PM0009 – CONTRACTS MANAGEMENT

SET – 1

Q 1: List and explain in brief the methods of selection of consultants.

A.1
The methods of selection have been designed to achieve the objectives of quality
, efficiency, and economy, fairness and transparency in selection process and to
encourage competition.
The methods of selection of consultants are:
Quality and Cost Based Selection (QCBS)
Quality Based Selection (QBS)
Selection under a Fixed Budget (FBS)
Least Cost Selection (LCS)
Selection Based on Consultant’s Qualification (CQS)
Single Source Selection (SSS)
Quality and Cost Based Selection (QCBS):
(a) Features: QCBS is a method based on the quality of the proposals and the cos
t of the services provided. It is the most commonly used method of selection for
most of the types of services. Under QCBS the technical and financial proposals
are submitted simultaneously in separate sealed envelopes (Two-cover system). P
roposals received after the deadline is rejected. Evaluation of the proposals is
done in two stages-Quality and cost.
The envelopes containing the technical proposals are opened by a committee of of
ficials of the Client immediately after the closing time for submission. The fin
ancial proposals envelopes remain sealed.
The evaluation of the technical proposals is done as per criteria set out in the
RFP. Technical scores of the technical proposals are notified publicly. The fina
ncial envelopes of those consultants who score more than the stipulated minimum
qualifying score are opened in the presence of the consultants or their represen
tatives wishing to attend. The financial proposals are then evaluated and the te
chnical and financial scores are then combined according to the weights indicate
d in the RFP.
The consultant obtaining the highest combined score is selected for award. He is
then invited for negotiations. Because price is a factor of selection, the staf
f rates and other unit rates are not to be negotiated.
(b) Where appropriate: This method of selection is appropriate when:
The type of services required is common and not too complex;
The scope of the work of the assignment can be defined with precision and the TO
R is clear and well specified;
We (Client who hires the consultant) as well as the consultant can estimate with
reasonable precision the staff time, the assignment duration and the other inpu
ts and costs required of the consultants;
The risks of downstream impacts are quantifiable and manageable;
The capacity building aspect of the assignment can be estimated with regard to d
uration and staff time effort;
To ensure receipt of responsive proposals, the RFP under QCBS shall indicate the
 level of key staff inputs (in staff time) estimated by us (the Client) to carry
out the assignment or the estimated cost of the services, but not both. However
the consultants shall be free to determine their own estimates of staff time to
carry out the assignment and to offer the corresponding cost in their proposals
.

(c) Type of assignments for which this method of selection is adopted:

QCBS is adopted for the following assignments:
o Feasibility studies and designs where in the assignment is simple and we
ll defined; Preparation of bidding documents and detailed designs;
o Supervision of the construction of works and installation of equipment;
o Technical, financial or administrative services of a noncomplex nature;
o Procurement and inspection services;
QCBS may not be appropriate for complex or specialized assignments in which the
scope of the assignment is not well defined and staff time are difficult to esti
mate. Since cost is a factor in selection under QCBS consultants may propose con
ventional approaches and tested methodologies to keep the costs low. This may ul
timately affect the quality of the assignment especially if the downstream impac
ts are complex, large or unknown.
Quality Based Selection (QBS):
(a) Features: QBS is based on the evaluation of the proposal quality without any
initial consideration of cost. As in the case of QCBS, the technical and financ
ial proposals are received in two separate envelopes. The technical proposals ar
e evaluated. The financial proposal of that consultant who has scored the highes
t technical score (which should of course be more than the stipulated minimum sc
ore) shall be opened for evaluation of financial proposals. Because the TOR of t
he assignments under QBS are generally more complex and less defined than under
QCBS, contract negotiations with the winning consultant may be lengthy and compl
icated, we may need the assistance of a Technical advisor.
(b) Where appropriate:
QBS is appropriate when:
The downstream impact of the assignment can be so large that the quality of the se
rvices is of overriding importance for the success of the project as a whole;
The scope of the work, the duration of the assignment, and the TOR require a deg
ree of flexibility because of the novelty or complexity of the assignment, the n
eed to select among innovative solutions, or the particular physical, environmen
tal, social or political circumstances of the assignment; The assignment itself
can be carried out in substantially different ways such that cost proposals may
not be easily or necessarily comparable;
The introduction of cost as a factor of selection makes competition unfair;
The need exists for an extensive and complex capacity building program;
The RFP under QBS shall also indicate the level of key staff inputs (in staff ti
me) estimated by the Client to carry out the assignment or the estimated cost of
the services, but not both. However the consultants shall be free to determine
their own estimates of staff time to carry out the assignment and to offer the c
orresponding cost in their proposals. The staff time indicated by the consultant
s or the cost may differ considerably from our (Client’s) estimates, depending on
the particular methodology adopted by the consultant. The proposals should not b
e rejected on this account.
(c) Type of assignments where this method of selection is adopted:
o QBS shall be adopted for assignments such as the following: Complex sect
or and multidisciplinary studies of a complex nature; Important and far reaching
strategy studies;
o Complex master plans, pre-feasibility and feasibility studies, or design
of large and complex projects;
o Assignments in which consultant organizations with different cost struct
ures (for example traditional consultants, nongovernmental organizations (NGOs)
are required to compete;
o In situations of strong uncertainty or risk for the project;
o Design contests in which consultants present a plan or design based on c
oncept or criteria provided by the Client examples being:
o Railway Stations, Ports, Airport Terminals,
o Public buildings such as hospitals, theatres, concert halls, university
campuses, arts and sports centres, exposition and fair complexes, Malls, Multipl
exes and government buildings;
o Rehabilitation of large, obsolete, or abandoned structures and areas to
create multipurpose centres for public use;

