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Project Proposals & Tendering

Types of Contract
Prof. Debopam Roy

What is a contract
• Agreement between competent parties enforceable at law • Formation of Contract:
– – – – – Object Proposal / Offer Acceptance Consideration Reciprocal promise

Typical Parties for Works Contract
• Owners
– Public Owner (Government bodies) – Private Owner (also include quasi-public bodies)

• • • • • • • • •

Architect/Engineers (A/E) Prime/General Contractor Sub-contractors Suppliers Banks & Financial Institutions Specialized Service Agencies Labor Regulatory agencies General Public

Rules for the Participants • Contracts • Tort Law • Laws. and Regulations of Government Agencies . Statutes.

Typical contractual relations between parties of a construction project Owner – A/E Contract for Professional Services (Design and Bid Plans and Specifications) Advertisement for Bids Contractor Joint Venture Agreements Bids Owner-Contractor Construction Contracts (Prime Contracts) Surety Bonds Insurance Contracts Subcontractor Agreements Labour Agreements Purchase Order Agreements .

Nature of Contractual Services • • • • • Design Only Construct Only Design & Construct Turnkey Construction Management Services .

Purchase Orders. Insurance Contract .Nature of Contracts • Owner – Architect Contracts and Owner – Engineer Contracts • Owner – Construction Manager Contracts • Owner – Contractor Contracts • Subcontracts .

The Prime Contract .

STANDARD FORMS OF CONTRACT-India • • • • CPWD MES State PWD Model Standard Contract For Domestic Construction – CIDC • ONE-OF-A-KIND CONTRACTS – Created for a particular project – Little about them is standard or traditional .

org/resources/contracts/which_contrac t.STANDARD FORMS-OF-CONTRACT International • American Institute of Architects (AIA) Contracts – Standard form of Agreement Between Owner and Contractor – Most widely used form for fixed-price building construction works in USA.asp . • FIDIC .fidic.International Federation of Consulting Engineers – http://www1.

This form may also be suitable for contracts which include. contractor-designed civil engineering. electrical and/or construction works. mechanical. the Conditions may be suitable for contracts of considerably greater value. or wholly comprise. Conditions of Contract for Construction. They are considered most likely to be suitable for fairly simple or repetitive work or work of short duration without the need for specialist sub-contracts. building. the Engineer. which are recommended for building or engineering works designed by the Employer or by his representative. mechanical and/or electrical works. the works may include some elements of Contractor-designed civil. However. depending on the type of work and the circumstances. However. Under the usual arrangements for this type of contract. .These Conditions of Contract are recommended for engineering and building work of relatively small capital value. the Contractor constructs the works in accordance with a design provided by the Employer.

ready for operation (at the "turn of the key"). . Procurement and Construction: providing a fullyequipped facility.Conditions of Contract for Plant and Design-Build. which may include any combination of civil. electrical and/or construction works Conditions of Contract for EPC Turnkey Projects. in accordance with the Employer‟s requirements. the entity carries out all the Engineering. which are recommended for the provision of electrical and/or mechanical plant. the Contractor designs and provides. Under the usual arrangements for this type of contract. plant and/or other works. mechanical. This type of contract is usually negotiated between the parties. and for the design and execution of building or engineering works. Under the usual arrangements for this type of contract. which are recommended where one entity takes total responsibility for the design and execution of an engineering project.

where proposals for such services are invited on an international basis: They are equally adaptable for domestic agreements.The purpose of these guidelines is to present the commonly used methods of consultant selection. The terms of the Client Consultant Model Services agreement (The White Book) have been prepared by FIDIC and are recommended for general use for the purposes of pre-investment and feasibility studies. to explain the respective procedures and to combine them all in one compact document. as well as to emphasize and explain FIDIC's policies on the subject of selection. designs and administration of construction and project management. .

and the Bid Form • General Conditions of Contract • Special Conditions of Contract • Specifications • Drawings • Reports of investigations of physical conditions . the Instruction to Bidders.TYPICAL DOCUMENTS COMPRISING THE CONTRACT • Bidding documents consisting of the Invitation to Bid.

BIDDING DOCUMENTS • Normally begins with an advertisement – Identifies the project for which bids are desired – The owner – Time and place of bid opening – Instructions to potential bidders on how to obtain a full set of contract documents • Invitation for Bids (IFB) or Request for Proposals (RFP) – IFB used when bidders must strictly confirm to drawing and specs. – RFP when bidders may propose variations for the project .

late bids etc. date.) – A description of the drawings and specs. their cost. modifications. and precise time of the bid opening – The penal sum of the required bonds (bid bond. and where they may be obtained – Rules regarding withdrawal.BIDDING DOCUMENTS • IFB or RFP typically include: – A description of the contract work – The identity of the owner – The place. . performance bond etc.

sign. signed and sealed in accordance with the IFB or RFP and Instructions to Bidders . seal and turn it in – Constitutes the “offer” – To constitute a responsive bid.BIDDING DOCUMENTS • Instructions to Bidders • Bid Form – Bidders complete this document. the bid form must be completely filled.

