CONTRACT MANAGEMENT

The 3 R’s of contracts

Responsibility
Reimbursement
Risk
What is a contract?
It is an agreement between two parties wherein one party
(contractor) promises to perform a service, and the other party
(client) promises to do something in return – typically make
payment for the service.
Both the service requirements and the payment must be clearly
spelled out.
Business contracts are those contracts which are enforceable
by law.
RESPONSIBILITY
What work is to be outsourced?
Define that work in unambiguous terms.
Define the end result – performance parameters.
These three are called “the scope of work”.
Scope is related to responsibility.
Most problems in contracts arise because the scope is not
defined clearly!
According to industry practice, a certain cluster of
responsibilities in a set pattern are considered for a contract –
each such pattern can be treated as a type of contract.
REIMBURSMENT
Different arrangements may be described as follows:
Lump sum contract
Lump sum: fixed price arrived at by way of competitive bidding.
Cost plus contract
2.1 Cost plus % fee:
For services = actual man hour x (rate) + % of this for
overhead + agreed % of sum of above as fees + costs at actual
For supply = Equipment cost + agreed % fee
For turnkey = installed plant cost at actual+ agreed % fee
2.2 Cost plus fixed fee:
Fee component is fixed – there is no link with other costs which
are reimbursed at actual
Item rate contract
The contractor offers a unit rate for each item mentioned (in
the form of a detailed schedule of items and their approximate
quantities) in the contract. Rates may also be obtained against
items not mentioned in the contract.
Convertible contract
This works on cost plus basis till scope of work can be defined
and can be later converted to lump-sum.
Hybrid contract
For Example: - Lump sum + item rate
The contract may be divided into two parts. The part where
design parameters (or quantities) are fixed - are put on lump
sum. For the rest, where quantities may change (at detailed
design stage) item rates are invited from the contractor for a
schedule of items with approximate quantities.
RISK
Both the owner and contractor are concerned equally – in fact a
contract is considered as an instrument to transfer the risk to
the contractor by the owner.
For the owner, risk may mean – will the contractor be able to do
the work as per specifications? Within decided time? Within the
quoted cost? Will the performance be up to the mark?
For the contractor, risk may mean – will the owner terminate
the work before completion? Will the payment be on time? Will
the scope change and upset his estimates? Will the owner
honor extra claims? Will he make a profit?
TYPES OF CONTRACT
Process licensing contract
Know – how contract
Detailed engineering contract
Supply contract
Supply plus erection contract
Turnkey contract
Project monitoring contract
Labor contract
TURNKEY CONTRACT
A single contractor has complete responsibility for building the
plant.
Turnkey is the expression for the extent of responsibility that a
contractor undertakes.
It might be fixed price or cost plus.
Engineering consultancy organizations can also undertake
turnkey responsibilities without having the capability of finance
and supply.
(They can get the engineering and construction work done on
contract)

BOOT, BOT AND BLOT CONTRACTS

• BOOT (build, own, operate, transfer) is a public-private

partnership (PPP) project model in which a private
organization conducts a large development project under
contract to a public-sector partner, such as a government
agency. A BOOT project is often seen as a way to develop
a large public infrastructure project with private funding.
How the BOOT model works
The public-sector partner contracts with a private developer –
typically a large corporation or consortium of businesses with
specific expertise - to design and implement a large project.
The public-sector partner may provide limited funding or some
other benefit (such as tax exempt status) but the private-sector
partner assumes the risks associated with planning,
constructing, operating and maintaining the project for a
specified time period.
During that time, the developer charges customers who use the
infrastructure that's been built to realize a profit. At the end of
the specified period, the private-sector partner transfers
ownership to the funding organization, either freely or for an
amount stipulated in the original contract. Such contracts are
typically long-term and may extend to 40 or more years.
BOOT is sometimes known as BOT (build, own, transfer).
Variations of this model are BOO (build, own, operate), BLT
(build, lease, transfer) and BLOT (build, lease, operate,
transfer).
BLOT Contract
• BLOT (build, lease, operate, transfer) is a public-private
partnership (PPP) project model in which a private
organization designs, finances and builds a facility on
leased public land. The private organization operates the
facility for the duration of the lease and then transfers
ownership to the public organization.
BOO (build, own, operate)
• BOO (build, own, operate) is a public-private partnership
(PPP) project model in which a private organization builds,
owns and operates some facility or structure with some
degree of encouragement from the government. Although
 the government doesn't provide direct funding in this
model, it may offer other financial incentives such as tax-
exempt status. The developer owns and operates the
facility independently.

EMERGENCE OF PROJECTS (Project Classification)

Projects are the key to the progress of an economy because development itself is
the outcome of a series of successfully managed projects. Both developing and
underdeveloped countries need a planned economy for their sustained growth.
Projects can also be classified as ‘industrial’ and ‘non industrial’ projects.
Industrial projects are set up for the production of some goods. Projects such as
healthcare projects, educational projects, irrigation projects, soil conservation
projects, pollution control projects, highway projects, water supply projects come
under the category of non-industrial projects.
Projects can be classified on the basis of size- small, medium and large. The size
is in terms of amount of investment required. The investment limits for different
categories are announced by the government from time to time. As per the
directive of Govt of India, investment in plant and machinery up to Rs 1 crore are
categorized as “small scale project” while those with investment above Rs 100
crores are classified as “large scale projects”.
Private enterprises need to continuously evolve and grow to keep up with
technological and other changes and maintain their profitability. Projects can
also be classified as follows, based on the needs of an enterprise.
New projects
Expansion projects
Modernisation projects
Replacement projects
Diversification projects
Backward integration projects
Forward integration projects