Procurement and Contract

PROCUREMENT AND CONTRACT
Chapter Outline
1.1. General Introduction
1.2. Stages in Construction
1.3. Introduction to Procurement
1.4. Procurement and Contract Management
1.5. Procurement and Contract Delivery Methods
1.6. Procurement Management
 Construction Industry is an industry which is involved
in the planning, execution and evaluation of all types
of civil works
 CI Categories:
 Transport and Communication (Road, Railway, Airway,
and Telecommunication)
 Water and Energy Works; and
 Buildings and Other Physical Infrastructures
 CI is among the leading industry in producing
employment and contribute to the overall national
development (Current situation of Ethiopia)
 CI specially in developing countries like ETHIOPIA
consumes much of the national budget.
Ethiopian Construction –Recent Trends
 Roads Projects ( 43 Billion Birr in 5 yrs)
 Many road projects under the federal & regional state Road authorities
 Road to connect Addis to Adama
 Hydropower and Wind energy Projects
 The Grand Ethiopian Renaissance Dam Project
 Gilgel Gibe I, II, and III, Tekeze, Tana Beles, Fincha-Neshe, etc.
 Wind energy (around Mekele & Adama)
 Buildings projects
 Housing projects at federal & regional state level ( 400,000 houses ( 16 B Birr)
 The 13 universities and Many health centers
 Water Supply and Irrigation projects ( 10.63 B Birr)
 Kessem , Tendaho, Omorate , Gidabu, Fincha SFEP, Ribi-Megech, etc.
 Railway
 Addis Ababa city rail ways ( supposed to begin shortly)
 In the Private Sector
 Residential and commercial Buildings
 The main players in the construction industry are:
 The Client:
 The Consultant:
 The Contractor:
 Insurance Companies:
 Banks:
 Suppliers:
 Permitting Agencies:
 Public:
…cont’d
Purposes and advantages of bonds
• Bonds are used to guarantee completion of a project as
specified and that it will be free of liens when completed.
Lien: the legal right of a party to control the property of
another or have it sold in order to recover payments of a
claim by the injured party.
• Main advantages of bonds:

– The owner is protected against the withdrawal of a
favorable bid by a contactor through bid bond.
– Suppliers and subcontractors are protected against
nonpayment by a contractor with a labor & material
payment bond.
– The owner receives protection against default, breach of
contract or nonperformance by the contractor through a
performance bond.
Resources for the Construction Industry
҉ Human Resources / Labor or Workmen
҉ Financial Resources / Fund
҉ Information Resources
҉ Physical Resources such as Materials (55-70%),
Equipment and Other Assets
҉ Services and Management.
1.2. Stages in Construction
 Inception and feasibility
 Planning and Design
 Tendering Stages
 Bid Evaluation
 Award of Contract
 Construction Stage
 Commissioning and Acceptance
 Provisional Acceptance
 Final Acceptance
• Procurement is a process used to select the lowest
competitive and qualified bidder for procuring services,
works or goods from potential competitors based on
reasonable & relevant criteria.
• CI involves procurement and contract management systems
in order to ensure fair competition and distributions of
obligations and rights among stakeholders.
• Competition helps:
 The Project Owners- acquire the five rights (Counterpart, Cost,
Time, Quality and Quantity)
 The Project Financiers & Regulators- value market principles and
effective utilization of finance, and
 The Project Providers- get impartial & neutral Opportunity for
business.
 An effective and efficient procurement method ensures

the following rights called the "Five Rights".
 These are:
 The Right Quality,
 The Right Quantity,
 The Right Cost / Price /,
 The Right Counterpart and
 The Right Time.

1.3.1. Types of Procurement
 Procurement can be classified based on the things to

be procured and the way they are procured.
A. Things to be Procured: Goods, Services, or Works
 A -1.Procurement of Goods: Physical resources like Materials
and Equipments are made available using Procurement of
Goods.
 A -2.Procurement of Services: In the CI procurement of services
are often termed as consultancy services procurement.
 These include services like Pre-feasibility and Feasibility studies,
Design and Contract Administration of projects, Construction
Management Consultancy Services, Research or Study based
Consultancy Services, etc.
 A –3.Procurement of Works: In the CI procurement of works

mean the procurement of contractors to carryout the actual
physical infrastructures.
B. Bidders’ Coverage: Competitive Vs Negotiated
Tendering
 B –1.Competitive Tendering: Used for the selection of
better and capable winning bidder among the
various eligible firms.
 Competitive bidding can either be Open or Limited
Competitive Bidding in the form for their invitations.
 B –1.1 -Open Tendering–all eligible bidders are
allowed
 Consumes time for tending and bid –evaluation
 Might result in incompetent bidder
 Results in better cost