Selection under a Fixed Budget (FBS):

(a) Features: In this method, the available budget is disclosed in the RFP to th
e invited consultants. The budget indicated in the RFP should be reasonable, com
patible with the TOR and the consultants should be able to perform within the bu
dget. Under the FBS, the consultants to whom the RFP is issued are requested to
submit their technical and financial proposals in separate envelopes. Technical
proposals are evaluated first using the same procedures as for QCBS and QBS and
the financial proposals of those consultants who score more than the minimum are
opened in public. Because Lump sum form of contract no corrections shall be mad
e to the financial proposals. Activities and items described in the technical pr
oposals but not priced or quantified differently in the financial proposal from
the technical proposal shall be assumed to be included in the prices of other ac
tivities or items. That means the financial proposals will not be altered. We di
scard the proposals that exceed the indicated budget and select the consultant w
ho has submitted the highest ranked proposal within the budget.
(b) Where appropriate: FBS is appropriate only when:
The budget cannot be exceeded;
The objective and the TOR including the scope of work are very precisely defined;
The time and the staff month effort required from the consultants can be assessed
with precision;
Capacity building is limited to a simple transfer of knowledge, that can be very
easily estimated;

(c) Negotiations:
Because the budget is fixed, the consultant’s TOR cannot be changed substantially
and technical negotiations cover only minor aspects. Financial negotiations will
not include discussions of remuneration rates and of other unit rates, but only
of minor rearrangement of activities and staff for compatibility with the work
plan and clarification of tax liability.
(d) Type of assignments for which this method of selection is adopted:
FBS is likely to result in better quality proposals than under QCBS, because it
is easier for consultants to maximize quality under a fixed budget than under si
multaneous quality and cost competition. FBS also requires a shorter time than Q
BS for negotiations. FBS is convenient for consultants because the pre-establish
ed budget allows them to determine in advance whether they are interested in com
peting for the proposed assignment and to develop the best proposal consistent w
ith budget. More so than with QBS and QCBS, FBS requires the TOR to be consisten
t with the established budget and to contain a well specified scope of work for
consultants to present clear and responsive proposals. The main risk of using th
e FBS is under budgeting the TOR and in doing so discourage good consultants fro
m participating and then receiving poor performances
from the awarded consultant.
Least Cost Selection (LCS):
(a) Features:
Under LCS a minimum qualifying mark for quality is fixed and indicated in the RF
P. Shirt listed consultants are requested to submit their proposals (technical a
nd financial) in two separate envelopes.
Of the consultants who have scored more than the minimum technical score, the co
nsultant with the lowest price is selected. LCS shall not normally used as a sub
stitute for QCBS. Because quality is to be ensured, we should set a mark that is
higher than usual (for example 75 or 80 percent) to ensure quality and avoid th
e risk of selecting low cost proposals of poor or marginally acceptable quality.
(b) Where appropriate:
The LCS method is appropriate only for small assignments of a standard or routin
e nature wherein the intellectual component is minor, well established practices
and standards exist.
(c) Type of assignments for which method of selection is adopted:
The LCS method of selection is adopted for the following assignments:
Standard accounting or simple audits;
Engineering designs or supervision of simple projects;
Repetitive operations, maintenance work and routine inspections;
Simple surveys;

Selection Based on Consultant’s Qualification (CQS):