BIDDING DOCUMENTS • Bid Forms Contents – A definitive statement of the general terms and conditions of the offer – The format of the commercial terms applying to the offer – Supplementary information that the owner may want to know about the bidder – Requirement for public projects – Bid security .

clause by clause. of all general terms and conditions that will govern the performance of the contract work • The general concept of this section is to include all clauses that will remain the same. contract after contract.GENERAL CONDITIONS OF CONTRACT • Very definitive statements. changing very infrequently .

SPECIAL CONDITIONS OF CONTRACT • Also known as Supplementary Conditions • Project specific matters • Those that are either site specific or in some other way apply only to the specific contract .

SPECIFICATIONS • The technical requirements for each division of work in the contract will be completely detailed in specifications • Conforms to Uniform Construction Index or Masterspec format • Should be carefully drafted so that both parties to the contract have a mutual understanding of the precise technical requirements .

requiring the contractor to prepare the detailed drawings • In fixed-priced bids should be adequately sufficient and clear .DRAWINGS • Complement the specifications • Should be sufficiently clear to adequately show exactly what is to be built • Certain features may be shown in fairly general terms.

• Is such material to be considered part of the contract documents? • Owners often use disclaimers. stream flow hydrographs etc. to escape liability .REPORTS OF INVESTIGATION OF PHYSICAL CONDITIONS • Often concern the geotechnical aspects of subsurface conditions • Usually appear in the form of written evaluations and soil boring logs • Other examples are weather records.

Turnkey. Design Build • Cost Reimbursable – – – – Cost plus percentage fee (CPPF) Cost plus fixed-fee (CPFF) Cost plus incentive fee (CPIF) (Also called as “Target Estimate”) Guaranteed Maximum Terms (GMP) • Concessions .Types of Prime Contract • Measurement Contract – Item Rate – Percentage Rate • Fixed Price – Lump Sum – EPC.

They are bound by each individual rates • Payment is based on actual measured quantity of work • Most common type is Item Rate . each for a discrete element of work of the project • The two parties are not bound by the total value of work.Measurement Contract • Contract is Broken Down into a series of bid items.

No.Item Rate Contract • Also called unit-price contract • Bid document includes a schedule-of-bid-items or Bill of Quantities • The schedule contains the following columns: – – – – – – – Sl. Description of each item of work Unit of Measurement Estimated quantity Rate or Price per unit of work Value of the particular item of work Remarks if any .

Item Description UOM Quantity Rate Amount Remarks .Item Rate Contract Sl. No.

Item rate Contract • The schedule with item description and quantities is given with bid form • The bidders fill in the rate column for each of the item • The rate or unit price includes the contractor’s overheads and profits • By totaling all the arithmetic products (Quantity x Rate). the bidder with lowest estimated cost who satisfies all pre-conditions . i.e. the estimated total cost of the project is obtained • The project is awarded to the lowest responsible and responsive bidder.

the rates may be revised • The final contract price will depend on the actual quantity of work. the payment is made on quantity of work physically measured • If no changes are made in nature of work. The estimated value of contract is not binding • For new items of work. the quantity of work actually performed can vary from the quantities in BOQ (subject to limits). without change in rate • If the quantity of work changes beyond limits.Item Rate Contract • As the actual work progresses. not in original schedule. the rates need to be separately negotiated .

Item Rate Contract • Bid Documents – – – – – – – – – – Notice Inviting Tender Instruction to the Bidders Qualification Criteria General Conditions of Contract Special conditions of contract Project Details Bill of Quantities Basic Drawings Specifications Details of Bid Bonds .

prepare and submit the bill periodically ( generally every month ) – The engineer either accompanies the contractor or his representative while the measurements. . – The amount recommended by the engineer is the cost of the work less retention money and the cost of material supplied to the contractor by the owner and actually used on the work during the period under consideration. – If no discrepancy is found recommends the bill for payment.Item Rate Contract • Mode of Payment – The contractor has to take measurements of the work carried out. or checks the quantities afterwards. otherwise It is paid for as an ‘extra’ item as a specially analyzed rate. – If any item occurs during execution which is not included in the bill of quantities. It is usually possible construct that item by a combination of other items already in the bill.

etc. This arrangements is fair to both the parties . Mobilization. can be carried out in parallel with design & drawing – Easier to accommodate changes due to differing site conditions. etc.Item Rate Contract • Pros – The tender can be floated right after preparation of preliminary drawings – Beneficial when there is lack of design information – Tendering process. change in requirements. – Less risk of contractor making error in quantity estimation during short time period available during bidding – Less tendency of contractor to bid conservatively – What the owner pays to the contractor is the actual cost of the work at the agreed rates.

