Day 2-

SESSION I:

TYPES OF
CONTRACT AND
FRAMEWORK
B2 TRAINING ON PROCUREMENT OF WORKS AND CONSULTANCY
CONTRACT SERVICES

IPFMRP – CDP Project

Shakti Prasad
Shrestha
  Matters to be taken to
select Procurement
Contract
Presentation  Types of Procurement
Outlines Contract for Civil Works
 Framework Contract
 Case: Selection of
methods and contract
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SELECTION OF PROCUREMENT CONTRACT (RULE-20)
After selection of the procurement
method, Public Entity shall have to
select a procurement contract in
regard to procurement proceeding
by which the procurement is to be
made out of the contracts provision
for construction work
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SELECTION OF PROCUREMENT CONTRACT (Contd..)
Following matters shall be taken into account
for selecting a procurement contract :-
The type and quantity of procurement
 Whether or not the likelihood of re-
procurement of the same nature,
 Distribution of risk between the Public
Entity and construction entrepreneur and
 Method of supervising the procurement
contract.

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SELECTION OF PROCUREMENT CONTRACT (Contd..)
 Procurement Contract for
Construction Works (Rule 22): In
order to implement a construction
work, PE may conclude any
contract out of the contracts set
out in Schedule-4 .

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 Unit Rate Contract
 A unit rate contract may be concluded:
 When the quantity is not ascertained
at the time of conclusion of
procurement contract or
 When to have the per unit activity of a
construction work at the rate referred
to in the Bill of Quantities,

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 Unit Rate Contract
 In unit rate contract, materials, labor and
other things required to complete the
proposed construction work is to be
included
 In making payment for the work done the
amount to be found from computing the
quantity as ascertained from
measurement of construction site by per
unit rate.
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 Unit Rate Contract
 Total contract price is based upon the price of all the
individual units of the work.
 Rather than setting a price based on that finished
product, a unit price contract will determine the price
based on the “units” that will be required to make up
that job.
 Often, the number of units needed won’t really be
specified at the start of work
 Any cost needed to completing given unit of work will
be price, which commonly factored into unit prices
such as Labor, Material, Overhead, Profit, Taxes, Permit
and Inspection Costs etc.
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 Lump Sum Contract
 Contractor is required to submit a
total and global price instead of
bidding on individual items.
 Most recognized agreement form on
simple and small projects and
projects with a well-defined scope or
construction projects where the risk
of different site conditions is minimal.
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 Lump Sum Contract
 Usually is developed by estimating labor
costs, material costs, and adding a specific
amount that will cover the contractors
overhead and profit margin.
 Nature of Construction Work: used when
the work is difficult to measure such as
installation of underground water pipeline
or a construction work that can be
measured such as structure of a bridge
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 Lump Sum Contract
 Risk/Liability: All risk and liability relating to
the construction work shall remain on
construction entrepreneur.
 Liability of the Employer: if the financial
liability of the construction work is increased
due to make a change of any type in the
construction after commencement of the
construction work upon conclusion of the
procurement contract, the PE shall have to
bear such liability.
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 Lump Sum Contract
 Single Price quoted for the entire
project based on plans and
specifications and covers the entire
project and the owner knows exactly
how much the work will cost in
advance.
 Requires a full and complete set of
plans and specifications and includes
all the indirect costs plus the profit.
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 Lump Sum Contract
 Very minimal and changes in design or
deviation from the original plans would require
a change order paid by the owner.
 Payment made as per the percentage of work
completed
 Contractor responsible for additional costs
beyond the agreed price, however, if the final
price is less that the agreed price then the
contractor will gain and benefit from the
savings.

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 Cost-Reimbursement Contract
 Projects that involve a substantial
amount of technical and financial
uncertainty and accord greater flexibility
during performance of the work
 Employer promises to pay all allowable,
allocable, and reasonable costs incurred
in performing the contract work, as well
as a fee that constitutes the contractor's
profit.
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 Cost-Reimbursement Contract
 In turn, contractor promises to exert its best
efforts to perform the desired work. If the
work turns out to need more money than
originally estimated, the contractor notifies the
government and the contractor may stop work
when the money runs out .
 Appropriate when uncertainties regarding
contract performance do not permit costs to
be estimated with sufficient accuracy to use
any type of fixed-price contract.

