TYPES OF CONTRACT
Types of Contract System
VARIOUS FORMS OF CONTRACT SYSTEM
- The Standard Specifications & Department codes mentions only 4 forms of execution of work.
- Department execution
- K2 Contract – Piece Work
- Lump Sum Contract
- Schedule Contract
- Only the first 3 forms are in vogue in most of the Departments.
- Lately EPC system (derived from FIDIC doccument) is being extensively used in all the Departments and BOT system is also introduced and used.
1) DEPARTMENTAL EXECUTION OF WORKS :
- All the Public works in the pre-independence days were got executed departmentally, by engaging daily rated casual workers and monthly rated work charged staff for petty supervision and Contingencies.
- This methodology is generally adopted in cases where no contractors are available or where, for other reasons, like guidelines of funding agencies, emergencies, natural calamites etc., and where it is found more economical.
- Under this method, the department manufactures or purchases its own materials. The purchase of materials or tools and plant and machinery is governed by the stores rules.
- In exceptional cases, where departmental execution is considered desirable in the interest of the work either on account of its urgency or its special nature, the authority competent to call for the tenders to the work may order for taking up departmental execution of the work, with the approval of the next higher authority (Technical).
2) K2 CONTRACTS :
- When several developmental works were taken-up, it became difficult to manage several works with the available meager work charged staff.
- The system of ‘K2 Contracts’, or piece work agreements have come into force.
- This is basically a labour supply agreement and the contractor has to execute the work, strictly as directed by the Engineer-inCharge and with no responsibility fixed on him.
- The conditions of the contract and the security to be taken from the piece-workers for the due fulfillment of the contract are set forth in form Public Works Department, K2 Form.
- The schedule of rates in the piece-work agreement should show the rates either for finished work or for labour and material, as the case may be, even for items for which lumpsum have been provided in the sanctioned estimates.
3) LUMP SUM (L.S) CONTRACT
- The tenders are called indicating the items of works to be executed, their quantities and rates, and the total cost of the project.
- The contractor has to quote a total lump sum price to complete the work in all respects.
- Item wise rates are not to be quoted and not applicable.
- The work is awarded to the lowest bidder.
- The designs and drawings are to be furnished by the dept.
- Payment is made for the work done, based on the dept estimate rates plus or minus tender premium.
- The client can introduce variations in the work.
- The contractor can claim additional payment for any changes in the work content.
- Tender price is usually increased by variations and claims.
- L.S. type of contract is sometimes called Drawings and Specifications Contract. In regard to this methodology, the details are set forth clearly in –
- The Preliminary Specifications of the State P.W.D Detailed Standard Specifications;
- The standardized forms of articles of agreement, tender notice and tender mentioned in the State P.W.D Detailed Standard Specifications.
- The intermediate and the final bill-forms connected therewith [Public Works Department Form Nos. XXI & XXII of A.P. Account Code].
- This system provided the following loop holes, which were successfully exploited by the contractors for their monetary gains. In the process, the Projects suffered heavily due to slow progress and consequent cost escalation.
- Abnormal variations in the sanctioned estimates and revised estimates.
- Delays due to non-finalization of alignment, non-approval of drawings, delays in land acquisition, delays due to approval from competent authority for change in soil classification, Change in leads and lifts.
- Prolonged litigation by Arbitration.
- Thus there are both time and cost overruns in conventional tender system.
4) Schedule or Item Rate Contract
- The tenders are called, indicating the items of works to be executed, their quantities and dept rates.
- The contractor has to quote item wise rates.
- The work is awarded to the lowest bidder
- The designs and drawings are to be furnished by the department.
- Payment will be made for the work done, based on the item wise rates quoted.
- This method is adopted for small /repair works.
- This method is in use mainly in the R &B, Forest, Agricultural and other Departments.
- Mistaken quantities if reflected in the document is called unbalanced bid. Significant unbalanced bid is now considered as unethical.
- Sometimes contractor quotes the unit price of the work and lump-sum amount separately as profit overhead.
5) EPC ( Engineering, Procurement, Construction)
- E.P.C/ Turn Key System is the methodology being adopted for expeditious completion of the projects to achieve the targeted goals by simultaneous Investigation, Exploration, Design, Procurement and Construction and Completion of Projects in a time-bound manner.
- Contractor will investigate, prepares designs & drawings, estimates and quotes a price to complete the work specified by the Department.
- The tenders are called by specifying the detailed scope of work / components of works to be executed.
- Quantities ,rates, cost of the project etc are NOT furnished in the tender.
- ECV (Estimated contract value) of the work put to Tender is disclosed to the bidder.
- The contractor himself has to investigate, prepare designs & drawings, estimates and quote a lump sum price to complete the work, in all respects.
- The work will be awaded to the lowest bidder.
- The bidder will furnish the component wise costs for approval of dept
- The work is to be executed as per the designs approved by the department
- Payment is arranged based on the stage wise progress achieved ( not based on the quantities).
OTHER FORMS OF CONTRACT SYSTEM
- PPP - PUBLIC PRIVATE PARTNERSHIP
- BOO - BUILD, OWN AND OPERATE
- BOT - BUILD, OPERATE AND TRANSFER
- BOLT - BUILD, OWN, LEASE AND TRANSFER
- BOOT - BUILD, OWN, OPERATE AND TRANSFER
- DFBOT - DESIGN, FINANCE, BUILD, OPERATE AND TRANSFER
Note:- BUILD, OPERATE AND TRANSFER form of contract system is being followed mostly in NHAI/ Roads Sector.
The Govt is also considering to implement the Switz challenge method in the Re-engineering works.