No scope for value engineering – Dispute regarding extra items – Malpractices (Insider trading) – Front loading . Increases overheads – No incentive on contractor to reduce quantity / cost. Can lead to huge cost escalations – Needs lot of book keeping.Item Rate Contract • Cons – Owner can not be sure of total cost till completion of project.

Difficult to get the extra items done by another contractor – In most cases owner has to meet the demands .Item Rate Contract • Dispute regarding extra items – The contractor invariably presses for higher rates than he would have tendered in the beginning – May threaten to not perform the extra items if his demand not made.

Item Rate Contract • Malpractices – The bidder. can get information on an item. and bid low for another which he knows may decrease in quantity – He may be awarded the contract on becoming L1. and on actual completion. which has more probability of increase in quantity – He may bid high rate for that particular quantity. by bribing an insider. the payment made may be much more than what would have been made if project was awarded to the L2 bidder – Through corruption the quantities can even be intentionally changed to facilitate such malpractice .

contractor may run away. and a lower rate for ending items – This ensures that contractor becomes cash rich upfront. and can manage his working capital better – However if the bid is heavily front loaded. after completing the profitable items .Item Rate Contract • Front Loading – The contractor may put a higher rate for works to be completed earlier.

in addition to item description and quantity • The bidder has to quote a percentage above / below / at par with the rates given in the BOQ • Rates of all items will be increase/decreased by the percentage quoted by the bidder • The bids will be compared based on value of work derived based on the revised rates .Percentage Rate Contract • Another type of measurement contract • Devised to get rid of unbalanced / front loaded bids • The rates are estimated by the owner himself. and included in the BOQ.

Percentage Rate Contract • No scope for – Unbalanced bids – Front loading – Malpractices through insider tips • used in preference to the item rate contract for the works where the estimated quantities are uncertain and likely to change considerably. .

only rate column of BOQ filled by owner and not bidder • Mode of payment – Same as item rate .Percentage Rate Contract • Documents – Same as item rate.

the bottom-line or total estimated contract value • The value of the works is estimated by the contractor based on the drawings and specifications provided.e. i. the contractor will be paid an agreed fixed price for the contractually stipulated services • The lump sum amount can be decided by negotiation or competitive bidding • The bidder’s quotations are compared on the basis of only one figure. .Lump sum Contract • It is a Fixed Price Contract.

estimation of the fixed price in short time available for bid preparation becomes difficult • Contractor may quote very conservatively • Sometimes. . the agreement makes provision to adjust the ‘fixed sum’ allowing for the cost of extra work.. etc. variation . through deviation schedule.Lump sum Contract • Fixed price contract needs complete and accurate set of drawings and specifications • Even with complete drawings. omission.

including item description. as in a BOQ – Gives a complete break-up of the fixed price.Lump sum Contract • Deviation schedule – The work is broken into a no. the amount payable for that particular item is decided based on the deviation schedule . quantity and rate – In case of variation. of items.

Lump sum Contract • Even though the fixed price is for the total completion of job. working capital management becomes difficult if there is no interim payment • Milestones are decided • Payment is linked with completion of milestones • Payment schedule is mostly back loaded • In case the contractor abandons midway. he can only receive payment for completed milestones and not the actual portion of work done • The engineer’s interim certificates form the basis of part payments to the contractor by the owner .

Lump sum Contract • Bid Documents – – – – – – – – – – – Notice Inviting Tender Instruction to the Bidders Qualification Criteria General Conditions of Contract Special conditions of contract Project Details Complete set of Detailed Drawings & site investigation data Specifications Details of Bid Bonds Deviation Schedule Payment Schedule .

This is a sound footing on which he can take the decision whether to start the project or abandon the same – Owner need not employ too many staff to keep periodical accounts of the contractor’s materials. All that the engineer has to do on his behalf is to see that the work is being executed exactly according to the terms of the contract and issue interim certificates to the contractor – There is incentive on the contractor to save on quantity / cost. labour and output. Considerable scope for value engineering and innovation .Lump sum Contract • Pros – If no extras are contemplated the tenders tell the owner exactly what the project will cost him.

Lump sum Contract • Cons – Before a contract is let out the project has got to be thoroughly investigated and all the contract documents kept ready in every respect. extent. This entails costly and time consuming work and which is often difficult to accomplish. and details of the work are not properly defined by the contract documents. many additional features may have to be determined and provided for as the work progresses. – If the nature . These features not being part of the original agreement give opportunity to the contractor for claiming payment at abnormal rates .

etc. Examples of such works are public and private building. .Lump sum Contract • A lump sum contract can be used successfully for the construction of works with which the contractors have had considerable experience and whose cost they can predict with reasonable accuracy. workshops . warehouses.