 B –1.2 -Limited Tendering - only those passing a certain
qualification criteria are allowed
 Applicable when the project is urgent or unique
 Avoids the rejection of Bids which are non –responsive for
technical evaluations
 Results in higher costs –professional negotiation
 B –2. Negotiated Tendering - Direct appointment of an

eligible firm
 Exceptionally exercise
 Applicable when the project requires special skill and is
very urgent
 The offer might be higher than the norm
C. Geographical Coverage:
 Based on geographical coverage: i.e. International,
Regional, National and Local Tendering.
 Such types of procurements are generally caused by
three major factors.
 Local Capacity –lack of local capacity,
 Financial Sources –depending on financial source and,
 Globalization –free trade policy
 In Practice - Preference Margins –Up to 10% margins
might be used to encourage local firms.
D. Procurement Awareness: General and Specific
Tendering
 It is advisable to include bidders at initiation of projects
 Then General Procurement Notice (GPN) is made
during projects planning phase
 It only arouse the interests of the bidders.
 GPN is used when
 The Project Owners: to save time; identify bidders relevant
for the procurement required; and protect loss of cost in
preparing lots of tender documents
 The Bidders to: to give sufficient time to assess the cost of

the project; protect loss of cost only to participate; and
encourage competent bidders who wary about law-balling
to participate.
 GPN–is of two types based on purpose & time of notice.
 Type I –posted to create awareness of up coming projects
(Announced -Design implementation stage is started)
 Type II –to determine interested bidders to invite them in
the form of limited competitive tendering.
 Specific Procurement Notice (SPN)–is an Invitation to

tender or request for proposal (Project ready for
Implementation)
 Might be used to invite pre-selected bidders through
GPN.
E. Procurement Steps:
 Single Vs Two Staged; and
 Pre-Vs Post -Qualification Tendering.
Single or Two Staged Tendering:

• Single: Bidders submit single proposal and the
evaluation is carried out on the same.
• Two Staged: When the bidders submit separate

proposals and the evaluation will be carried out
separately, usually financial then technical.
Pre or Post Qualification Tendering:
 Prequalification–an internationally accepted practice &
Common in civil works -nature & cost is large & complex.
 Bidders are invited to provide evidence of their ability.
 Pre -qualification can be of two types
1. Those considered qualified during licensing requirements
which entitled them for a single stage tendering process.
Tender evaluation criteria become the low priced bid.
2. When two staged tendering is used to pre-qualify

tenderers for their technical competency. Then either the
lowest priced bidder or the lowest evaluated bidder based
on the weighted average of the technical and financial
scores will be recommended for award.
• Pre -qualification criteria:
 Experience and past performance,
 Health, Safety and Environment Records, if any,
 Capability in respect of personnel and equipment,
 Organizational arrangement and facilities,
 Financial Status, and
 Schedule of Commitments.
The advantages of pre -qualification in procurement
are:
 Post –qualification is a tendering type where
Financial Evaluation is carried out first and rank
bidders on the basis of their offer for tender price.
Then Technical Evaluation follows.
 Advantage -the lowest bidder will not loose and

allows to save time during technical evaluations.
 However, Post qualification approaches often cause

to fix evaluators on financial results and be locked
and biased for successive technical evaluations.
1.4. Procurement and Contract Management
 Procurement and Contract Management involves three major
processes as shown in the figure:
1.5. Procurement and Contract Delivery Systems
• Is the way Project Owners,