(a) Features:
Under CQS, we first request expression of interest (EOI) and qualification infor
mation relating to the experience and competence of the consultants relevant to
the assignment. We then evaluate the information, establish a shortlist and then
select the firm with the best qualifications and references among those who con
firm to be willing to
submit a proposal if selected. The RFP is then sent to the selected consultant a
nd asked to submit technical and financial proposals and then invited to negotia
te the contract if the technical proposal proves acceptable.
(b) Where appropriate:
CQS method is appropriate for assignments for which the cost of a full fledged s
election procedure would not be justified. CQS method can substantially reduce t
he process cost for us as well as the consultants and the time required to hire
a consultant as
well. This method is particularly suitable when the past qualifications and expe
rience of the consultant are crucial to the choice while the technical proposal
itself is not likely to reveal much additional or decisive information on the su
itability of the consultant for the proposed assignment.
(c) Type of assignments for which this method is adopted:
CQS is usually adopted for the following assignments:
o Evaluation studies at critical decision points in the project implementati
on such as review of alternative solutions with large downstream effects;
o Executive assessments of strategies and programs;
o High level, short term, expert advice;
o Participation in project review panels;

Single Source Selection (SSS)

(a) Features:
Under this method, we request the already identified consultant to prepare techn
ical and financial proposals which are then negotiated.
(b) Where appropriate:
Because there is no competition, we should use this method, only when it offers
obvious advantages over a competitive method, as in the following cases:
The assignment represents a natural or direct continuation of a previous one award
ed competitively and the performance of the consultant has been good or excellen
t;
The consultant’s prompt • availability is essential (for example in emergency opera
ns following a natural disaster, a financial crisis etc.);
The contract value is very small;
Only one consulting organization has the qualifications or experience required to
carry out the assignment

(c) Type of assignment for which this method of selection is adopted:

Good or excellent performance in the first assignment has to be a precondition f
or contract continuation. In such cases, we should weigh the importance of conti
nuing with the same technical approach, the experience acquired and the continue
d professional liability of the incumbent consultant against the benefits of com
petition, such as fresh technical approaches and competitive remuneration rates.
In theses cases we have to consider and account for the time and cost of a comp
etitive round, because it may weigh considerably on our decision. SSS should not
normally be adopted when the downstream assignment is substantially larger in v
alue than the initial one.

Q.2 Describe six channels that can be used for communication, giving the salient
advantages/disadvantages of each and the situation each is best suited for.
A.2
Medium Advantages Disadvantages Best used for
Face-to-
face
meeting 1. Promotes trust
2. Content & level of
formality can be adjusted during the meeting
3. Disagreements can be negotiated 1. Expensive
2. Time consuming 1. Recruiting
2. Team building
3. Brainstorming
4. Developing new
business
5. Confidential and
sensitive personal
issues
Phone call 1. Requires immediate
response
2. opportunity to restate or clarify if the listener does not understand
1. interrupts work flow
2. Can extend for a long time
3. No record
4. Hard to judge the emotional component 1. Social interaction
2. Quick fact -
checking
Video
conference 1. Can be used for a
‘milestone ’ interaction
e.g. finalizing an important drawing to be issued for construction
2. Relatively inexpensive compared to face-to face meeting 1. Substantial o
rganization to arrange a video Conference (especially across time zones
2. Limited possibility of a breakthrough if participants have not previously met
face -to -face 1. Meetings required to be conducted periodically when participa
nts are geographically dispersed
e-mail 1. Easy and quick
especially across time
zones
2. Easily copied to several people simultaneously
3. Can be saved and
printed
4. recipient can access the message at any time 1. Impersonal and lacks emotiona
l issues and hence liable for
misinterpretation Normal
communication
between co-workers
Memo Quasi-formal Routine
announcements
Letter 1. Permits time for
analysis of proposals
2. Can be the basis of a formal contract
3. Can be formal or
informal as per the
intended message to be conveyed 1. One -sided
2. Response may
be delayed
3. It takes time to
prepare a good
letter 1. Statement of
terms & conditions
of a business deal
2. Formal instructions
3. Formal warnings
4. Documenting
items agreed in
face-to -face
meetings