. such as additions and alterations to existing structure which involves the maintenance of operations while the work is being performed. – Emergency projects that have to be rushed through without time to prepare complete set of contract documents. – The works subjected to unusual and unpredictable hazards such as floods beyond the control of contractors.Lump sum Contract • This type of contract is not suitable for works of which extent and nature cannot be predicted in advance. It is then unfair to make the contractor assume all risks and uncertainties. – Works. dewatering of foundations. Example of works unsuited to a lump sum contract are : – Works involving difficult foundations : Where it is no possible to know in advance the characteristics and quantity of excavation. shoring etc.

Detailed Design & Working Drawings (Detailed Engineering) is done by the contractor as per specifications provided by owner • In most cases specifications lay down the performance criteria only.e. Combination of A/E contract & Prime Contract) • The owner only provides preliminary conceptual drawings (Front End Engineering) & specifications during bidding. Methods decided by the contractor • A Construction Management Service or a Project Management Consultant may be employed by owner to check progress and quality of works .EPC / Turnkey Contract • EPC  Engineering Procurement Construction • Turnkey  Ready to be commissioned at turn of a key • These projects include design as well as construction (i.

EPC / Turnkey Contract • Commercial Terms can be – Lump sum – Item rate – A combination of both – Cost plus • Mode of payment can be – Measurement Based – Milestone Base – Combination of Both .

EPC / Turnkey Contract • In case of LSTK (Lump Sum Turn Key). it is impossible for bidder to estimate the final cost correctly • Hence the bid documents include a BOQ. which contains rates of all items and initial quantities (estimated by the bidder). used as a back up to arrive at the Lump sum. The BOQ is revised after all drawings are completed. and the lump sum fixed based on previous rate • Lump sum includes design fees . deviation schedule is mandatory since in absence of all drawings.

• The quantities and rates are estimated and submitted by the bidders.EPC / Turnkey Contract • In case of unit price EPC contract. including design services. but quantities may be changes depending on the drawing (to any extent) • The payment is based on actual measured quantity . the BOQ contains all items of work. escalation. The rates are fixed. etc.

asphalt.e. Toll Plazas may be lump sum • Invoicing schedule will contain both milestone and measurement . earthwork. some related items may be bundled into a lump sum. excavation. and some other portions may be item rate (i. CD structures. other items stay unbundled and are paid on unit price) • Example: In a highway contract.EPC / Turnkey Contract • In big projects. may be item rate (paid on per LM) whereas Flyovers. WMM. some portions may have lump sum price.

EPC / Turnkey Contract • Bid Documents – – – – – – – – – – – – – Notice Inviting Tender Instruction to the Bidders Qualification Criteria General Conditions of Contract Special conditions of contract Project Details Preliminary Drawings Specifications Details of Bid Bonds Invoice Schedule Bill of Quantities Milestone schedule Deviation schedule .

of professional staff • Enables the contractor. Project is fast track since design and construction can proceed in parallel • There is no division of responsibility. with specialized knowledge of his own techniques. in a way that an architect or engineer without knowledge of these techniques would not be able to produce. to design so as to produce maximum economy. and therefore a leaner price. • More scope and incentive for innovation and value engineering .EPC / Turnkey Contract • The work can be greatly expedited under such contracts as extensive plans and specifications need not be prepared by the employer. hence contract management is simpler • Owner needs to employ less no.

plus an additional amount which would cover his profits and indirect overheads • Not as common as lump sum / item rate but sometimes may become necessary due to various circumstances – Unusual nature of work – Lack of interest among contractors .Cost Plus Contracts • In these contracts the owner agrees to pay the contractor the actual cost of carrying out the work.

Cost Plus Contracts • The items. expenses under which will constitute actual cost. and is considered to be part of the percentage fee paid – Salaries of he contractor’s supervisory staff. postage . – Salaries or portion of salaries or traveling expenses of the officials of the firm who may visit the work. – Charges for the use of any equipment that the contractor would not normally use for the performance of the work. – Contractor’s general office expenses such stationery. . are to be carefully defined in the agreement • Generally the following are not included as cost. telephone accounts etc.

Cost plus percentage fee (CPPF) • The owner agrees to pay to the contractor the actual cost of the work plus an agreed percentage of the actual or allowable cost .

Cost plus percentage fee (CPPF) • Bid Documents – Notice Inviting Tender – Instruction to the Bidders – Qualification Criteria – General Conditions of Contract – Special conditions of contract – Project Details – Details of Bid Bonds .

Disputes arising due to extra work are eliminated. The decisions can be taken speedily. these being prepared as the work progresses. – Extra Works : No work or a portion thereof that the contractor is directed to perform can be called an “extra work”. designs. These factors lead to the rapid execution of the work.Cost plus percentage fee (CPPF) • Pros – Early completion of the work : The work can be started even before the drawings. This flexibility allows the adoption of alternative ways and methods of construction from which to choose the most economic one for the work as a whole. . estimates and specifications are prepared. This may reduce the cost of the work.