Regulators & Financiers
determine the assignment of
responsibilities.
• Project Delivery method is an

organizational concept which
assigns specific responsibilities
and authorities to people and
organizations and which
defines relationship of the
various elements in
construction of a project.
Types of Procurement and Contract Delivery systems:
Force Account
 Project Owners undertake the project.
 Used when:
 It provides a comparative advantage in Cost, Time and
Quality issues.
 When there is a lack of capacity from the private

sector to undertake very large and technologically
new projects.
 When projects are unattractive (small & remote) to

bidders.
Design Bid Build (DBB)
 Is the most practiced type of delivery system in the Ethiopia
Construction Industry.
 Project owners –Basic Planning →Design –Consultants
→Bid –Contractors → Project Built.
 Client–coordinates the different packages.
 Consultant–Design and may supervise the project. (Provide
the methods, not the end result.).
 Contractor-construct works with due care and diligence and
complete them in accordance with the contract, but they
are not held responsible for design deficiencies.
 Since the 1980s, this traditional approach has become less
popular due to the following factors:
 Severe Adversarial relations between the designer and contract
administration consultant and the contractor.
 Fragmented contract for the project owner.
 Project owner responsibility for risks associated with the design and
contract administration.
 Non -Impartiality of the Design and Contract Administration
services.
 The inability of design and contract administration consultants to
cope up with new construction technologies and constructability
issues of their designs.
 The following standard forms of DBB Conditions of Contract are

known for use for such delivery system:
 FIDIC White Book for Consultancy Services (Design and Supervision)
and Red Book for Construction Works.
 Standard Conditions of Contract for Construction of Civil Works,1994;
MWUD.
 Standard Bid Document by PPA ( Public Procurement Authority)
Design Build (DB) / Turnkey
 Is a response to problems associated to the last two types of
delivery systems.
 The complete design and building of the project is carried out by a
single contractor.
 Reduces fragmentation, adversarial relations and Project Owners’
risk.
 Often called turnkey b/s single contractor handovers the completed
facility & let the owner to turn the key & get in.
 Additional responsibility to contractor, Fitness to Purpose according
to the ORNGE BOOK OF FIDIC.
Finance / Build Operate Transfer (BOT)

 Promotes Public Private Partnership (PPP) –A private company is
contracted to finance, design, construct, operate for a certain
period (usually 10 years) and transfer.
Construction / Facility Management Consultancy
 CMC firm is used to coordinate all activities from concept
inception through acceptance of the facility.
 There are two types:
 CM at Risk–where the consultant is responsible for any
risks associated with the project ( increase in cost, change
of ground conditions, etc).
 CM at Free–the client will bear all the risks.
 Facility management–consultancy adds operation of
facility during operation to Construction Management
Consultancy.
 Major difference, involved in whole construction
processes and not only during implementation.
Partnering, Alliances, Outsourcing
Uses
 Running delivery system using Partnering and Alliances,
 specialized delivery system using Outsourcing,
 fast tracking, parallel and coordinated implementations
using Concurrent Engineering and Just in Time Principles.
 Focuses on management of relationships to ensure
quicker, cheaper and quality services.
Assignment I
1.1. Extract a GPN and SPN for:

 Construction services (Group I),
 Works (Group II) and
 Goods (Group III).
1.2.Prepare a short report on the Grand Ethiopian

Renaissance Dam Project.
Last Date of Submission is March 26, 2012.

1.6 Procurement Management
Procurement Management process can be idealized into three
major processes.
A. Procurement Preparation phase: includes
A.1. Formation of a Procurement Team

 Minimum of five members shall be established
 Necessary Experts shall be included(since tender evaluation involves
joint technical & commercial exercise)
A.2. Preparation of Tender Documents:

 Are prepared to:
 Instruct bidders on the procedures for the preparation and
submissions of bids,
 Inform prospective bidders about the nature of things to be procured,
 Inform bidders about the criteria for evaluation and selection of the
successful bidder, and
 Lay down the Contract conditions, Delivery system, Procurement
Methods and Contract types of the project.
Tender documents include:
1. Form of Invitation to Tender or Request for Proposals
2. Instruction to Tenderers (Standard and /or Particular information –Box
1.2) or Terms of References;
3. Prequalification Documents if necessary –Refer procurement methods
based on stages (Section 1.3);
4. Forms of Tender -Refer Contract Documents (Chapter 2);
5. Forms of Contract Agreement -Refer Contract Documents (Chapter 2);
6. General and Particular Conditions of Contract –Refer Contract
Documents (Chapter 2);
7. Bill of Quantities and Drawings -Refer (Chapter 4);
8. Technical Specifications & Methods of Measurement –Refer (Chapter 3 &
4); and
9. Other Forms, Formats and Schedules –Refer Contract Document Parts
(Chapter 2).
Instruction to Tenderers
 A.3.Approval of Tender Documents: includes the