Q.3. Explain International competitive Bidding, its requirements and steps follo
wed for ICB
A.3
International Competitive Bidding (ICB) from an international financial institut
ion to meet the foreign currency payments involved in the contract;
Requirements for ICB
(a) Advertisement: we (as Employer or Purchaser)[2] have to publish the Invitati
on for Pre -qualification of works/Invitation for Bids (IFB) in widely seen webs
ites such as United Nations development Business online (UNDB online)[3], and in
the Development Gateway’s dgMarket[4] to attract the attention of the foreign con
tractors and suppliers,. The Invitation for pre-qualification/IFB shall contain
details regarding the scope of the ICB, the address and telephone numbers of the
officer from whom details could be got (or the/pre qualification / bidding docu
ments are available), the website where the detailed Invitation for pre-qualific
ation /IFB and pre-qualification/bidding documents are available, the last date
and time, the place for submission of the pre-qualification applications/bids. T
o ensure further wide publicity, we could also send copy of the Invitation for p
re-qualification/IFB to the Embassies and Trade representatives of the countries
from where we can expect participation in the bid. All the countries have their
Embassies and Trade representatives in New Delhi. We should also publish the In
vitation for pre-qualification/IFB in national news paper(s) having wide circula
tion in metros and principal cities of India and also in the region where the pr
ocurement is being made. We should also publish the Invitation for pre-Qualifica
tion/IFB in appropriate Trade Journals published in the country. These actions w
ill ensure adequate publicity and we could expect better competition and thus ec
onomic and efficient procurement.
(b) Pre-qualification document (for works): The pre -qualification document shal
l include sufficient details regarding eligibility, method of submission of pre
-qualification documents, details of documents/ information to be furnished, qua
lification criteria to be satisfied, evaluation methodology, preparation of the
list of pre-qualified applicants and notification of the list of approved pre-qu
alified bidders.
(c) Period for submission of pre-qualification documents: The pre-qualification
submission period, that is the period from the date of publication of the Invita
tion for pre-qualification in the press or the date of making available the docu
ment for sale (whichever is later) shall be sufficiently large, depending on the
size and complexity of the proposed contract to enable the prospective applican
ts to obtain the pre-qualification document, study the field conditions, collect
field data, compile the qualification and other required information and then s
ubmit pre-qualification applications. A period between 45 to 60 days depending o
n the size and complexity of contracts is considered reasonable.
(d) Bidding document (for works and goods): The bidding document shall include s
ufficient details regarding eligibility, method of submission of bids, bid secur
ity (amount and currency) to be furnished, period for submission of bids, qualif
ication criteria to be satisfied, evaluation methodology, securities to be submi
tted, award of contract etc. It shall also include internationally accepted Cond
itions of Contract, such as those developed by Federation Internationale Des Ing
enieurs -Conseils (FIDIC) and Institution of Engineers, U.K.
(e) Bidding period (for works): The bidding period, that is the period from the
date of issue of the bid document to pre-qualified bidders to the last date stip
ulated for the submission of the pre -qualification document, shall be sufficien
tly large, depending on the size and complexity of the proposed contract to enab
le the prospective bidders to obtain the bidding document, study the field condi
tions, collect field data, work out reasonable rates and then submit meaningful
bids. A period between 45 to 60 days or even more in case of large and complex c
ontracts is considered reasonable.
(f) Bidding period (for goods): The bidding period, that is the period from the
date of publication of the IFB in the press or from the date of making available
the document for sale (whichever is later) to the last date for submission of b
ids, shall be sufficiently large, depending on the size and complexity of the pr
oposed contract to enable the prospective bidder to obtain the bidding document,
study the same, work out the reasonable rates and then submit meaningful bids.
A period between 45 to 60 days is considered reasonable.
Steps for ICB
(a) Works with pre-qualification:
We, as the Employer, have to take the following essential steps:
• Notification and advertising for submission of pre -qualification applications;
• Issue/sale of pre-qualification documents to prospective bidders;
• Submission of pre -qualification applications by the prospective bidders;
• Opening of pre-qualification applications;
• Evaluation of pre-qualification applications;
• Preparation of the list of pre-qualified bidders;
• Issue the bidding document to the pre-qualified bidders;
• Submission of bids by pre -qualified bidders;
• Evaluation of the bids;
• Selection of lowest evaluated responsive bid;
• Contract award and signing of the contract with the Contractor;
• Contract performance by the Contractor;
(b) Works and goods without pre-qualification (post -qualification):
We, as the Employer/ Purchaser, have to take following essential steps:
• Notification and advertising;
• Issue/sale of the bidding document to the prospective bidders;
• Submission of bids by prospective bidders;
• Evaluation of the bids;
• Selection of lowest evaluated responsive bid based on post-qualification;
• Contract award and signing of Agreement with the Contractor/ Supplier;
• Contract performance by Contractor/Supplier.

PM0009 – CONTRACTS MANAGEMENT

SET – 2

Q.1 Write short notes on:

