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Types of Contracts for works and Goods and Guidelines for their choice

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Usual Codal Provisions

• PWD Codes discuss in brief generally only two types of contracts, namely Lump-sum and Schedule (Item Rate);

• Development projects of Government Departments/PSUs and local bodies are sometimes complex and necessitate use of other alternative types of contracts.

3

Choice of Type of Contracts

• Choice of type of contract has to be made at the initial stage itself, preparation of Procurement Plan;

• Type of contract affects the subsequent stages of procurement, the content of tender document etc;

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Choice of Type of Contracts (contd)

• Factors which affect/influence the choice of type of contracts;– Nature and complexity of works;– Size and duration of contract;– Degree of definition of the works and the element of

risk/uncertainty;– Status of design(preliminary or final);– Technical capability, design and supervisory resources

of the Employer;– Financial resources and budgetary constraints;– Previous experience of Employer on the type of contract

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Lump-sum or all inclusive contract (Works)

• Tenderer quotes a fixed sum for execution of work as per design and specification within stipulated time;

• Payment is linked to stage of completion of an activity;

• Relatively easy to administer;Inflexible for design changes

• Normally used for small, short duration, well defined, detailed works;

• Example standard housing, bus shelters, primary health centre etc.

6

Item rate/unit rate/ad-measurement contract (Works and Goods supply)

• Most common type of contract;• Tenderer quotes unit rates for different items;• Unit rates is inclusive of the costs of labour,

materials, equipment;• Detailed measurements are recorded and payment

made at the tendered unit rates;• Flexible to handle variations due to changes in

design;• Higher supervisory costs;• Amenable for manipulation

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Percentage rate contract (Works)

• Contractors to submit the %age above or below the current schedule of rates;

• Simple to comprehend for the contractor;• Decision on tender immediate;• Irrational tender, same percentage above or below

different category of items;• Appropriate for small value contracts, when items

of work are few and belong to same category.

8

Cost plus contracts (Works)

• Periodic reimbursement of contractor’s costs of inputs plus fee to cover overheads;

• Fee may be fixed or percentage of measured costs;• Early mobilization possible in emergency situations

or poorly defined works;• If fee is fixed little incentive to produce quality

work; If fee is %, limited incentive to be cost effective;

• Appropriate for open ended emergency situations;• Mostly used in private sector.

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Supply and erect/install, commission and test contracts (Combination of Supply and

Works)

• Single responsibility;

• Management is simple;

• Direct cost is likely to be more;

• Appropriate for power plants, water pumping plants, water treatment and sewerage treatment plants; telecommunication projects etc

10

Design and Build Contract (Works)

• Innovative competitive designs are possible, which result in economy, better design and aesthetics;

• Pre-qualification is an essential feature;

• Appropriate for important buildings, major bridges, complex flyover, navigation works, airports and other infrastructure works

11

Turnkey contracts (Combination of Works and Supply of Goods)

• Tenders for alternative systems and processes;• Two stage tendering procedure followed;• Usually Lump sum with price adjustment;• Employer is able to choose the best available

processes and thus effect economy;• Appropriate for procurement of complex industrial

process plants such as steel mills, fertilizer plants, food processing, oil refineries etc.

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Management Contracts (Combination of Works and Supply of Goods)

• Firm acts in the role of a contractor that does not actually perform work directly but manages the work of other sub-contractors;

• Bears full responsibility and risk for price, quantity and timely performance of contract;

• Appropriate for major infrastructure projects such as airports, sea ports etc.

13

Public Private Participation contracts (Mostly infrastructure Projects)

• BOT, BOO, BOOT contracts;• Concessionary turn key type of contract including

financing in addition to design and construction, operation and maintenance of public and private revenue earning projects;

• It is a way of overcoming the budgetary constraints to acquire the needed infrastructure for growth;

• Appropriate for profit earning projects such as power generation and distribution, toll roads, and other projects.