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 Cost-Reimbursement Contract
 Nature of Construction work: Highly risky and
unpredictable conditions of work and a construction
entrepreneur does not agree to carry out or cannot
carry out under the unit rate contract cost
 Payment System : Made for the actual incurred cost
for carrying out such a construction work, overhead
cost thereof in addition to the profit as stated in the
approved cost estimate.
 Fix the maximum amount of cost-reimbursement: In
this type of contract, PE have to fix the maximum
amount of cost-reimbursement and if an amount
exceeding such limit is to be paid , need to obtain the
pre-approval of the of Departmental chief.
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 Cost-Reimbursement Contract
 This contract requires that:
 Contractor’s accounting system is
adequate for determining costs
applicable to the contract; and
 Appropriate government surveillance
during performance will be provided.

 Prohibited to use for the acquisition

of commercial items.
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 Cost-Reimbursement Contract
 Advantages of Contract :
 In contrast to a fixed-price contract, a
cost-plus contractor has little incentive to
cut corners.
 Often used when long-term quality is a
much higher concern than cost, such as in
the United States space program.
 Final cost may be less than a fixed price
contract because contractors do not have
to inflate the price to cover their risk
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 Cost-Reimbursement Contract
Disadvantages :
There is limited certainty as to what the final cost will
be.
Requires additional oversight and administration to
ensure that only permissible costs are paid and that the
contractor is exercising adequate overall cost controls.
Properly designing award or incentive fees also
requires additional oversight and administration.
There is less incentive to be efficient compared to a
fixed-price contract.

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 Time and Material Rate Contract
 Contracts involve both parties agreeing on
predetermined unit rates for labor and
materials, and there is no preset price for
construction.
 This type of contract is used
 when it is impossible to get an accurate
estimate of the total project cost,
 when the schedule cannot be defined, or
 when changes are likely to be made during
construction.
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 Time and Material Rate Contract
 Highest risk for the employer or client and the least
risk for the contractor because there is no limit on
how long the project will take or how much it will cost.
 Use of the contract: To carry out a work by computing
the labor on the basis of time and the materials on
the basis of unit rate due to unpredictability at the
time of conclusion of procurement contract of the
labor and materials required for the repair and
maintenance of a construction work, a time and
material rate contract may be concluded.

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 Time and Material Rate Contract
For Example : Pot Hole of Road, Repair and Maintenance
Payment under the Contract :
Amount found out after adding to the overhead
cost and the profit referred to in the approved
cost estimate to the sum find out by dividing the
labor on the basis of per hour or per day or per
month, and
The paid amount of the price of the material
used for maintenance, subject to the limitation of
the amount referred to in the procurement
contract.
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Time and Material Rate Contract : Drawbacks
 Employer or clients may try to
negotiate for not-to-exceed
conditions, reduced markup on
materials, or reduced billable per-
hour rates, ultimately reducing the
contractor's profit. Sometimes clients
will set prices that are lower than
actual market rates, based on their
internal cost structure, or vice-versa.
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Time and Material Rate Contract : Drawbacks
 Many Employers not used to working with
time and materials contracts, making
finding new business opportunities
challenging.
 Such contracts should be structured so
that the contractor is able to bill for a
sufficient amount of money to cover fixed
costs. When the billing hours are reduced,
fixed costs must also be reduced at the
same rate as the billable hours.
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 Time and Material Rate Contract
To ensure the appropriate and effective use,
PE:
Must establish that no other contract type
is suitable.
Need to clearly and carefully document
findings in a written determination and
findings to provide appropriate insight into
the circumstances where these vehicles are
needed.

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 Time and Material Rate Contract
To ensure the appropriate and effective use, PE:
Must recognize that once needs become known,
they must maximize the use of other contracting
forms, which, in the context of a commercial item
acquisition, with economic price adjustment
contracts.
Should familiarize with and use the alternate
terms and conditions designed to address
payment, inspection and acceptance, and access
to records

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 Design and Build Contract
 A project delivery system used in the
construction industry.
 Design and construction services are
contracted by a single entity known as the
design–builder or design–build contractor.
 Employer awards the entire project to a
single company.
 Once the contract is signed, the contractor
is responsible for all design and construction
work required to complete the project.
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 Design and Build Contract
 Allows the employer to deal with a single
source throughout the duration of the
job, rather than coordinating between
various parties.
 The technician or team examines the
design shall have to examine and approve
such design, drawing and cost estimate as
set forth in Regulation for examination
and approval.
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 Design and Build Contract
 Awarded builder hire all architects and engineers required to
complete the design work.
 Employer has the right to approve or reject design options, but
not responsible for coordinating / managing the design team.
 Once the Employer approves the design, the same contractor
then oversees the construction process
 Benefits :
 A simplified role in the construction process, and will often
greatly reduce administrative and management responsibilities.
 Result in a more team-oriented atmosphere, and may reduce
claims and legal problems over the course of the project.
 Have more accurate budgets and estimates as well, and a
faster completion time.