a. Lump-sum contract
b. Cost reimbursable contract
c. E-procurement
A.1
a. Lump-sum contract
In a lump-sum or fixed price contract, the prime contractor agrees to complete t
he project, as described in the contract documents, for a fixed price. For firm
fixed-price contracts, once a contract is in place the contractor is responsible
for any cost overruns. In this case, the buyer is responsible for providing a c
omplete definition of what is required and schedule for delivery. The price prov
ided by the seller is going to include an estimate of its costs and its profit.
If the seller’s costs are less than the costs included in its fixed price, the sel
ler earns additional profit. If the seller’s costs are more than the costs include
d in its fixed price, the seller earns less profit. Fixed-price contracts are ad
opted and are effective when the scope of work is well-defined. Fixed-price cont
racts shift at least some of the uncertainty associated with a project to the co
ntractor. The evident advantage of a Fixed -price contract is that it encourages
efficiency in the contractor’s work since the level of profit realized depends on
a contractor’s ability to control costs. Fixed-price contracts are among the easi
est to administer if change orders are not required. However, they can result in
relatively inflexible project activities, with significant institutional disinc
entives to modifying activities once work has commenced as per the contract.
b. Cost reimbursable contract
Cost-reimbursable are those in which the owner pays the contractor the costs nec
essarily incurred in the construction plus a fee. The latter portion viz. the fe
e can be fixed in a number of ways which we will discuss later in this section.
The main reasons for adopting this mode of contracting are:
– At the time of contracting, the scope of the work is indeterminate or highly unc
ertain and the kinds of labor, material and equipment needed are also uncertain.
– At the time of contracting, the owner is unable to finalize the plans and specif
ications for the project
– At the time of contracting, the owner is not certain whether the construction pr
oject will be completed in full.
– Cost-reimbursable contracts offer an easy response to unexpected conditions aris
ing during project implementation.
Under this arrangement complete records of all time and materials spent by the c
ontractor on the work must be maintained. (These types of contracts are also cal
led Time and Material contracts or Cost-plus contracts) Evidently the risk of in
crease in the project cost in this mode of contracting is entirely to the owner.
The most important question that should be resolved for finalizing cost-reimbur
sable contracts is to identify the following costs:
• Reimbursable costs (Costs that are reimbursable to contractor i.e. costs that ar
e necessarily incurred in the performance of the work)
• Non-reimbursable costs (Costs that are not reimbursable to contractor)
• Costs that are included in the base figure which is agreed as the basis for dete
rmining the fee
(The first and the third figures are not necessarily identical)
Typically these costs comprise the following elements:
1. Reimbursable costs (i.e. costs that are necessarily incurred in the performan
ce of the work)
• Wages, payroll taxes and fringe benefits
• Cost of all materials, supplies and equipment incorporated in the work including
the costs of transportation, unloading thereof
• Payments to subcontractors
• Rental and maintenance charges for all equipment, trucks and hand tools
• Cost of salaries of all contractor ’s staff stationed at the field office
• Cost of salaries of contractor’s staff utilized for expediting of supplies, superv
ising of transportation etc. calculated for time specifically spent on the proje
ct
• Cost of travel and travel incidentals of contractor ’s staff directly incurred on
the project
• Premiums of all bonds and insurances incurred by contractor for the work
• Permit fees
• Cost incurred for communication i.e. telephone, electronic communication etc. an
d for stationery etc. at site
• Cost of temporary site facilities, removal of debris
• Losses and expenses not compensated by insurance which result from causes other
than the fault or negligence of the contractor.
c. E-procurement
In this era of globalization, public procurement has become a specialized functi
on. Today’s environment calls for efficient, responsive and transparent procuremen
t procedures. IT has converged in almost every area of public procurement and ha
s revolutionized the process of public buying.
E-procurement provides the advantages of reduced tender processing time, reduced
costs for the government, transparency of and access to the tendering process,
increased competition as evidenced by the increase in the average number of bidd
ers per tender and discouraging cartelization.
The number of people buying on line is growing rapidly in repetitive, low cost t
ransactions. Such transactions are enabled in high volumes through e-procurement
systems. It is therefore necessary for today’s and future procurement managers to
develop their familiarity and skills with the latest technologies of internet a
nd electronic communication. E-procurement’s infiltration into industry implies th
at contracting / procurement professionals who have not established a track reco
rd with e-commerce and e -procurement will definitely lag behind others who deve
lop these skills. However, in project contracting, contract management skills in
volving people skills and negotiation skills (discussed in Unit 7) will continue
to play a very important role.

Q.2 Explain contracting and the benefits of contracting.

A.2
Definition:
Webster’s New World College Dictionary, 4th edition:
An agreement between two or more people to do something, especially one formally
set forth in writing and enforceable by law; compact; covenant American Heritag
e Dictionary of the English language: An agreement between two or more parties,
especially one that is written and enforceable by law
Webster Dictionary, 1913:
1. (Law) The agreement of two or more persons, upon a sufficient consideration o
r cause, to do, or to abstain from doing, some; an agreement in which a party un
dertakes to do, or not to do, a particular thing; a formal bargain; a compact; a
n interchange of legal rights.
2. A formal writing which contains the agreement of parties with the terms and c
onditions, and which serves as a proof of the obligation
Cambridge Dictionary of American English:
A legal document that states and explains a formal agreement between two differe
nt people or groups, or the agreement itself
The Free Dictionary by Farlex: An agreement with specific terms between two or m
ore persons or entities in which there is a promise to do something in return fo
r a valuable benefit known as consideration. Consideration implies something of
value such as money or personal services in exchange for an act or promise.
Business dictionary.com:
‘A voluntary, deliberate and legally enforceable (binding) agreement between or mo
re competent parties ’.
Here,
• Agreement implies evidence of mutual accord between two or more legally competen
t parties about their relative duties and rights regarding current or future per
formance
• Legally competent party implies party having the required legal capacity to ente
r into a binding contract. This legal capacity is the power provided to the part
y under law to enter into binding contract and to sue and be sued in its own nam
e. The following persons are incompetent to contract.
1. Minors
2. Persons of unsound mind
3. Persons disqualified by law to which they are subject.
• Duty implies the accountability owed to someone who has the corresponding right
to demand satisfaction of an obligation
For an agreement to become a contract, it must contain three basic elements:
• Offer and acceptance
• Consideration
• Intention to create legal relations

