Contract Award, Performance, and Administration

Award of Contract Contract Documents

Documents should clearly define:

THE SCOPE OF WORK TO BE PERFORMED

THE GOODS TO BE SUPPLIED THE RIGHTS AND OBLIGATIONS OF

THE PURCHASER AND OF THE CONTRACTOR OF SUPPLIER AND

Award of Contract Contract Documents (cont’d)

IN ADDITION TO THE GENERAL CONDITIONS OF CONTRACT ANY SPECIAL CONDITIONS APPROPRIATE TO THE NATURE AND LOCATION OF THE PROJECT SHOULD BE INCLUDED

CONTRACTS FORTHE INTERNATIONAL SALE OF

GOODS SHOULDBE PREPARED ON THE BASIS OF

EQUALITY ANDMUTUAL BENEFIT

Contract Definition

A CONTRACT ISAN AGREEMENT BETWEEN

TWO OR MORE PARTIES WHEREBYEACH PARTY PROMISES TO DO,OR NOT DO DO, SOMETHING:A TRANSACTION INVOLVING

TWO OR MORE INDIVIDUALS,WHEREBY EACH HAS

RECIPROCAL RIGHTS TODEMAND PERFORMANCE OF

WHAT IS PROMISED

(Friedman, Jack. P.,Dictionary of Business terms, page 123)

CONTRACT

AGREE TO TERMS,HAVE THE RIGHT TO

DEMAND PERFORMANCE

MORE IMPORTANT

THIS PROMISE TO DO OR NOT TO DO SOMETHING IS ENFORCEABLE BY LAW AND INCORPORATES REMEDIAL

RIGHTS FOR NON PERFORMANCE

SELLER

BUYER

Applicable Law

A CONTRACT COMES INTOBEING WHEN

THE PARTIES HAVE REACHED AGREEMENT ON

ALL ESSENTIAL POINTS INTHE FORM REQUIRED

BY THE APPLICABLE LAW

Applicable Law (cont’d)

WORLD BANKSTANDARD DOCUMENTS

A CONTRACT WILL BE INTERPRETEDIN ACCORDANCE WITH THE LAWS OF THE PURCHASERS COUNTRY

UNTIL A FORMAL CONTRACTIS SIGNED, THE BIDDER’S OFFER TOGETHER WITH THE NOTIFICATION OF AWARD WILL CONSTITUTEA BINDING CONTRACT

Contract Format

CONTRACT FORM

BID FORM

PRICE SCHEDULE

SCHEDULE OF REQUIREMENTS

TECHNICAL SPECIFICATIONS

Contract Format (cont’d)

GENERAL CONDITIONSOF CONTRACT

SPECIAL CONDITIONSOF CONTRACT

AMENDMENTS TO THEBIDDING DOCUMENTS, IF ANY

PURCHASERNOTIFICATION OF AWARD

Preparation of Contract

EACH CONTRACT IS UNIQUE

BUYER AND SELLER MUST AGREE

PREPARE ON THE BASIS OF EQUALITY AND MUTUAL BENEFIT

PREPARE IN LINE WITHTHE APPLICABLE LAW

Preparationof Contract (cont’d)

AVOID CONFUSION ANDLEGAL GAPS

(by adhering to standard documents, such as those included in the World Bank’sSample Bidding Documents)

MAKE SURE YOU KNOW YOUR CONTRACT

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Contract Performance and Administration

Contract Performance and Administration

• Contracts for Goods/Equipment– INCOTERMS– Use of Letter of Credit

• Contracts for Works– Securities

• Common Problems

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Contracts for Goods/Equipment• Performance Security• Payment Terms• Pre-Shipment Inspection (Compliance with Specifications,

with Bid)• Understanding Delivery terms• Liquidated (Delay) Damages• Receipts• Stores (Accounting for Goods received/dispatched)• Warranty Obligations

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Contracts for Goods/Equipment

• Contract changes/amendments are exceptional (and should be subject to Bank review)

• Litigation relatively rarely (Dispute settlement by arbitration if amicable settlement fails)

• Any amicable settlement should be subject to Bank review

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INCOTERMS 2000

• GROUP E: DEPARTURE– EXW: EX WORKS (…named place)

• GROUP F: MAIN CARRIAGE UNPAID– FCA: FREE CARRIER (…named place)– FAS: FREE ALONGSIDE SHIP (…named port of

shipment)– FOB: FREE ON BOARD (...named port of

shipment)

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INCOTERMS 2000 cont.

• GROUP C: MAIN CARRIAGE PAID– CFR: COST AND FREIGHT (...named port of

destination)– CIF: COST, INSURANCE AND FREIGHT (...named

port of destination)– CPT: CARRIAGE PAID TO (…named place of

destination)– CIP: CARRIAGE AND INSURANCE PAID TO (...named

place of destination)18

INCOTERMS 2000 cont.

• GROUP D: ARRIVAL– DAF: DELIVERED AT FRONTIER (…named place)– DES: DELIVERED EX SHIP (...named port of destination)– DEQ: DELIVERED EX QUAY (...named port of destination)– DDU: DELIVERED DUTY UNPAID (…named place of destination)– DDP: DELIVERED DUTY PAID (…named place of destination)

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EX WORKS (EXW)

• DELIVERY:– SELLER PLACES THE GOODS AT BUYER’S DISPOSAL– AT SELLER’S PREMISES– NOT CLEARED FOR EXPORT – NOT LOADED ON ANY VEHICLE

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EX WORKS (EXW)

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SELLER’S RISK

SITE

BUYER’S RISK

S BSELLER’S COST BUYER’S COST

DELIVERY

FREE ON BOARD (FOB)

