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MBA IV SEMESTER PM0018 CONTRACTS MANAGEMENT IN PROJECTS ASSIGNMENT SET-1

Q1. Describe the four basic elements of a contract. Ans: Basic elements of contract Now that we have learnt the definitions of contract, let us now learn about the basic elements of contract. We must note that for an agreement to become a contract, it must enclose an offer, acceptance, consideration, and an objective to create legal relations. The basic elements of a contract are shown in figure 1 and explained thereafter:
Figure 1 : Basic Elements of Contracting

Offer: An offer is proposal or a statement by one party to another, manifesting the intention to enter into a contract on certain terms. For example, suppose you want to sell a book, and you tell your friend that he could buy it for Rs.200. In this case you offer to sell your book for Rs. 200, without which you cannot develop a contractual relationship with your friend. The offer that you make must be clear in a manner capable of acceptance without anything further required by the other party.

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Acceptance: To create a contract, the party to whom you make an offer must accept it, without which no contract exists. For example, if your Friend agrees to buy the book, and then he has accepted your offer and a contract is created between you and your friend. An acceptance of the offer results in a meeting of minds. Acceptance can be in oral, or in writing. Consideration: It is the key element of a contract. It is the thing for which the parties have bargained. It may be a promise or payment of money. This promise is to perform the intended task. In our example the consideration is both Rs. 200 and the book itself. You bargain for the money and your friend bargains for the book. Intention to create legal relations: The parties in agreement can decide if they intend to make their contract a legal agreement that is enforced by law. This involves terms and conditions for performance; including fulfilling promises. For example, a major producer of automobiles enters into an agreement with a service company to service its automobiles. A contract can be written or oral, but oral contracts are difficult to prove. Contracts can also consist of a series of letters, offers, counter offers and orders. Some types of contracts are: Conditional contract (that is. it depends on an event that affects legal relations). Joint contract (ie; when several parties combine to make a joint promise to perform; however, each is responsible). Implied contract (ie; a legal contract which arises due to some relationship among the intermediate parties). Q 2. Describe the characteristics and legal issues of Lump-Sum Turn Key type (LSTK) contract Ans: Characteristics and legal issues of LSTK EPC contracts: Design: In a LSTK EPC contract, the responsibility for basic and detailed

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design rests with the contractor. You give the design criteria and contractor gives his price based on his basic and detailed design. If you give very clear design criteria, you become responsible for design deficiencies. If your design criteria are ambiguous, then the contractor should clarify this ambiguity prior to submitting his price. If the design criteria are critical to the project, contractor should ensure that it is made part of the contract. Otherwise, different interpretations of the design can lead to disputes affecting both the schedule and cost of the project. This can only be prevented by pre-contract negotiations, scope review and clarification sessions, agreement on preliminary P and I d s (Process and Instrumentation diagrams) and design drafts. Changes or variations: Even when design criteria are clear, EPC contracts allow for variations (see note on FIDIC in this section). The impact that a change will have on the project will depend on the timing of the change, example, a change in the P and I d at the design stage will have less adverse impact than at the construction stage. This means that changes should be addressed early. Schedule delay: You regard schedule as contractors responsibility in a LSTK EPC contract. However, for you to claim compensation for schedule delay from the contractor, you must prove that the contractor delayed a work on the critical path of the schedule. Similarly, the contractor should also keep producing a time-impact analysis of each delay throughout the project in order to claim any extension in the project completion schedule as well as financial compensation that he may desire from you. Force majeure: These are occurrences beyond the control of either you or contractor for example war, terrorism, labour strikes, radiation and so on. However, precise terms regarding force majeure conditions should be included in the contract. These terms should also address whether only time extension will be given for such events or whether financial compensation will also be

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allowed. Owner controlled activities: Despite the single point responsibility by the LSTK EPC contractor, you are also responsible for contractors action, some of which are: Adequate site access. Assurance that basic design issues are addressed. Facilities for commissioning like raw material feed, water, power and other utilities asapplicable which are usually in your (owners) scope. Payment and performance assurances: EPC contractor is customarily bound for satisfactory performance by a Bank guarantee of the project for a period (usually one to one and a half years) termed as the Defect Liability Period. This is a help mechanism for you to recover any defects even post project delivery. In some contracts, contractor can get his payment assurance for work done when you give an open letter of credit in favour of the contractor. However, this is usually for delivery of costly equipment or imported equipment. Insurance: Insurance companies offer several options to both owner (you) and contractor. Examples are LD insurance, cost over-run insurance, insurance for even some force majeure items and so on. Insurance is an important risk mitigation mechanism that should be adopted in EPC contracts. EPC projects offer a mutually beneficial and exciting form of project delivery for you as well as the contractor. However, you should not mistake the LSTK EPC approach as a license to do anything you want without the threat of increase in project cost or delay in project schedule. You must discharge your responsibilities without hindering the work of the contractor. You must realise that the goal of LSTK EPC contract is to allow the work to proceed without disruption due to changes throughout the implementation of the project. 4