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 Design and Build Contract
 The primary drawback : lack of checks and balances system.
 On a traditional design-bid-build system : architect and contractor act
as separate entities, responsible for protecting the best interests of the
owner.
 When the design team and contractors are all working together, the
employer may find himself working against both of these parties.
 Design-build can leave the project owner feeling overwhelmed. As
most organizations have limited construction experience, they may find
it difficult to coordinate directly with the contractor as the project
progresses.
 Instead of having the architect to represent the employer as in a
design-bid-build contract, the employer must represent himself.
 A lack of experience with this process on the employer 's part may
lead to project delays or increased expenses in some situations.
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 Management Contract
 Nature of Contract : A construction work carried out
through different subcontractors subject to the
conditions that legal and contractual obligation relating
to the quality and completion period of construction
work shall be undertaken by the construction
entrepreneur themselves
 Prime Contractor Responsibility : Public Entity concludes
procurement contract with prime construction
entrepreneur and such work is carried out under their
management and supervision.
 Payment System : Made only to the prime construction
entrepreneur who has concluded contract with the PE
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 Management Contract
 Management contractor is responsible for all the
administrative and operational work of the construction
project.
 Employer comes in the picture to hire the management
contractor and then when the building of the project is
complete. The entire work in between these two event is
done by the management contractor
 Management expertise of a contractor organization to
assist and advise in developing the design, coordinating the
interface between design and construction, undertaking
the construction and planning for and remaining within a
target cost and target time for delivery of the project.

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 Management Contract
Advantages :
Most beneficial when little guidance or information is available in the
initial stage of the project
Pay a single management team rather than several contractors and
workers.
Management contracts fixes the price of building the project enable
investor to calculate its finance and profit
This enable experts to control the design, quality, cost of material
used in early stages.
Disadvantages :
High risk of conflicts between manager and the investor.
The price is fixed in advance which may change from time due to
change economy resulting in conflicts between the investor and
manager

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 Performance based Maintenance
or Management Contract:
 Nature of Contract : May be concluded in order to
carry out a construction work without mentioning the
equipment required to maintain and manage a
construction work and item wise work and by
mentioning only the final performance.
 Performance-based Management and Maintenance
of Roads (PMMR) is a new way of effectively and
efficiently preserve road assets
 It has started to replace the traditional method-based
contracting of road maintenance.
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 Performance based Maintenance or
Management Contract:
Good Road Asset Management (RAM) :
is a systematic process of maintaining, upgrading,
expanding and operating road, bridge and road side
assets,
using engineering principles with sound business
practice
to effectively and efficiently allocate and utilize
resources
for the provision of well defined levels of service to
satisfy public expectations
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 Performance based Maintenance or
Management (PBM) Contract:
Steps to Implement Road Asset Management in the context of
PBM Contract :
Establish a complete inventory
 Establish a complete condition assessment
 Estimate the value of the asset
 Predict future demand of traffic and service needs (including
overloading)
Predict asset deterioration , Establish service levels
Estimate maintenance and upgrading needs and costs
Set up funding scenarios for the regular and timely maintenance
and upgrade of the road related assets

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 Performance based Maintenance or
Management Contract:
Benefits of Road Asset Management :
Consistent good level of service
Reduced life-cycle cost
Reduced road user cost
Ability to monitor and track performance
Improve transparency in decision making
Ability to predict consequences of funding decisions and future
funding needs
Decreased financial, operational and legal risk
In the long run the best way of effectively and efficiently manage
road related assets is through Performance Based Contracting (PBC)

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 Performance based Maintenance or
Management Contract: Benefits
For Road Agency
Reduces maintenance cost (based on the same level of
service!)
Avoids frequent claims and contract amendments to
increase quantities of works by contractor
Avoids road rehabilitation
Improves quality of works
Improves control and enforcement of effective road
quality service levels

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 Performance based Maintenance or
Management Contract: Benefits
For the Road Users
Provides better and safer roads with consistent conditions
Reduces road user cost
For Consultants and Contractors
Guarantees workload over longer period
Provides potential for increased margins Opens excellent
opportunities for business growth

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 Performance based Maintenance or
Management Contract: Benefits
Payment and Incentive System
Fixed periodic payments for scope of works and
services contracted under performance or service levels,
mainly for routine maintenance works.
Payments based on unit prices and quantities of work
performed typically for “risky” work items such as
Emergency and Unforeseen Works and often for periodic
maintenance and rehabilitation works as well.

