Types of Contracts and Guidelines for their choice K.N. Venkata Raman Procurement Consultant, World Bank

Codal Provisions Paragraph 168 of KPWD Code Volume I discusses in brief 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.

Government Instructions Circular issued by FD in January 2005; Circular details the various types of contracts and gives guidance for their choice; Choice of type of contract has to be made at the initial stage itself, preparation of P.P.; Type of contract affects the subsequent stages of procurement, the content of tender document,

Government Instructions (contd) Factors which affect/influence the choice of type of contract; 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

Lump-sum or all inclusive contract 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.

Item rate/unit rate/ad-measurement contract 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

Percentage rate contract 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.

Cost plus contracts 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.

Supply and erect/install, commission and test contracts 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

Design and Build Contract 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

Turnkey contracts 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.

Management Contracts 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.

Public Private Participation contracts 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.