. the use of inferior type of materials than specified and hurried completion resulting in poor workmanship do not increase the contractor’s profit. This induces him to perform the work in the best interest of the owner. The final result is therefore a better quality work. Similarly .Cost plus percentage fee (CPPF) • Pros – Quality of Work : The contractor is assured of a reasonable amount of profit even though the prices of materials and the labour charges are subjected to fluctuations .

On the contrary any increase in the construction cost due to delay.Cost plus percentage fee (CPPF) • Cons – Lack of Incentive : Other than professional ethics and goodwill. and economically by proper planning and efficient management . changes in the drawings and designs result in increase of his profit. . There is no incentive for the contractor to complete the work speedily. wastage of materials.

a high cost gives the contractor a higher amount of profits. labour and equipment. This results in waste. Since profits of the contractor are linked with cost of materials.Cost plus percentage fee (CPPF) • Cons – Unpredictability : The final cost is not known to the owner. This may lead the owner to financial difficulties. inefficiency and extravagance by contractors .

. – Illegal for Public Works : Where the owner happens to be a public body or government department this form of contract cannot be adopted except during emergencies. the labour and plant employed and other miscellaneous expenses incurred on the work.Cost plus percentage fee (CPPF) • Cons – Accounts Keeping : Both the parties have to do a lot of accounts keeping regarding the materials purchased and used.

palaces. where the cost of the work is of no consequences but the materials to be used and the methods to be adopted are to suit the choice and taste of the owner . neither the employer nor the contractor is sure about the cost of construction.Cost plus percentage fee (CPPF) • Suitability – When there is an emergency or any other condition that requires constructing a facility in a hurry without time to develop plans for it. a ‘cost plus percentage’ contract is generally used – Works ( in situations which are no emergencies )Where no one can foretell with certainty just what troubles would be encountered in the work.g. and correct decisions cannot be taken except during the progress of the work – Construction of expensive structures e.

who will not exploit the weakness of this type of contract to his advantages. A person or firm of known integrity . will be the best choice .Cost plus percentage fee (CPPF) • The owner should exercise great care in selecting a contractor to carry out the work for him.

try to complete the job as fast as possible. therefore. The contractor receives only the stipulated sum for his part in overseeing and doing the job. no matter what the cost of the project may be • The contractor will. to reduce his overheads . • It has evolved because of the potential for abuse in CPPF format • The profit of the contractor is not linked with the cost.Cost plus fixed fee (CPFF) • The contractor is reimbursed the actual cost incurred by him on materials and labour and is given a fixed amount of money as his fee.

Cost plus fixed fee (CPFF) • The agreement specifies the fixed lump sum to be paid to the contractor by the owner over and above the actual cost of the work. • The employer can select a reliable contractor to execute the work. • However. there is no incentive for the contractor to do the work economically . The parties can work in harmony and accomplish amazingly fine results.

Documents. Suitability – Same as CPPF .Cost plus fixed fee (CPFF) • Mode of Payment.

and an incentive amount.Cost plus incentive fee (CPIF) • A more sophisticated form of cost reimbursable contract • The contractor is paid the actual costs for carrying out the work. worked out by a pre agreed formula. which is directly proportional to the savings over a target estimate .

• A fee as payment for the services is also agreed to based on the magnitude of the target estimate. • The exact formula for sharing is also agreed to at the onset and may vary from contract to contract • Usually there is a cap on the contractor’s share of overruns ( the agreed upon fee) . compared to the target estimate. as the most probable cost of providing the contemplated services.Cost plus incentive fee (CPIF) • The target estimate is an estimate agreed upon by the arties prior to entering into the contract. with the provision that the parties will share the benefits or penalties of any underruns or overruns in the actual costs incurred in providing the services.

Thus higher the actual cost. lower will be the value of the fee that the contractor receives and vice versa.Cost plus incentive fee (CPIF) • By introducing an element of incentive for the contractor to carry out the work in the most economic way an attempt is made in this form of contract to overcome the main drawback of the previous two types of cost-plus contracts. • This is achieved by suitably changing the nature of the agreement in respect of the fee is determined by reference to some form of sliding scale. .

Guaranteed maximum price (GMP) • The parties agree on an initial estimate for the cost of the contemplated services and on a fee for the provider • The estimated cost . owner receives total benefit of savings • Contractors may be interested in GMP only in case of very high fees . contingencies are added to yield the Guaranteed maximum price • The GMP is the owner’s maximum financial exposure • The owner reimburse the contractor for all costs incurred and pays the fees pro-rata • No further payment after GMP is reached • If the cost exceeds the GMP. fee . the contractor suffers a loss • If cost is less than GMP.

operate and maintain the works for a concession period • The contractor recuperates his cost from the collection of charges levied on the beneficiaries who use the work and in some cases annuity payment each year. • The facility is returned back to the government and all rights of concessionaire cease to exist • Depending on the type of ownership. finance . this may be further subdivided into different formats used in different countries at different times . construct .Concession • The contractor undertakes to design.