checking, renewal and approval of tender documents.
 Check list is best practice for Tender Documents
approval.
 Prepare Checklist for
1. Request For Proposal including Proposed Program and
Terms of References
2. Architectural, Structural, Electrical and Sanitary
Preliminary and Final Designs
3. Feasibility Studies for Big Projects
4. Road and Bridge Designs
5. Water Works Designs
6. Contract Documents
7. General Points
B. Tendering Phase: includes Invitation, Clarification,

Submission and Opening of tenders.
 Normally open tenders are floated for a period between 30
to 45 days. Limited and Negotiated tenders can be invited
between 7 to15 days.
B.1. Invitation: the invitation to tender shall clearly state:
 The owner and his desirous service or works
 Eligibility requirements,
 Place to get further information,
 Where to purchase & submit tender documents,
 How long the tender will be floated,
 How should the tender offer be packed, and
 When and where submission and opening of tender will take
place.
B.2.Clarifications: -can either be requested by interested

bidder or carried out using a pre-tender clarification
meeting.
 Issues clarified shall be sent (written) to all bidders

participating for the intended services or works.
 The bidders shall submit their offer on or before the

submission date and time including the issues clarified.
 Late bids are automatically rejected.

B.3. Tender Opening: Bids shall be opened in public on the

date, at the time and place mentioned in the invitation to
tender and stipulated in the tender documents.
 Ethiopian practice (public):Two representatives from

MWUD, Project Owner, Consultant (if available), and
Contractors (Who wish to attend) by themselves or by their
legal representatives shall attend during the tender
opening ceremony.
 The following will be carried out during tender opening:-

1. Tender Attendee members shall take their place and be
registered,
2. Tender box opened and checked for faulty things,
3. Check the tender is the right one,
4. Bids will be opened one after the other,
5. All necessary data which deem useful such as Project Name, Name of
bidder, Bid Bond Amount, Tender Price, etc. will be read aloud and
recorded at the opening of bids.
6. Bidders representative shall sign a register to attest their presence during
opening, and
7. Tender committee members shall sign on the Tender
• The following is bid recording format for basic data during opening
C. Tender Evaluation Phase: meant to determine the winner

based on:
 Technical qualification,
 Completion time,
 Commercial terms of the offer, etc
 Note: -Least bidder may not necessarily be the winner.
C.1. Preliminary Evaluation: includes Eligibility and Arithmetic

Review requirements.
• Eligibility Requirements: Tenders are subjected to eligibility

qualifications before they enter to bid and their respective
evaluations.
 Most often sited issues considered in eligibility

requirements are:
 Valid & Up to date Trade and Professional License,
 Valid & Up to date Membership to Financier Organizations,
 Valid provision of Bid Security or Bond,
 Completeness and submittals of all required documents,
 Turnover requirements fulfilled
 Power of Attorney, Signature & Sealing Requirements, and
 Appropriate Invitation, Packaging and Submission
Requirements.
• Responsive to Tender is based on the deviation from the

bid conditions.
• The more major deviations are witnessed the bid will be
rejected based on non –responsiveness to bid conditions.
Arithmetic Review
 Most tenders are often submitted hastily and it is
common to have arithmetic error.
 Evaluation without arithmetic check will
ultimately result in despites.
 Therefore, it is a formal evaluation process to
review arithmetic before carrying out detail
evaluations.
 Note: -Arithmetic review can be done if and only

when financial proposals are opened.
C. 2. Detail Evaluations: include Technical, Commercial and
Financial Qualification requirements.
 Critical evaluation of Technical and Commercial offers will
be carried out to ensure common bases for evaluation.
 Finally, the Financial offer will be updated using Absolute
Results from Commercial comparisons.
 Technical Requirements: Will be carried out according to
the criteria set. E.g. Pre –Qualification Criteria.
 Commercial Evaluation: This includes Benefit Forgone due

to Completion Time; Additional Costs due: to differences in
Foreign Currency Exchange and Advance Payment
requirements; and Provisions of Domestic or Regional
Preference Margins.
1. Benefit Forgone due to Completion Time

