
GM HR & Admin Mgr Fin & A/C Mgr Fin & A/C
Mgr HR & Admn Mgr HR & Admn
GM Construction
Mgr Const. ( for Mgr Const. ( for
diff disciplines) diff disciplines)
H.O.Const Coordn
 Matrix organisation

• This form advantageous as it provides

– Flexibility in the deployment of resources
– Effectiveness in the usage of specialist skills
– Better use of experienced gained in the organisation for its
own benefit
– Saving in the project cost because of minimum idling
• Most useful form in a multi-plant organisation and
also a project with several large work packages
 Task force

• Special Task Force set up by the management for

executing or expediting specific tasks
• Procedural guidelines and sufficient authority for
decision making given to the task force
• Represents members from various functional
departments
• Task Force dismantled on completion of task
 Project Manager
• Success of project depends upon a capable and reliable Project
Manager
• Responsibilities of Project Manager
– Coordinating the efforts of the project team members and functional
departments
– Calling all meetings other than those of the CEO’s steering
committee
– Project scheduling and achieving the scheduled performance to
complete the project without overruns
– Mobilisation of resources
– Monitoring performance and reporting to top management
– Obtaining policy decisions from top management and passing down
to the team members
 Project Manager
– Coordination and liason with all agencies
– Foreseeing problems and making contingency plans
– Quality assurance and quality control
– Project cost control
– Risk management, environmental care and safety
– Management of project personnel
– Control over the assets under his charge
– Project office administration
 Planning Manager

• An important key person next to the Project Manager

• Should possess knowledge of Planning, scheduling,
controlling techniques, graphical presentations and
information technology
• A qualified engineer and/or project-oriented
economist with personal attributes alike the Project
Manager
• Preferable to have him associated with the project
from the beginning to the end
 Team Members

• Individuals of excellent personal qualities

• Should possess
– Positive attitude
– Good conceptual abilities
– Good communication skill and language ability
– Dependable character
– Knowledge of enterprise and its philosophy
– Good knowledge of work
 Virtual Project

• In the traditional Project team, members

– Shared a common workplace
– Saw each other frequently,
– Knew each other well, and
– Expected to continue working together for an extended
period of time
• In the changing environment of rapid technological
advancement and with tough global competition,
dynamic markets demanding short production runs of
unique products, the Project Manager develops an
effective and productive project team with in a ‘Virtual
Project’.
 Virtual Project

• Virtual project, also known as distributed team, is one

where participants
– Are geographically separated such that
• They may seldom meet face-to-face as a team
– Resulting in difficulties of communication
• Associated costs of both face-to-face and electronic
communication increase dramatically
• Electronic communication takes on much more
importance in virtual projects as it makes the
development of effective project teams possible
 Virtual Project

• Project manager has to manage issues of

– Managing trust
– Developing group identity
– Sharing information
– Developing clear structures
– Formation of informal subgroups
– Understanding information
 Virtual Project

• As face-to-face meeting in a virtual team is difficult,

Project Managers use all forms of electronic
communication
– Cellular phones, pagers, faxes, e-mail, Web pages and
computer –to-computer transmissions across local area and
wide area networks
• To distribute everything from key reports to jokes, logos,
and mottoes
– Regularly scheduled video and telephone conference calls
increase team members’ exposure to project information as
well as to each other