Concession • • • • • • • • • • • • BOT BOOT BTO DBFO BOLT ROT LOO Annuity FBOOT BOOST BRT BOO .

Concession • • • • • • • • • • • • Build Operate Transfer Build Own Operate Transfer Build Transfer Operate Design Build Finance Operate Build Operate Lease Transfer Rehabilitate Operate Transfer Lease Own Operate Annuity Finance Build Own Operate Transfer Build Own Operate Subsidies Transfer Build Rent Transfer Build Own Operate .

Concession • The cost of construction of the project is ascertained in the manner of a lumpsum or item rate contract • The bidder then works out the cost of financing the project and its recovery from the collection of toll or similar method till the cost of construction together with the cost of finance and expected profit is fully recovered • The cost of maintenance of the project during the period in question has also to be added to the basic cost • Each year’s income will recover the cumulative investment till the net becomes zero or negative .

. • The bidder who submits the cash flow projections seeking the minimum period of concession is generally awarded the contract.Concession • The concession period worked out by each bidder will depend upon the cost of construction worked out by each bidder and also the rate of interest considered for financing the project and expected profit.

Concession • In some cases the total income predicted over any reasonable concession period does not adequately cover the total cost (EPC + O&M)+ interest + profit • The authorities can provide some grants to bridge the gap • Known as Viability Gap Funding • The authority fixes the period of concession and seeks offers on the basis of grant expected from the employer • The bidder expecting the least grant is generally awarded the contract • The grant may be in the form of annuity payment or released in a phased manner as mutually agreed by the parties .

the bidders do not need grant. or a share in revenues to the authority • The bidder offering maximum negative grant or share in revenues will be awarded the contract . the concessionaire may quote an upfront negative grant. and the cumulative income from the years of concession fixed by the authority. far exceeds the total cost • In these cases.Concession • In some cases.

forms an integral part of the contract . investment cost and profit during the concession period .Concession • Documents – In addition to the usual contract documents cash flow projections giving details of how the contactor intends to generate finance and use it till the recovery of his capital.

Concession – The main agreement contains several schedule describing • • • • • • • • • • • • the project site project facilities site delivery schedule design requirements construction requirements operation and maintenance requirements cash flow projections annuity / grant payment schedule performance security state support agreement substitution agreement hand back requrements .

Concession • Pros – public authority is not required to finance the project immediately – project is made to generate the funds and be self financing to the extent possible – greater autonomy for the contractor – more scope for value engineering and innovation – quality is assured since poor quality means increased maintenance cost for the contractor .

• Cons
– greater risk on contractor – Contractor needs expertise in not only construction but other areas like finance, O&M as well

• Ideal type of contract for highways and expressways, bridge , tunnels , electricity power generation and supply etc that save the cost of operation or time of travel for which users will pay reasonable charges • Not suitable for works that are not likely to generate capital for self financing eg. rural water supply projects, village roads , city roads, etc.

Subsidiary Agreements Required for Main Contract
• • • • Insurance Surety Purchase Orders Subcontracts

Surety Bonds / Guarantees .

the owner of the project is the obligee . and will pay up on default of the principal • Principal: The entity that actually furnishes the bond • Obligee: The entity who is guaranteed payment by the bond. in case of bonds furnished by the prime construction contractor. For example.RELEVANT PARTIES AND SURETY BOND TERMS • Surety: A financial institution/entity possessing great wealth.

who promises to pay the surety back for any cost that the surety incurs if called upon to make good the guarantee . essentially underwriting the performance of the principal • Penal Sum: The monetary limit to the guarantee is called the penal sum.RELEVANT PARTIES AND SURETY BOND TERMS • Guarantee: The promise made by the surety to the obligee. May vary from 10% in bid bonds to 100% in performance bonds • Premium: The fee that the principal pays to the surety in exchange for providing the guarantee • Indemnitor: A person or entity.

HOW DO SURETY BONDS WORK? • The potential liability assumed by a surety greatly exceeds the premium charged for underwriting the performance of the principal • The considerations lying behind the willingness of the surety to assume the liability are: – Indemnity Agreement: Will provide that the principal and/or the indemnitors will pay the surety back for an losses that the surety incurs in making good the guarantee – Surety bonds v/s Insurance contracts: Surety bonds are called on only when the principal fails to „perform‟ – How good is the guarantee? Surety must be reputed and at the same time be financial stable for the obligee to have confidence in the guarantee – Surety‟s belief in the Contractor‟s ability to perform .