The existence of a contract has the following factual elements:

1. An offer
2. An acceptance of that offer which results in a meeting of minds
3. A promise to perform
4. A value consideration (which can be a promise or payment in some form
5. A time or event when performance must be made (meet commitments)
6. Terms and conditions for performance; including fulfilling promises
7. Performance
Contracts for illegal purposes are not enforceable by law
Theoretically, contracts can be written or oral, but oral contracts are difficul
t to prove. A contract can also consist of a series of letters, offers, counter
offers and orders. Some varieties of contracts are:
• Conditional (i.e. on an event occurring)
• Joint and several (several parties combine to make a joint promise to perform; h
owever, each is responsible)
• Implied (i.e. whether there is a contract will be decided by the court basing on
the circumstances)
In reality, there are innumerable variations of contract and the varieties given
above are only some examples.
Contracts are agreements, but not all agreements are legally enforceable contrac
ts.
Terms like void contracts, void able contracts etc. are also used. We address th
is by comprehending the legal effects of agreements as falling into four categor
ies:
a) Valid contracts:
– Agreements which are completely binding and enforceable
– Parties to valid contracts gain rights and responsibilities
– The courts will make sure that the parties follow these rights and respo
nsibilities if there is an argument
b) Void contracts:
– In fact, these are not contracts at all
Benefits of contracting:
1. Companies (Business owners) require known and capable contractors to carry ou
t works necessary for operating their business. This is an advantage that the bu
siness owner has in that a general contractor is available to him (invariably on
e among a group of general contractors, who is selected based on competitive bid
ding), thereby enabling the business owner to concentrate his time, money and en
ergy on his core competence of running his business.
Similarly, general contractors make a living working with known subcontractors.
An established general contractor will have established relationships that will
outlast a specific construction project or specific projects which he is present
ly engaged in.
The subcontractors will acknowledge this with their cooperation. This is an adva
ntage which a general contractor has, and the owner does not have, since most su
bcontractors recognize the risk of working with a one time client with higher bi
ds.
2. For the business owner, work is started and completed quickly, thereby enabli
ng him to realize his revenues early.
3. Contracting lowers the overall cost of the service to the business owner by r
educing scope, defining quality levels, re-pricing, re-negotiation.
4. Business owner can focus on developing core business.
5. Cost restructuring – contracting reduces the ratio of fixed costs to variable c
ost by offering a move from fixed to variable cost and also by making variable c
osts more predictable.
6. Improve quality – The contractor or his subcontractor as applicable will have s
pecialists (the business owner will ensure that the contractor is capable of ens
uring quality during the prequalification process to ensure quality of specific
works, since these works will be their core business)
7. Knowledge – access to intellectual property, wider experience and knowledge of
the contractor specializing in the work
8. Existence of a contract – since there is a contract (which is legally binding)
legal redress / financial penalties are possible to prevent / correct non perfor
mance or substandard performance, which may not be possible with internal servic
es
9. Access to a larger talent pool and sustainable source of skills with the cont
ractor
10. Reduce time to market – development of a product can be speeded through the ad
ditional capacity brought by the supplier
11. Risk management – this is one of the main benefits of contracting especially i
n large, complex projects where the risks are distributed to parties most capabl
e of managing the risks applicable to the work of each party
12. Contracting for low cost labor – an example is R & D projects which can be out
sourced by the high labor -cost countries to expertise available in low labor -c
ost countries like India and China
The term ‘subcontracting’ is used to imply the next level of contracting resorted to
by a general contractor. If a contracting firm takes up the total project of co
nstructing a building, the firm itself may have the core competence of carrying
out the civil works, but it will usually award subcontracts for components of th
e total work like electrical works, air-conditioning works, fire protection syst
em works etc. to respective subcontractors specializing in such works – the contra
cting firm, however is accountable to the building owner for the performance of
the total work. Since the 1980’s the term ‘outsourcing’ has also come into use. It imp
lies essentially the same as contracting or subcontracting. Outsourcing is the t
ransfer of management and / or day-to -day execution of a specific business func
tion to an external source provider. The contractual agreement should define the
transferred services. Business segments that are outsourced are:
• IT
• HR
• Facilities management
• Accounting
• CAD drafting
• Market-research
• Manufacturing
• Designing
• Web-development
• Content writing
• Engineering
Subcontracting or outsourcing thus essentially results in a division of labor, w
hereby each agency executes a part of the total project requiring specific skill
s applicable to that part.
The term ‘off shoring ’, which is also extensively used these days, is the type of o
utsourcing in which the buyer organization belongs to another country. As an ext
ension of this usage for the term, even if the work is not outsourced i.e. the w
ork stays within the same corporation / company, the transfer of an organization
al function to another country is now understood as off shoring. The distinction
between outsourcing and off shoring will become less clear over time, because o
f increasing globalization of outsourcing companies. Outsourcing involves contra
cting with a supplier, which may or may not involve some degree of off shoring.
Q.3 Write short notes on the following bringing out their essential features and
their applicability in procurement for works and goods:
(a) Pre and Post qualification of bidders;
(b) Single and Two stage bidding;
(c) Single cover and two or more cover bidding systems;
(d) E-procurement for government requirements