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 Performance based Maintenance or
Management Contract: Benefits
Payment and Incentive System
Periodic fixed payments to be reduced if contractor
does not comply with the performance service levels
Contract to be terminated prematurely for under
performance
Some contracts include bonus payments
Payment and incentive systems vary widely from one
country to another

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 Performance based Maintenance or
Management Contract: Frameworks
Legal: Need to consider
 Multi-year contracting
 Road maintenance regulations
Financial: should assure
 Sufficient funding
 Multi-year financing
 Dedicated funds
Institutional: Arrangement
 Separation of client and contractor
 Privatization of road maintenance
 Competition between contractors
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 Piece -Work Contract (PPR)
 In order to carry out a construction work related to
small scale maintenance and repair which requires to
be carried out frequently as and when required, a
piece- work contract may be concluded by establishing
the list of price of such work.
 The contract covers all occurring services and works
that are necessary in order to implement the works
through to full completion, unless otherwise stated in
writing.
 Generally, the period of this contract shall not exceed
one year.

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 Piece -Work Contract
 By the contract for a piece of work, the contractor binds himself
to execute a piece of work for the employer, in consideration of
a certain price or compensation.
 The contractor may either employ only his labor or skill, or also
furnish the material
 The contract covers all occurring services and works that are
necessary in order to implement the works through to full
completion, unless otherwise stated in writing.
 The basis of the piecework contract is inspection and review
as well as the supplied and reviewed drawing material,
timetables, descriptions and measurement depending on the
piecework type selected.

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 Framework Agreement
 An agreement with one or more bidders for the
supply of goods, services and, in some cases, works,
the purpose of which is to establish the terms
governing contracts to be awarded for a given period,
in particular with regard to maximum price, minimum
technical specifications and, where appropriate, the
quantities envisaged
 An agreement with suppliers to establish terms
governing contracts that may be awarded during the
life of the agreement.
 A general term for agreements that set out terms and
conditions for making specific purchases (call-offs).
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 Framework Agreement
 It establish terms governing contracts that may be
awarded during the life of the agreement.
 Note that a framework covers the provision of a
generic group of goods, works or services (or a
combination), for example:
 Goods – Office furniture, Stationaries
 Services – Design consultancy
 Works – Construction of different works
 When concluding a framework agreement, the
quantities and delivery times are usually described in
broad terms or (in particular in the case of quantities)
left open.
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 Framework Agreement
 FA in which all of the terms are defined (whether single-
or multi-supplier) facilitate the workload of PE as they
allow more straightforward contracting, through non-
negotiated, directly placed purchase orders.
 FA are often used for products or services that do not
require customization or where additional flexibility at the
call-off stage is not necessary.
 FAs define all of the technical specifications and service-
level agreements (SLAs) in the FA itself.
 FAs in which not all of the terms are laid down at the
outset allow PEs additional flexibility in the second (call-
off) stage.
 Typical goods or services categories for this type of FA can
be office supplies, hardware, furniture or fuel.
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 Framework Agreement
 Framework agreement not normally a contract
 The framework agreement itself may be a
contract, but only if the agreement places an
obligation to purchase.
 FA is more likely to not be a contract itself, but
merely an agreement about the terms and
conditions that would apply to any order placed
during its life.
 A contract is made only when the order is placed
and each order is a separate contract.
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Framework Agreement - Construction Works
 PEs that continuously commission construction work might
want to reduce procurement timescales, learning curves and
other risks by using FA
 Allows allows PEs to invite tenders from suppliers of goods
and services to be carried out over a period of time on a call
off basis as and when required.
 The FA contract documents should define the scope and
possible locations for the works or services likely to be
required during the defined time period.
 FA Contract should describe the contract conditions that will
be used for pre- construction services (such as design) and /
or contract conditions that will be used to execute the works
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Framework Agreement - Construction Works
 Depending on the size and complexity of the
anticipated projects, the supplier might provide
a pricing mechanism or risk adjustment
mechanism for different types of contract that
might be used, for example a minor works
contract, a cost reimbursable contract , a design
and build contract, and so on.
 A suitable option would then be selected by the
PEs depending on the nature of the projects that
emerged.
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 What a Framework Agreement Does ?
 A framework agreement sets out the terms for
procurement contracts over a given period,
sometimes several years.
 It establishes various elements such as the
maximum price, technical specifications and
maximum or minimum quantities that can be
purchased.
 A government body can make an agreement
with a single supplier or with several suppliers
in the same line.
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 What a Framework Agreement Does ?
 For example, a local government agency sets up a
three-year procurement framework with several
vendors to purchase paper supplies.
 The framework sets the parameters for prices,
quantities and types of paper, such as lined or
unlined.
 When the government needs to make a purchase,
it can pick from whichever supplier offers the best
deal within the framework parameters without
negotiating the purchasing contract from scratch.