 The Benefit Forgone (BF) due to additional completion
time can be computed using the following expressions:
 BF = (FV –TO) / (1 + i)n; FV = TO (1 + i)n
Where; TO = Tender Offer after Arithmetic Check;

n = Completion time in days
i = Discount Rate = 0.05% per day
=1.5% per month;
FV = Future Value
2. Additional cost due to:
2.1. Foreign Currency Exchange requirements
 Used when the tenders have provisions to quote different currencies
 Comparison will be made based on the effects due to the additional
cost incurred from variations in currency exchange requirements.
 Then every currency is converted to a Common Currency.
 For currency conversion, selling rates of Bank published by an official
source and applicable for transactions shall be used.
 Additional cost due to Foreign Currency Exchange requirements can

then be determined using selling rates at:
 15 days prior to tender submission date
 Tender Opening Date
 Decision for Award or Expiry of Tender Validity date
2.2. Additional Cost due to Advance Payment
 Occurs when different amounts of advance payment are requested
as part of the tender offer.
 The Additional Cost due to differences in mobilization advance
requirements can be computed from the following expressions:
APAC= {(AP x TO) / 100} –PV;

PV = A x PWF; A = {(AL%) x TO} /n; PWF = {(1 + i)n–1} / {i(1 + n)n}
Where; AP = Advance Payment Requirement in %;

TO = Tender Offer after Arithmetic Check;
i = Discount Rate = 0.04 % per day; n=Completion time in days
PWF = Present Worth Factor;
PV = Present Value
Domestic and /or Regional Preference

 Domestic or regional preference margin is a provision to give
preference to local companies even if their bid offer is not
over by a percentage often equals 7.5 -10 % for construction
works.
 Eligibility criteria for performance margin are usually set.

 Financial Offer Comparison: After all commercial

comparisons are considered on the same bases; the Tender
offer will be adjusted based on the Cost -Benefit principle
which involves adding costs and benefits foregone. That is:
 TO evaluated = (TO + BFCT + ACAP + ACFE + ACPM)
 Besides, Financial offers per groups of trades of works are

compared in order to evaluate whether tenders are front
loaded or not.
 Front loading often cause disruption of projects or
overzealous contractual negotiations.
Rejection of All Tenders:

 Though is solely the power of the employer to decide,
for the sake of fairness it is recommended that such
rights shall be exercised in the following cases:
 All Tenders are found non –responsive during the

Preliminary evaluations.
 Evidences of lack of competitions such as collusion among

bidders, monopoly, etc.
 Lowest responsive offer is found unreasonably high.

Example –Tender Evaluation
Tender Evaluation
• Preliminary Evaluation: -Eligibility Responsiveness and
Arithmetic Review.
• Detail Evaluation: -Commercial and Equivalent Financial

Offer Comparisons.
• Commercial: Benefit Forgone due to Completion Time;

Additional Costs due to differences in Foreign Currency
Exchange and Advance Payment requirements; and
Provisions of Domestic Preference Margins.
• Finally the equivalent financial offer is computed.