A.3
(a) Pre and Post qualification of bidders;
Pre-qualification:
For large value contracts and complex projects (for example custom designed equi
pment or design and build contracts or turn key contracts or management contract
s) the bidders are usually pre-qualified. Pre-qualification is done with the int
ention of inviting bids only from those bidders who have adequate capabilities,
and resources and are determined to be competent to execute the works or supply
the equipment, for which bids are to be invited. You will appreciate that in the
case of open bidding all the prospective bidders will have to incur heavy expen
diture for preparation of bids, which may discourage competition. You could pre-
qualify the prospective bidders for a single work or supply or for a group of wo
rks or supply to be made during a specified period of say one year.
The pre-qualification process involves invitation of applications from prospecti
ve bidders by issue of pre-qualification documents in which you should detail th
e scope of works or supply, eligibility, qualification and financial requirement
s. After the receipt of the applications and the requisite information, you will
have to evaluate them and prepare a list of qualified bidders. You have to do t
he Pre-qualification based entirely upon the capability and resources of prospec
tive bidders to perform the contract satisfactorily, taking into account their (
a) experience and past performance on similar contracts, (b) capabilities with r
espect to personnel, equipment and construction or manufacturing facilities, and
(c) financial position. You should then issue the bidding documents to the pre
-qualified bidders and invite the bids from them only.
When the bidders are pre-qualified for groups of works or supply, you should tak
e into consideration the available bid capacity before award of the contracts. A
lso you should periodically update the list of pre -qualified bidders. Before aw
arding the contracts you should get confirmed from the pre-qualified bidders, th
e information they provided at the time of submission of pre-qualification appli
cations to ensure that they still meet the qualification requirements. If the se
lected bidder does no longer meet the specified qualification criteria, it shoul
d not be awarded the contract.
Post -Qualification:
When the bidders are not pre -qualified, bids are received by open bidding and e
valuated as per provisions in the bid document. In respect of single cover syste
m, the technical information as well as financial/commercial offer is received t
ogether in a single cover. You should make preliminary checks with regard to the
technical and commercial responsiveness as per provisions contained in the bid
document and determine the lowest evaluated responsive bidder. You should then c
heck as to whether the lowest evaluated responsive bidder as determined by you m
eets the technical specifications as well as the qualification criteria (includi
ng available bid capacity) as specified in the bidding document. If the bidder i
s substantially responsive and fully meets the specified criteria, you should aw
ard the contract to the selected bidder. In case the selected bidder does not me
et the specified criteria, you should reject its bid and make a similar determin
ation in respect of the next lowest evaluated responsive bidder and award the co
ntract to the responsive bidder who meets fully the stipulated criteria.
In respect of two cover system of tenders, the technical information and the com
mercial information to determine responsive ness and the price offer or bid pric
e are received in two separate covers. You should open the first covers of bidde
rs containing the technical and commercial information to determine the responsi
veness of bids. You shall evaluate the bids as per provisions in the bid documen
t and prepare a list of responsive (both technical as well as commercial) bidder
s who meet the specified qualification criteria. You should reject the bids whic
h are non -responsive to the technical and commercial conditions and not open th
eir bid price or financial offers. You should open the price offers of the respo
nsive (both technically and commercially) bids and evaluate them as per provisio
ns contained in the tender document. You should award the Contract to the lowest
evaluated responsive and qualified bidder. This process is called post -qualifi
cation.