• DELIVERY:– WHEN GOODS PASS SHIP’S RAIL– IN PORT OF SHIPMENT

• SELLER CLEARS GOODS FOR EXPORT• FOB ONLY FOR SEA AND INLAND WATERWAY

TRANSPORT

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FOB

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SSITE

BSELLER’S COST BUYER’S COST

SELLER’S RISK BUYER’S RISK

DELIVERY

COST, INSURANCE AND FREIGHT (CIF)

• DELIVERY:– WHEN GOODS PASS SHIP’S RAIL– IN PORT OF SHIPMENT

• SELLER CONTRACTS AND PAYS:– INSURANCE– FREIGHT

• CIF ONLY FOR SEA AND INLAND WATERWAY TRANSPORT

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TO NAMED PORT OF DESTINATION

CIF

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SSITE

BSELLER’S COST BUYER’S COST

SELLER’S RISK BUYER’S RISK

DELIVERY

CARRIAGE AND INSURANCE PAID TO(CIP)

• DELIVERY:– TO FIRST CARRIER NOMINATED BY SELLER

• SELLER CONTRACTS AND PAYS:– CARRIAGE – INSURANCE

• CIP USED IRRESPECTIVE OF MODE OF TRANSPORT, INCLUDING MULTIMODAL TRANSPORT

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TO NAMED PLACE OF DESTINATION

CIP

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S

DELIVERY

BUYER’S RISK

SITEBORDER

BSELLER’S COST

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• Most suitable for purchase of imported goods and equipment

Use of Letters of Credit

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Definition of Letters of Credit

A written undertaking by a bank(issuing bank) given to the Seller at the

request and in accordance with theinstructions of the Purchaser to effect

paymentup to a stated amount, within a prescribed

time limit, and against stipulated documents

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LETTER OF CREDIT: 1

BUYER SELLER

1. Contract

3. Letter of Credit

5. Goods on Board12. GoodsDelivered CIF

7. 6.Doc.s

8. Documents

9. Money

11.Money

10.Documents

2.Credit

AdviseL/Cissued

4.

ISSUING BANK ADVISING/CONFIRMINGBANK

Contracts for Works• Performance Security• Advance Payment Security• Insurance Obligations/Documentation• Supervision of Works• Due Diligence of Engineer/Employer• (Progress) Payment Certificates• Liquidated (Delay) Damages• Completion Certificate• Liability Period (usually 1 year)• Defect Liability Certificate

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Unit Price/Ad Measurement Contracts

• Use of Bill of Quantity (quantities estimated by Employer and Unit Prices offered by Contractor/Bidder)

• Payments as per quantities executed * Unit Prices• Variation Orders• Quantity Variations: use contract provision for % limits on

increases / decreases• New Prices determined by Engineer

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Lump Sum Contracts• For simple contracts, construction of buildings • Quantities estimated by Contractor/Bidder under his own

responsibility• Final Payment predetermined as a LS• Payments as per Schedule of Activities• Normally no price increase (except under Price Adjustment

provision in contract)• Engineer to supervise quality and compliance with contract

specifications

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Contracts for Works

• Price Adjustment Provision• Final Payment• Delayed Payments/Interest due• Contract Amendments (subject to Bank

Review if > 15% in value)• As-Built Drawings• Operation and Maintenance Manuals

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SECURITIES, BONDS AND GUARANTEES (cont’d)

• PERFORMANCE SECURITY

– BOND OR BANK GUARANTEE

¨ BORROWER SPECIFIES IN

BIDDING DOCUMENT

¨ BOND -- 30% - 50%

¨ PERFORMANCE BANK GUARANTEE -- 10%

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SECURITIES, BONDS AND GUARANTEES (cont’d)

• RETENTION– NORMALLY 5% OR 10% OF EACH PAYMENT CERTIFICATE– HALF PAID TO CONTRACTOR ON TAKE OVER– SECOND HALF REPLACEABLE BY BANK GUARANTEE ON TAKE-OVER

(HENCE ALSO PAID ON TAKE-OVER)

• ADVANCE PAYMENTS

– TO BE SECURED BY BANK GUARANTEE (NOT BY AN INSURANCE BOND!) FOR EQUAL AMOUNT

Common Problems

• Inappropriate payment practices– Excessive advance payments (70%!) 15-20% should be a maximum– Advance payments inadequately secured (must be a bank

guarantee)– Delays in making balance payment (up to one year+!)– Interest is not paid to Contractor on delayed payment

• Consequences: – Contractors add cost to their bid price (up to 35%!)– Serious contractors/suppliers stay away from public procurement!

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Common Problems (cont’d)

• Poor performance by Contractors• Mostly consequence of:

– Insufficient qualification of contractors– Poor practices in qualifying contractors– Lack of monitoring and remedial actions by

Employer/Engineer– Collection of Delay (Liquidated) Damages is

deficient/non existent

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Common Problems (cont’d)

• Receipt of Goods/Delivery Notes deficient and/or unrecorded

• End users unaware of warranty obligations of supplier

• Contract Filing and Documentation inadequate

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Contract Management Monitoring and Evaluation

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Issues to be addressed

• Monitor contract execution to ensure that Contractor/Supplier performs as per Contract

• Sanctions in case of non-performance• Payment should be contingent on satisfactory

performance

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Recommendations for Effective Monitoring (1/2)

• Monitoring system should provide for adequate sanctions against both public officers and contractors/suppliers

• Sanctions must be well known to both contractors and implementing agencies

• Project monitoring should be provided with appropriate staff, equipment, and motivation and by empowering the team with the required authority

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Recommendations for Effective Monitoring (2/2)

• Need for a handbook for monitoring goods/works/services, build on best practice, and addressing both financial and technical issues

• Use independent consultants for monitoring/supervision of large technical supplies and civil works

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