Types of Contracts and Guidelines for their choice

1. Types of Contracts and Guidelines for their choice K.N. Venkata Raman Procurement Consultant, World Bank

2. Codal Provisions • Paragraph 168 of KPWD Code Volume I discusses in brief only two types of contracts, namely Lump-sum and Schedule (Item Rate); • Development projects of Government Departments/PSUs and local bodies are sometimes complex and necessitate use of other alternative types of contracts.

3. Government Instructions • Circular issued by FD in January 2005; • Circular details the various types of contracts and gives guidance for their choice; • Choice of type of contract has to be made at the initial stage itself, preparation of P.P.; • Type of contract affects the subsequent stages of procurement, the content of tender document,

4. Government Instructions (contd) • Factors which affect/influence the choice of type of contract; • Nature and complexity of works; • Size and duration of contract; • Degree of definition of the works and the element of risk/uncertainty; • Status of design(preliminary or final); • Technical capability, design and supervisory resources of the Employer; • Financial resources and budgetary constraints; • Previous experience of Employer on the type of contract

5. Lump-sum or all inclusive contract • Tenderer quotes a fixed sum for execution of work as per design and specification within stipulated time; • Payment is linked to stage of completion of an activity; • Relatively easy to administer;Inflexible for design changes • Normally used for small, short duration, well defined, detailed works; • Example standard housing, bus shelters, primary health centre etc.

6. Item rate/unit rate/ad-measurement contract • Most common type of contract; • Tenderer quotes unit rates for different items; • Unit rates is inclusive of the costs of labour, materials, equipment; • Detailed measurements are recorded and payment made at the tendered unit rates; • Flexible to handle variations due to changes in design; • Higher supervisory costs; • Amenable for manipulation

7. Percentage rate contract • Contractors to submit the %age above or below the current schedule of rates; • Simple to comprehend for the contractor; • Decision on tender immediate; • Irrational tender, same percentage above or below different category of items; • Appropriate for small value contracts, when items of work are few and belong to same category.

8. Cost plus contracts • Periodic reimbursement of contractor’s costs of inputs plus fee to cover overheads; • Fee may be fixed or percentage of measured costs; • Early mobilization possible in emergency situations or poorly defined works; • If fee is fixed little incentive to produce quality work; If fee is %, limited incentive to be cost effective; • Appropriate for open ended emergency situations; • Mostly used in private sector.

9. Supply and erect/install, commission and test contracts • Single responsibility; • Management is simple; • Direct cost is likely to be more; • Appropriate for power plants, water pumping plants, water treatment and sewerage treatment plants; telecommunication projects etc

10. Design and Build Contract • Innovative competitive designs are possible, which result in economy, better design and aesthetics; • Pre-qualification is an essential feature; • Appropriate for important buildings, major bridges, complex flyover, navigation works, airports and other infrastructure works

11. Turnkey contracts • Tenders for alternative systems and processes; • Two stage tendering procedure followed; • Usually Lump sum with price adjustment; • Employer is able to choose the best available processes and thus effect economy; • Appropriate for procurement of complex industrial process plants such as steel mills, fertilizer plants, food processing, oil refineries etc.

12. Management Contracts • Firm acts in the role of a contractor that does not actually perform work directly but manages the work of other sub-contractors; • Bears full responsibility and risk for price, quantity and timely performance of contract; • Appropriate for major infrastructure projects such as airports, sea ports etc.

13. Public Private Participation contracts • BOT, BOO, BOOT contracts; • Concessionary turn key type of contract including financing in addition to design and construction, operation and maintenance of public and private revenue earning projects; • It is a way of overcoming the budgetary constraints to acquire the needed infrastructure for growth; • Appropriate for profit earning projects such as power generation and distribution, toll roads, and other projects.