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Framework Agreement : Some Considerations
 Once established, frameworks must be used
 Frameworks should deliver a specified minimum value of
work
 Number of companies on a framework should be
proportionate.
 PEs should refrain from using multiple frameworks for
greater flexibility
 Framework operators only consider the use of mini
competitions if - a clear commercial reason for doing so.
 PPMO, PE (procurement units): need to ensure
framework agreements are fair and that they do not
overlap.
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Objectives, Actions & Benefits of Framework
Agreements

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Objectives, Actions & Benefits of Framework
Agreements

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 Framework Arrangement : Utility
 Widely used in the Public and Utility Sectors : facilitate frequent
buying instead of doing 'one-off' purchase orders and minimizing
repetitive purchasing tasks.
 Sets the basics of business: relating to price, delivery, and
quality of services), but specific details added later (quantity,
scope of services etc.)
 Works as an ‘umbrella agreement’ that sets out the terms under
which individual contracts (call-offs or one-offs) can be made
throughout the period of the agreement
 Allow flexibility, for example, Purchases of travel services and
software often have to be customized each time they are
bought. If a procurement framework gives the parties that extra
leeway, it will require more negotiation when the time comes to
make a purchase.

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 Framework Agreement Drawbacks
 Depend on Listed suppliers : Procurement arrangement with
one or several suppliers, no option to buy from anyone else.
 Small- or medium-sized businesses often get shut out of the
framework.
 Agreement that standardizes the future contracts too much-
can hurt need for specialized, nonstandard purchase.
 An agreement that authorizes too many small purchases
throws away one of the government's biggest cost-saving
tools: the ability to buy in bulk.
 Bigger the framework, the harder to manage everything-
 explaining the rules to contractors, guidance for buyers on
how to make purchases and informing whoever monitors
spending about the agreement's existence.

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 Framework Contract in Nepal
 In Nepal PPR has made provision of Framework Contract in the
case of Goods and services only.
 Mostly used in Stationary Supply indicating the quantity and
rate for a year
 The PPR 2064 provision: A framework or unit rate contract may
be concluded to make arrangements for obtaining the goods or
other services set out in the procurement contract at the time
when the demand is made by a Public Entity from one or more
suppliers as per the rate and conditions set forth in the
procurement contract.
 Contract shall have to specify the minimum and maximum
quantity of the goods or other services to be procured
( generally, (+/- 15 %)) and period of this contract shall not
generally be more than one year.

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 Points to Remember
 Procurement contracts has to be selected after selection of
Methods of procurement
 Procurement Contracts need to consider the public procurement
law and model form of contract prepared by PPMO
 If the model contract document has not been prepared by
PPMO, then public entity should prepare the contract document
themselves and need to get consent of PPMO
 Mostly used contract for construction work in Nepal is Unit Rate
Contract (BoQ rate Contract)
 Selection of wrong contracts agreement may invite the
technical, financial and legal actions regarding claims,
compensation etc.

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Case: Selection of methods and contract
 There was sudden floods in a village. Your office is
responsible for such water induced disasters.
Considering the situation the department asked to your
office to control the flood by using whatever budget
available.
 In this case how do you deal with this situation to
solve the problem. Brief about the steps you will take
regarding technical report, legal matters , funding and
budget, use of the procurement methods and the
selection of the contract.
 What do you do and why ?

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