BID BONDS • The bid bonds protects the interests of the owner against the potential loss that it may incur upon the refusal of the lowest bidder to sign the contract • Bid bond guarantee – The surety guarantees to the obligee that the principal will enter into a contract in the event of an award – The principal will furnish the performance bond and insurance policies required by the contract .

up to a stated limit .BID BONDS • Bid bond penal sum: can be expressed in either of the two ways: – As either a fixed amount of money or as a percentage of the bid total – It can be stated in the form of actual damages suffered.

proof of actual default leads to litigation • Ways to make good the guarantee: (once default is established) – Assist principal to remedy default by providing financial assistance – Take control of contract and complete project by hiring another contractor or by the principal itself – Allow obligee to get it completed and pay the obligee .PERFORMANCE BONDS • Invoking the performance bond: – Requires proof of default – Delay may be because of conditions of force majeure – In most cases.

if costs are lower.PERFORMANCE BONDS • How much does surety pay? – Penal sum is 100% of the contract price – Determination of surety‟s obligation can be reached in various ways: • Surety and obligee agree on a fixed amount (upto the penal sum limit). subject to maximum (penal sum) . If actual costs are higher. surety doesn‟t pay anything. oblige keeps the difference • Another way would be to pay: actual costs incurred – any unpaid contract balance + liquidated damages (due under contract).

PERFORMANCE BONDS • Owner‟s misconception about performance bonds – Possessing the bond does not imply absolute power over contractor – Surety won‟t act until they believe principal is truly in default. the surety can‟t recover the paid up money from indemnitors – To collect eventually on the performance bond guarantee. the obligee must be legally correct on the facts of the default . – If surety pays up and later it is discovered that there really wasn‟t any default on part of the principal.

the contractor will have to pay up later for all expenses incurred by surety . the obligee may actually not recover all costs incurred – Surety is not liable to pay for such losses and will contest „excess early payment‟ • Contractor protection of bonding capacity – Small contractors won‟t want the surety to receive complaints about their performance – If surety takes control of project (after default).PERFORMANCE BONDS • Excess early contract payments – In cases when the contract is heavily front loaded.

• On similar lines but fundamentally different in purpose.PURCHASE ORDER AND SUBCONTRACTOR AGREEMENTS • Additional contracts closely related to the construction contract between owner and prime contractor. • Need to understand clearly the purpose and key features of each in order to decide which should be used for a particular business transaction .

PURCHASE ORDERS • Intended for transactions that involve the sale of goods by a seller and delivery of those goods to a contractor buyer at the site of a construction project. • Should be distinguished from the provision of services or the performance of work involving labour at or on the construction site • For example. providing fabricated structural or reinforcing steel .

It should be handled with a purchase order – In India. Sale of Goods Act.PURCHASE ORDERS • Goods or Provision of Services? – Whether a particular transaction constitutes the sale of goods or the provision of services? – Treat all transactions involving the provision of significant amounts of on-site construction labour as a construction operation requiring the use of a subcontract agreement – Transactions that do not involve the provision of significant amounts of labour at the site should be treated as the sale of goods. 1930 applies .

PURCHASE ORDERS • Use of purchase orders for certain jobsite services – That involve minimal labor like provision and collection of trash containers • Purchase order quantity limitations – PO can be limited to a “one-time” transaction or may provide for a continuing supply of goods on an “asrequired” basis – PO for continuing supply may be open ended or limited to stipulated maximum quantity. .

PURCHASE ORDERS • Conflicts with seller‟s sales quotations – The fine print on the back of the preprinted vendor‟s sales quotation document conflicts with similar fine print on the back of preprinted purchase order document – “boilerplates” – Both vendors and contractors/purchasers try to obtain the most favorable terms – Drafter of PO should ensure that the conflicts are avoided • Flow-Down Language from Prime Contracts – PO may contain explicit flow-down language intended to make all applicable provisions of the prime contract also apply to the PO .

“RED FLAG” PURCHASE ORDER PROVISIONS • Necessary Identifying information – Construction project for which the prime construction contract is held by the buyer – Owner for that project – A/E – Contractor buyer – Seller • Description of the Goods Purchased – Accurate and complete description of each separate item including appropriate references – Quantity of each separate item .

• Pricing and Basis for Quantity Measurement – May contain flow-down provisions – Prime contractors often purchase many items for which payment will be completely unrelated to the provisions of the prime contract .“RED FLAG” PURCHASE ORDER PROVISIONS • Shipping Instructions – Exact name and address of the intended receiving party and instructions on how the goods are to be packaged and marked.

.“RED FLAG” PURCHASE ORDER PROVISIONS • Payment and Retention Provisions – Issues similar to the conditions under the prime contract to the owner – “No pay until paid” clause – Does not excuse the prime contractor from eventually paying – Presence of “condition precedent” • It is specifically understood and agreed that the payment to the trade contractor is dependent. upon the construction manager receiving contract payments. including retainer from the owner. as a condition precedent.