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Otherwise many of the benefits of this mode of project delivery will not be realised. Q 3. Write short note on the following bidding methods: a. International/Global Competitive Bidding (ICB). b. Limited International Competitive Bidding (LIB). c. National Competitive Bidding (NCB). Ans: a. International/Global Competitive Bidding (ICB) International competitive bidding is a process that governs procurement, which involves World Bank funding for your projects. As the name suggests, this bidding happens internationally. The funding for such projects happens through World Bank. Hence, you have to globally advertise about the project for which you seek funds. In ICB, bids are opening for works and goods through advertisements in electronic and print media. ICB is best suited for a large contractor or supplier, whose scale of operations and high level of expertise is expected to result in most economic and efficient procurement resulting in economical growth. Hence, it is also called Global Competitive Bidding. The contractors and suppliers can submit bids in internationally convertible currency and they get paid in the same currency. Bids will normally be requested from several firms or organisations in writing. Conditions for adopting ICB One should adopt International Competitive Bidding (ICB) in the following conditions: The value of the package of works and goods are high or the works/goods are complex in nature. Currently, for work contracts, estimated cost must be crores of rupees or more while it is lakhs of rupees for goods contract. High degree of mechanisation is involved for execution of the project work.

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Irrespective of value, supplies need to be imported and entail payment in foreign currency. No local bidder is available to fulfil the requirements. b. Limited International Competitive Bidding (LIB) In Limited Competitive Bidding (LIB) method, bids are invited for goods from selected suppliers, who are the only known manufacturers or suppliers for the required goods. In this case, no advertisements are issued through press or any other means. Since the bidding is open for a few selected manufacturers, no domestic preference is allowed. Similar to ICB, in this type of bid also the bidders can submit their bid in any internationally convertible currency and they are paid in the same currency. Condition for adopting LIB One should adopt Limited Competitive Bidding (LIB) when: The cost of goods to be procured is small. There is limited number of suppliers already listed.] There are few situations in which ICB cannot be adopted. In such cases, we may use LIB. National Competitive Bidding (NCB) In National Competitive Bidding you as an employer or purchaser, invite bids for works and goods through advertisement in electronic and print media within the country. However, foreign firms can participate in the bidding process, provided they accept the bidding conditions. The bidders have to submit their bids in national currency only and payment would also be made in national currency. Conditions for adopting NCB

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Contract values are lower than that fixed for ICB. Where the works are spread out geographically (for example different villages or towns in a district), or it has staggered period of starting time, may be due to the lack of availability of land or financial resources. Where the works are labour intensive (that is, deployment of huge labour force is necessary, which may not interest a foreign contractor). Where the goods are available nationally at prices below the international market because of high transportation costs. Where foreign firms are not likely to be interested to take up the works or make supply. Q 4. List the advantages of referring a dispute to arbitration. Ans: The advantages of referring a dispute to arbitration are: The time is lesser in conducting arbitration proceedings. The cost of dispute resolution is less. Convenience in fixing the hearing dates. The informal atmosphere which prevails during hearings. Option to select Arbitrators. Availability of expertise in the Arbitrators particularly required for most engineering contracts. The privacy in the hearings, since court hearings are open to general public. The finality of award, as in most cases the decision of the Arbitrator is binding. Consent awards are possible with the consent of the parties to the contract during the arbitration proceedings. The presence of the arbitration clause is a safeguard for fair deal and the bidder can offer most competitive bids.

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Q.5. Write a short note on the following types of mergers a. Product extension merger. b. Conglomeration. c. Horizontal merger d. Purchase merger e. Consolidation merger Ans: a. Market-extension merger: This happens between companies that sell the same products in different markets. A market-extension merger allows for the market that can be reached to become larger and is the basis for the name of the merger. b. Conglomeration: This happens between companies that have no common business areas. c. Horizontal merger: This happens when two or more companies who are in direct competition and share the same product lines and markets merge. d. Purchase mergers: This occurs when one company takes on another. The purchase is made with cash or through the issue of some kind of debt instrument. e. Consolidation mergers: This occurs when two or more companies join to become a completely new company. Q 6. Describe in brief the major components of planning negotiation Ans: Planning: The most complex part of the merger process is planning which involves analysis, action plan and negotiation with the parties involved in it. The planning stage can take any amount of time, but after its completion, the merger process is on the way. The planning stage also includes the following:

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The signing of the letter of intent that starts off the negotiation. The appointment of advisors who take part in the role of consultants, examining the strengths, weakness, opportunities and threats of the merger. The maintenance of deadline, conditions and type of transaction which can be merger by integration or through the formation of a new company. The maintenance of export report based on the consistency of the share exchange ratio, for the companies involved. Resolution: The resolution stage needs the approval of the management and the shareholders involved in the merger plan. The resolution stage also includes the following: The board of directors arrange meeting with extraordinary stakeholders whose item on the agenda is the merger proposal. The extraordinary shareholders meeting is called to overtake a resolution on the item on the agenda. The opposition to the merger that comes from the creditors or bondholders must be limited to within 60 days of the resolution. The evaluation of the impact of the merger is undertaken by the Italian Antitrust Authority, which imposes any requirement as a precondition for approving the merger.