(b) Single and Two stage bidding

Single stage contracts:
In single stage contracts for works or supply of equipment detailed designs and
specifications are drawn and bids are invited either from pre-qualified bidders
as detailed in paragraph above or open bids are invited in single or two cover s
ystem and the bidders are post qualified.
Two stage contracts:
However in respect of turn key contracts or contracts of large complex facilitie
s or works of a special nature or complex information and communication technolo
gy or industrial plants involving different manufacturing processes, it may not
be practically possible or undesirable on your part to prepare complete detailed
specifications while inviting bids. In such cases you should usually adopt two
stage bidding procedure. You should issue the bidding documents to the pre -qual
ified bidders (if bidders are already pre -qualified) or invite open bids by sal
e of the bidding documents to intending prospective bidders. In the first stage
you should invite technical proposals only without the bidders indicating the co
sts, based on the conceptual designs or performance specifications.
After opening of the first stage bids you should seek technical and/or commercia
l clarifications from the bidders, who have submitted the first stage bid. You s
hould then make adjustments in the technical requirements as required and also m
ake amendments to the bidding document and in the second stage invite fresh bids
from those who have submitted the first stage bids, containing the final techni
cal proposals as well as priced bids. You should then evaluate the bids and awar
d the contract to the lowest evaluated responsive bidder who is determined to pe
rform the contract satisfactorily.

(c) Single cover and two or more cover bidding systems;

Single cover bid system:
This has been discussed in paragraph above. In case of single cover system, you
should receive the technical information as well as financial/commercial offer t
ogether in a single cover. You should evaluate the bids and award the contract a
s explained in paragraph above.
Merit of the single cover bid system: In this system we would be able to evaluat
e the bids and award the contracts in a relatively shorter period. This is becau
se we would be making the detailed technical evaluation and checking the qualifi
cation criteria for the lowest evaluated responsive bidder only. In case the low
est evaluated responsive bidder fails to deposit the requisite security deposit
and sign the contract we would be required to make the technical evaluation and
check of qualification information for the second lowest evaluated responsive bi
dder.
Demerits of the single cover bid system: In this system we would be opening the
financial bids of all the bidders irrespective of the fact whether they meet the
technical specifications and meet the stipulated qualification criteria or not.
 The award decision may get biased in respect of a bidder who has offered a lowe
r price but has some minor shortcomings in the technical specification and/or do
es not meet the stipulated qualification by a small margin. There could be some
outside pressure to consider the bid of this bidder, because of lower cost, by o
verlooking the marginal deficiency.
Two or more cover bid system:
This has also been discussed above. In case of two cover bid system the technica
l information and the essential commercial information (such as bid security, va
lidity of bid, manufacturer’s authorization form etc.) to determine responsive nes
s and the price offer or bid price are received in two separate covers.
In some cases the bid security (earnest money deposit) is received in a separate
cover (third cover). The cover containing the bid security is opened first and
if adequate bid security in the form and validity as required in the bidding doc
ument has not been submitted by a bidder, that bid is rejected and the other two
covers are not opened at all. If the bid security is in order, you should evalu
ate and award the bids.

(d) E-procurement for government requirements

E-procurement makes use of the electronic media – the internet for the various pro
curement activities with the intention of expediting the procurement of works, g
oods and services, for achieving better competition resulting in economy and als
o checks the malpractices of manual procurement.
E-procurement has traditionally been used by the manufacturing enterprises to en
sure reliable supply chain of raw materials and other inputs at best prices to m
eet the production schedules. Typically E-procurement website allows qualified a
nd registered users to look for buyers or sellers of goods and services. Dependi
ng on the approach buyers or sellers may specify costs or invite bids. Companies
participating in E-procurement expect to be able to control parts inventories m
ore effectively, reduce purchasing agent overheads and improve manufacturing cyc
le.
E-procurement software includes special features such as:
Enterprise Resource Planning (ERP) – creating and approving purchase requisition,
placing purchase orders, electronic payment’s-sourcing – identifying suppliers for a
specific category of purchasing requirements;
e-reverse auctioning – to buy goods and services from a number of known or unknown
suppliers; etc.
Recently, E-procurement is being used for public procurement for procurement of
works and goods. The invitation for bid and the bidding documents are posted on
the web sites of the Department or public sector organization. The contractors s
ubmit their bids electronically before the stipulated date and time. The bid sec
urity (earnest money deposit) is also made electronically. The electronic box is
opened at a specified time and the bids are opened. The bids are evaluated as p
er provisions contained in the bidding document and contract awarded in a usual
way. The processes of approvals are made electronically. E-procurement results i
n better competition and cuts down costs, (since the bidders need not purchase t
he documents, bidder submits the bid electronically from their own office withou
t having to travel to the office of the Employer/Purchaser) and ensures confiden
tiality, prevents collusion practices (since the identity of the bidders are not
known to any body in the organization). It also prevents physical obstruction,
bid fouling by criminal elements (a usual malady of manual bidding in out of the
way places).