O. construction jobsite • Sales and Service Taxes • Purchase Order General Conditions – Contain most of the general clauses for prime contracts • Special/Supplementary Provisions – Courts give more weight to specially recorded terms than to preprinted terms .“RED FLAG” PURCHASE ORDER PROVISIONS • Specified Delivery Schedule – Equivalent to the statement of allowed contract time in prime contract • Required Delivery Point – Example. F.B.

a portion of the work to another contractor called a subcontractor • Prime contractor still retains the original liability to the owner for the performance of the work. • Subcontract work can be directly spelled out in the prime contract or it may be work incidental to the contractor .SUBCONTRACT AGREEMENTS • A prime contract between an owner and a prime contractor must exist before a construction subcontract can exist • Prime contractor decides to “lay off” or subcontract.

SUBCONTRACT “RED FLAG” PROVISIONS • Necessary Identifying Information – Project for the prime contract – Owner for that project – A/E – Prime contractor – Subcontractor • Description of the Subcontract Work – Must be carefully and completely described – Should incorporate direct references to all applicable drawings and technical specifications and sections of the prime contract .

SUBCONTRACT “RED FLAG” PROVISIONS • Pricing and Basis of Quantity Measurement – If the subcontract work is incidental than payment is not related to the provisions of prime contract • Payment and Retention Provisions • Contractor Control of Performance Time Requirements – “Subcontractor shall perform the subcontract work on a schedule to be determined by contractor” • Damages in the Event of Late Completion – Subcontract often explicitly states the flow of contract liability .

SUBCONTRACT “RED FLAG” PROVISIONS • Subcontract Changes Clause – Most subcontracts will give the prime contractor the right to make changes unilaterally in the subcontract work. the prime contractor is not and thus requires indemnification . delay. suspend or terminate it in the same manner as the owner can in prime contracts • Insurance and Bond Requirements – The subcontract may or may not require the subcontractor to furnish a performance bond and a labor & material payment bond • Indemnification – Owner may be protected by sovereign immunity.

to perform the necessary work with contractor‟s forces for the account of the subcontractor if the subcontractor fails to remedy the default within 48 hours of receipt of contractor‟s directive . after directing the subcontractor to remedy some default.SUBCONTRACT “RED FLAG” PROVISIONS • 48-Hour and 72-Hour Clauses – Pertains to the contractor‟s right.

INSURANCE CONTRACTS • Primary parties – Construction Contractor – the insured – Insurance Company – the carrier – Additional Parties – additional named insured • Policies for the construction industry – Worker‟s compensation and employer‟s liability policies – Public (or third-party) liability policies – Builder‟s risk policies – Equipment floater policies – Miscellaneous policies for special situations and needs .

60. • The Workmen‟s Compensation Act 1923 – provides for compensation to workmen or their survivors in cases of industrial accidents and occupational diseases. 5.000 to Rs.48 lakh • Employer's Liability Act.000 to Rs 4.56 lakh and in the case of permanent total disablement from Rs. 1938 .WORKER‟S COMPENSATION AND EMPLOYER‟S LIABILITY POLICIES • Statutory liability on employers which occurs when the employees are killed or injured in the course of performing their duties. resulting in disablement or death – compensation in case of death ranges from Rs 50.

. in exchange for the premium. agrees to assume the liabilities of the insured contractor subject to a stated deductible amount. 1991 – The essence of the public liability insurance contract is that the insurance company.PUBLIC LIABILITY POLICIES • Public Liability Insurance Act. – These policies do not protect contractors aginst contractually assumed business risks such as failure to complete the project. up to stated monetary limits of the policy.

• Exclusions, Endorsements and Deductibles – Exclusions like XCU Hazards ( Explosion, Collapse and Underground) – Endorsements are special provisions added to the policy to extend its coverage – Deductible is an amount stated in the policy that must be exceeded before the insurance company has any liability • Monetary limits – Primary and Umbrella policies – Primary: tailored to meet the monetary limit requirements of the prime contract – Umbrella: designed to raise the monetary limits to a much higher level

• Also called as “installation floater” insurance • Does not include consequential damages such as lost time or increased cost of performance • It can be obtained as either a named peril or an all risk policy • Traditionally cover losses to the contractor‟s temporary structures in addition to the losses to the permanent work • Does not cover contractor‟s construction equipment or tools

• Protects the contractor against physical damage or loss to tools and construction equipment (including theft) • Method of determining loss: – Replacement value – Book value – Pre-agreed value • Equipment floater insurance for Marine Equipment Operations – Called as hull insurance –

MISCELLANEOUS POLICIES FOR SPECIAL SITUATIONS • • • • Railroad protective insurance Transit insurance Business interruption insurance Fidelity and forgery insurance • Owner provided insurance programs .