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PM0018 - Contracts Management in Projects - Set 1

PM0018 - Contracts Management in Projects - Set 1

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Sem Assignment Contracts Mangment in Projects
Set 1 2011
Abhishek Jain - 511035358
Page 2 of 6
Master of Business Administration-MBA Semester 4
 Contracts Management in Projects
Assignment Set - 1
Q 1. Describe the four basic elements of a contract [10 Marks]Ans: Basic elements of contract
Now that we have learnt the definitions of contract, let us now learn about the basic elements ofcontract. We must note that for an agreement to become a contract, it must enclose an offer,acceptance, consideration, and an objective to create legal relations.The basic elements of a contract are shown in figure 1 and explained thereafter:
Figure 1: Basic Elements of Contracting
An offer is proposal or a statement by one party to another, manifesting the intention toenter into a contract on certain terms. For example, suppose you want to sell a book, and youtell your friend that he could buy it for Rs.200. In this case you offer to sell your book for Rs. 200,without which you cannot develop a contractual relationship with your friend.
The offer that you make must be clear in a manner capable of acceptance without anythingfurther required by the other party.
To create a contract, the party to whom you make an offer must accept it,without which no contract exists. For example, if your 
friend agrees to buy the book, then he has accepted your offer and a contract is createdbetween you and your friend.
An acceptance of the offer results in a meeting of minds. Acceptance can be in oral, or inwriting.
It is the key element of a contract. It is the thing for which the parties havebargained. It may be a promise or payment of money. This promise is to perform the intendedtask. In our example the consideration is both Rs. 200 and the book itself. You bargain for themoney and your friend bargains for the book.
Intention to create legal relations:
The parties in agreement can decide if they intend to maketheir contract a legal agreement that is enforced by law. This involves terms and conditions for performance; including fulfilling promises. For example, a major producer of automobiles entersinto an agreement with a service company to service its automobiles.A contract can be written or oral, but oral contracts are difficult to prove. A contract can alsoconsist of a series of letters, offers, counter offers and orders. Some types of contracts are:
Conditional contract (that is. it depends on an event that affects legal relations).
Joint contract (that is. when several parties combine to make a joint promise to perform;however, each is responsible).
Implied contract (that is. a legal contract which arises due to some relationship among theintermediate parties).In reality, there are innumerable variations of contract. The types given above are only someexamples.
Sem Assignment Contracts Mangment in Projects
Set 1 2011
Abhishek Jain - 511035358
Page 3 of 6
Q 2. Describe the characteristics and legal issues of Lump-Sum Turn Key type (LSTK) contractAns:
Characteristics and legal issues of LSTK EPC contracts:
In a LSTK EPC contract, the responsibility for basic and detailed design rests with thecontractor. You give the design criteria and contractor gives his price based on his basic anddetailed design. If you give very clear design criteria, you become responsible for designdeficiencies. If your design criteria are ambiguous, then the contractor should clarify thisambiguity prior to submitting his price. If the design criteria are critical to the project, contractor should ensure that it is made part of the contract. Otherwise, different interpretations of thedesign can lead to disputes affecting both the schedule and cost of the project. This can onlybe prevented by pre-contract negotiations, scope review and clarification sessions, agreementon preliminary P and I d s (Process and Instrumentation diagrams) and design drafts.
Changes or variations:
Even when design criteria are clear, EPC contracts allow for variations(see note on FIDIC in this section). The impact that a change will have on the project will dependon the timing of the change, example, a change in the P and I d at the design stage will haveless adverse impact than at the construction stage. This means that changes should beaddressed early.
Schedule delay:
You regard schedule as contractor 
s responsibility in a LSTK EPC contract.However, for you to claim compensation for schedule delay from the contractor, you must provethat the contractor delayed a work on the critical path of the schedule. Similarly, the contractor should also keep producing a time-impact analysis of each delay throughout the project inorder to claim any extension in the project completion schedule as well as financialcompensation that he may desire from you.
Force majeure:
These are occurrences beyond the control of either you or contractor for example war, terrorism, labour strikes, radiation and so on. However, precise terms regardingforce majeure conditions should be included in the contract. These terms should also addresswhether only time extension will be given for such events or whether financial compensation willalso be allowed.
Owner controlled activities:
Despite the single point responsibility by the LSTK EPC contractor, youare also responsible for contractor 
s action, some of which are:
Adequate site access.
Assurance that basic design issues are addressed.
Facilities for commissioning like raw material feed, water, power and other utilities asapplicable which are usually in your(owner 
s) scope.
Payment and performance assurances: EPC contractor is customarily bound for satisfactoryperformance by a Bank guarantee of the project for a period (usually one to one and a halfyears) termed as the Defect Liability Period. This is a help mechanism for you to recover anydefects even post project delivery.In some contracts, contractor can get his payment assurance for work done when you give anopen letter of credit in favour of the contractor. However, this is usually for delivery of costlyequipment or imported equipment.
Insurance companies offer several options to both owner (you) and contractor.Examples are LD insurance, cost over-run insurance, insurance for even some force majeureitems and so on. Insurance is an important risk mitigation mechanism that should be adopted inEPC contracts.EPC projects offer a mutually beneficial and exciting form of project delivery for you as well as thecontractor. However, you should not mistake the LSTK EPC approach as a license to do anything youwant without the threat of increase in project cost or delay in project schedule. You must dischargeyour responsibilities without hindering the work of the contractor. You must realise that the goal ofLSTK EPC contract is to allow the work to proceed without disruption due to changes throughout theimplementation of the project. Otherwise many of the benefits of this mode of project delivery willnot be realised.
Q 3. Write short note on the following bidding methods:a. International/Global Competitive Bidding (ICB).b. Limited International Competitive Bidding (LIB).c. National Competitive Bidding (NCB).Ans:a.
International/Global Competitive Bidding (ICB)

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