• Checks on front loading shall also be carried out.
Eligibility Requirement
Commercial Evaluation
Types of Bonds
1) Bid Bonds:
• A surety issues a bid bond to guarantee the contractor will, within a
specified period of time, enter into a contract at the price
submitted in the bid.
• The price of bid bonds vary, but 10% of the bid amount is generally
accepted.
• If the bidder has failed to execute a contract, and the owner has
made a claim to recover the difference in the two low bids from the
surety, the surety has to pay the guaranteed amount to the owner.
• Three possible defenses a surety can make:
– The low bidder can prove they made a mistake in the preparation of
their bid.
– The owner delays too long in making a contract award.
– The owner tries to change the terms and the conditions of the
contracts between the award and execution dates.
2) Performance Bonds:
• Performance Bonds provide the most important protection for the owner.
• They guarantee the work will be completed in accordance with the contract
document.
• In case of a breach or default by the contractor, the surety has several
options
• The surety can finance the project by
-providing funds to the defaulting contractor to complete the work.
-The surety can pay the face amount of the bond to the owner.
-The surety can wait for termination of the contract with the original
contractor, then complete the work with another contractor of their
choice.
• The surety does have some possible defenses against the claims made by
the owner, such as the following:
 Breach of Contract – If the owner has breached the contract through
wrongful delays, nonpayment of invoices and change orders.
 Overpayment – If the owner overpaid the contractor for the completed
work at the time of the default.
 Material Alternation – In case of significant alternation without written
notice to the surety.
Labor & Material Payment Bonds:
• They guarantee the project’s suppliers, subcontractors, and other
providers of labor, materials, goods, and services will be paid.
• This bond is also beneficial to the owner. It provides protection from
unpaid parties filing mechanics liens against the project property.
• A payment bond might generally cover:
– Equipment rental
– Freight and transportation fees
– Repair charges for tools and equipment
– Temporary structures, fuels, and union benefits
• Items not generally covered under a payment bond include:
 Insurance premiums
 Workers compensation
 Financial loans and taxes.
• Most payment bonds carry certain limitations to claims, which may
vary from one jurisdiction to another.
Construction Insurance
• Construction Insurance provides protection for
the proposed project and its participants (the
owner, contractor and the architect/engineer)
from physical damage and liabilities due to
project losses.
• Each participant must carry adequate insurance
coverage to protect themselves.
• Insurance requirements:
– Owners insurance requirements.
– Contractors insurance requirements.
– Design professional insurance requirements.

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PROCUREMENT AND CONTRACT

• Main advantages of bonds:

 An effective and efficient procurement method ensures

 The Right Quantity,

 The Right Cost / Price /,

 The Right Counterpart and

 The Right Time.

 Procurement can be classified based on the things to

 A –3.Procurement of Works: In the CI procurement of works

 Might result in incompetent bidder

 Results in better cost

 B –2. Negotiated Tendering - Direct appointment of an

 The Bidders to: to give sufficient time to assess the cost of

 Specific Procurement Notice (SPN)–is an Invitation to

Single or Two Staged Tendering:

• Two Staged: When the bidders submit separate

2. When two staged tendering is used to pre-qualify

 Advantage -the lowest bidder will not loose and

 However, Post qualification approaches often cause

• Is the way Project Owners,

• Project Delivery method is an

 When there is a lack of capacity from the private

 When projects are unattractive (small & remote) to

 The following standard forms of DBB Conditions of Contract are

Finance / Build Operate Transfer (BOT)

1.1. Extract a GPN and SPN for:

1.2.Prepare a short report on the Grand Ethiopian

Last Date of Submission is March 26, 2012.

A. Procurement Preparation phase: includes

A.1. Formation of a Procurement Team

A.2. Preparation of Tender Documents:

 A.3.Approval of Tender Documents: includes the

B. Tendering Phase: includes Invitation, Clarification,

B.2.Clarifications: -can either be requested by interested

 Issues clarified shall be sent (written) to all bidders

 The bidders shall submit their offer on or before the

 Late bids are automatically rejected.

B.3. Tender Opening: Bids shall be opened in public on the

 Ethiopian practice (public):Two representatives from

 The following will be carried out during tender opening:-

C. Tender Evaluation Phase: meant to determine the winner

C.1. Preliminary Evaluation: includes Eligibility and Arithmetic

• Eligibility Requirements: Tenders are subjected to eligibility

 Most often sited issues considered in eligibility

• Responsive to Tender is based on the deviation from the

 Note: -Arithmetic review can be done if and only

 Commercial Evaluation: This includes Benefit Forgone due

1. Benefit Forgone due to Completion Time

 BF = (FV –TO) / (1 + i)n; FV = TO (1 + i)n

Where; TO = Tender Offer after Arithmetic Check;

 Additional cost due to Foreign Currency Exchange requirements can

APAC= {(AP x TO) / 100} –PV;

Where; AP = Advance Payment Requirement in %;

Domestic and /or Regional Preference

 Eligibility criteria for performance margin are usually set.

 Financial Offer Comparison: After all commercial

 TO evaluated = (TO + BFCT + ACAP + ACFE + ACPM)

 Besides, Financial offers per groups of trades of works are

Rejection of All Tenders:

 All Tenders are found non –responsive during the

 Evidences of lack of competitions such as collusion among

 Lowest responsive offer is found unreasonably high.

• Detail Evaluation: -Commercial and Equivalent Financial