FURTHER TYPE OF CONTRACT SYSTEM
BUILD, OPERATE AND TRANSFER
The theory of BOT is quite simple. BOT model comprises of three phases:
- Build: A private company (or consortium) agrees with a government to invest in a public infrastructure project (such as a road or power Project). The company then secures their own financing to construct the project.
- Operate: The private developer then maintains and manages the facility for an agreed concessionary period (eg. 15 / 20 years) and recoups their investment through charges (eg. road tolls or electricity sales).
- Transfer: After the concessionary period the company transfers ownership and operation of the facility to the government or relevant state authority.
The Procedure suggested to approach BOT (Build-Operate-Transfer) is to provide infrastructure development, which enables direct private sector investment in large-scale projects such as roads, bridges and power plants.
BUILD, OPERATE AND TRANSFER – Toll / Revenue Model.
- The concessionaire (Private Sector) is required to meet the upfront/construction cost and the expenditure on annual maintenance for a specified period.
- The concessionaire recovers the entire upfront/construction cost along with the interest during the specified period out of the future revenue collection during operation.
- The viability of the project depends on the revenue generated out of the sale of power. However with a view to bridge the gap between the investment required and the returns expected, the difference of investment and return is to be provided by Government for the viability of the project.
BUILD, OPERATE AND TRANSFER - Annuity Model.
- The concessionaire (Private Sector) is required to meet the entire upfront/ construction cost no grant is paid by the client (Government) and the expenditure on the annual maintenance for a specified period.
- The concessionaire recovers the entire investment including interest and pre-determined cost of return out of the annuities payable by the client (Govt) every year.
- The selection is made on the least annuity quoted by the Bidder/ Consortium (The concession period being fixed).
- The client (Govt) retains the risk with respect to the sale of power, since the client (Govt) collects the revenue, and the owner ship will be with the client during construction period as well as maintenance for a specified period.
BUILD, OPERATE AND TRANSFER – Special Purpose Vehicle.
- The Government can also form a special purpose vehicle (SPV) for funding the project.
- SPV’s are separate legal entities formed under the companies Act, 1956.
- It involves very less cash support from the Government in the form of equity/ Debt., Rest of the funds comes from sponsor / Financial institution / Beneficiary Organisation in the form of equities/ Debt.,
- The amount spent on development of Project is to be recovered in the prescribed concession period by sale of power by Special purpose Vehicle.
- In BOT Build , operate and Transfer – Toll / Revenue Model : To bridge the gap between the investment required and the returns arising out of it, capital grant is to be provided to increase the viability of the project . But the Government is not in a position to provide capital grant for the project in view of the present financial constraints.
- Build, operate and Transfer - Annuity Model: The client (Govt) retains the risk with respect to the sale of power, as he collects the revenue. This concept is being used world wide as a project delivery system by which Government will be in possession of the infrastructure project transferred free of charge by private sector after a concession period.
- In Build, operate and Transfer – Special Purpose Vehicle: The Government can also form a special purpose vehicle (SPV) for funding the project. But the Government is not in a position to fund the project in view of the present financial constraints.
- It is of the opinion that the latest financial schemes suitable for taking up the Hydro Electric Power project is Build, Operate and Transfer (Annuity) concept, which is being used world wide as a Project delivery system by which Government will be in possession of the Infrastructure projects transferred free of charge by Private Sector after a concession period.
SWISS CHALLENGE METHOD (SCM)
- A Private Sector Participant (Original Project Proponent) submits an Unsolicited or Suo- Moto proposal at his own cost (subsequently reimbursable by the identified successful bidder)
- The proposal is accompanied by draft contract principles for undertaking a Project/Scheme.
- Government evaluates the proposal submitted by the OPP and, if it finds merit (found to be technically and financially viable) in the proposal, it invites other parties through tenders by invoking the Swiss Challenge Method to submit competing proposals in such manner as may be prescribed by the Government.
- The proprietary information contained in the original proposal shall remain confidential and will not be disclosed.
- The Private Sector is invited to match or better the OPP’s proposal through innovation, quality and efficiency.
- The OPP will be given the first choice to match the identified lowest bidder financial proposal and if refused the Project/scheme will be awarded to the lowest identified bidder.
- Thus innovative Projects could be done under Swiss Challenge Method (SCM) to encourage the Private and Public Sector participants to envisage an innovative project by maximizing competition & transparency.
The Hybrid Annuity Model (HAM)
In financial terminology hybrid annuity means that payment is made in a fixed amount for a considerable period and then in a variable amount in the remaining period. This hybrid type of payment method is attached under the HAM.
In India, the new HAM is a mix of BOT Annuity and EPC models. As per the design, the government will contribute to 40% of the project cost in the first five years through annual payments (annuity). The remaining payment will be made on the basis of the assets created and the performance of the developer. Here, hybrid annuity means the first 40% payment is made as fixed amount in five equal installments whereas the remaining 60% is paid as variable annuity amount after the completion of the project depending upon the value of assets created.
As the government pays only 40%, during the construction stage, the developer should find money for the remaining amount. Here, he has to raise the remaining 60% in the form of equity or loans.
There is no toll right for the developer. Under HAM, Revenue collection would be the responsibility of the National Highways Authority of India (NHAI).
Advantage of HAM is that it gives enough liquidity to the developer and the financial risk is shared by the government. While the private partner continues to bear the construction and maintenance risks as in the case of BOT (toll) model, he is required only to partly bear the financing risk.
Government’s policy is that the HAM will be used in stalled projects where other models are not applicable.
- Pre – Award Stage (Tenders)
- Award of Contract (Agreement)
- Performance of the Contract (Execution Process)
- Post Completion of Stage (Operation & Maintenance)