Module 4

Contract management, Tender and its process

Tender

The tender is an offer in writing to execute some specified work or to supply the
materials at certain rates within a fixed time under the certain conditions of
agreements between the contractor and department or owner of any party.

Tenderer: A person or a firm who tenders bid in response to invitation for tenders.

Tendering: The process of inviting bids and accepting them is known as tendering.

Tender form: It is a printed standard form of contract giving standard conditions

of contract, general rules and directions for guidance of contractors. There is also a
memorandum for giving: general description of the work, estimated cost, security
deposit, time allowed for the work from the start date of written order of
commence, columns for signature of the contractor before submission of tender,
signature of witness to contractors signature and signature of the officer by whom
tender is accepted. This is a part of the tender document.
Necessity for tenders:

Entrusting work by calling tender is advantages because of

1. lower bids that may be obtained due to competition among the contractors.

2. selection of contractors can be made based upon their experience in their line.

3. personal interests, prejudices, preferences, partially etc. can be avoided by

calling for tenders.

Classification of Tender

1. Open tender

2. Close tender / Selective tender

 3. Negotiated tender

1. Open tender :

 It is open to all qualified bidders

 Tender usually published in the newspaper and internet chosen on the basis
of price and quality.

 This is most effective way of obtaining many competitive rates.

Open tender – advantages

 Any contractor can tender their work

 No favoritism occurred

 maximum competition

Open tender - disadvantages

 Client must bear expensive cost of tendering ( reproducing number of dwgs,

boq etc.)

 The wrong contractor may be chosen because they are from unknown
background

 Time consuming

2. Close tender / Selective tender

 open to bidders in the category stated in the notice only

 contractor of known reputations.

 contractor who submit the lowest tender.

  chosen for their expertise and experiences

3. Negotiated tender

 Under this method, only one contractor is approached normally because the
skills of the contractor are such that the architect and other members of the
design team needed from the contractor’s specialist knowledge use for
design stage.

 Following the completion of the design, the contractor will price the bill of
quantities and then enter into a negotiation with the quantity surveyor.

Pre-qualification

Screening of potential contractors, suppliers, or vendors to develop a list of

qualified bidders who will receive the invitation-to-bid (ITB)/ tender documents.

• Parameters: Financial position, Previous experience, Technical expertise,

Management ability, Equipments, Management ability, Workmanship and ability,
Litigation history etc,.

• Document proof need to submit along with bid document.

• Two phase bidding system: Technical and Financial bidding.

Administrative approval and Technical Sanction:

Administrative approval:

 For every work, it is necessary to obtain, in the first instances the

concurrence of the competent authority of the administrative department
requiring the work. The formal acceptance of the proposals by the authority
is termed as Administrative Approval of the work.
  It is duty of the engineering department requiring the work by the
administration to obtain the requisite approval to it.
 An approximate estimate and such preliminary plans are necessary to
explain the proposals are submitted by an engineering department to the
administration to obtain administrative approval to take up the work within
the sanctioned amount.
 After receiving the administrative approval, detailed drawings, design and
the estimated cost etc. are prepared by the engineering department and
submitted to the administrative department for sanction.
 Department secretary provides the administrative approval after the consent of
minister incharge.

Technical Sanction:

 After receipt of administrative approval and expenditure sanction, a detailed

estimate is further sanctioned by a competent technical authority of the
engineering department empowered by the Government, which ensures that
the proposals are structurally sound and the estimate is accurately calculated
based on adequate data.
 Such sanction is known as Technical Sanction and should be taken before
inviting tenders to execute the work,
 Chief Engineer to Assistant Executive Engineer provide the Technical
Sanction based on the amount of work.

Tender document:

The following tender documents are made available along with the tender forms to
enable contractors to bid for the job.
1. Notice inviting tenders (NIT) in a standard approved form of a department.

2. General conditions of the contract including time limits.

3. Special conditions of the contract that may have to be highlighted.

4. Amount of Security deposits to be paid /deducted.

5. Bill of quantities

6. Schedule of tools and plant and other facilities to be made available by the
owner, indicating the conditions, hire changes and the place of delivery.

7. Schedule of stores to be issued by the owner indicating the rates and their place

and issue.

8. Detailed specifications or reference to standard specifications for each item of

work.

9. Set of approved drawings, including Layout plan and working drawings

Elements of Tender Operation OR Tendering process:

The process of finalization of contracts is achieved through the tender process.

1. Tender notice or invitation

2. Submission of tender and deposit of earnest money

3. Opening of the tenders

4. Comparative statement of tenders

5. Acceptance of tender
 1. Tender notice
Whenever works are to be let out on contract, tenders are to be invited from the
registered contractors or both registered and unregistered contractors depending on
the magnitude and nature of the work by issuing notice in newspapers. The notice
that includes various particulars of work is named as Tender Notice. It is essential
that tenders be given adequate publicity so that a sufficient number of contractors
may bid and the most attractive offer may be obtained. At the same time it is also
necessary that bids be obtained from contractors who have the capability and
capacity to undertake the work.
Tenders are publicized by the issue of a notice inviting tenders, which indicates (1)
name and description of the work (2) estimated cost (3) completion time (4)
earnest money payable indicating the manner in which payment is to be made (5)
security deposit (6)time and place where tender documents may be inspected or
obtained (7) last date and place of obtaining tender papers and submission thereof
(8) time and place of opening the tenders (9) authority competent to accept tenders.
The tender notice may be advertised in newspapers and issued to registered
contractors by post. Copies of the tender notice are
Time limits for tender notice

Following time limits between date of call for tenders and the date of opening of
the tenders are followed by central public works department.

Cost of the work Time limit

Up to 1 lakh 10 days

Between 1 lakh to 10 lakh 2 weeks

More than 10 lakh 3 week

Necessity of including tender notice in contract document

Tender notice includes several information and conditions such as time of
completion, earnest money, refund of earnest money, period of validity of rates
quoted by the tender, site inspection, etc. which are not included in the conditions
of contract/ Without performing as agreement for the above such particulars the
contract is invalid. So the tender notice paper is a very important document on
which tenders and subsequent agreements with the contractor are based. Hence
tender notice must be a part of the contract document.

2. Submission of tender and deposit of earnest money

According to the directions contained in the notice inviting tenders, the contractor
are required to submit their tender on or before the date and hour fixed for the
same duly filled in, signed and witnessed. Before that he has to deposit the earnest
money deposit usually 2 to 2.5% of the estimated cost put to tender.

3. Opening of the tenders

The sealed tenders are received are to be opened in the presence of the contractors
or their representatives tendering for the wok at the time and place already notified.
The divisional accountants should also be requested to be present on such occasion
wherever possible. The officer opening the tenders has to read out the rates offered
in case of item rate and percentage ate tenders and the amount in case of the lump
sum tenders for the information of all those present.

To avoid tampering of rates etc. the original tenders, before a comparative

statement is made out and put up to him by the office, he has to attest the
corrections, overwriting etc. in red ink, number them and put his initials at the foot
of each page of the documents attached to the tenders. Tenders containing
unauthorized corrections and mutilations are liable to reject. The tenders which are
not received in proper form duly filled in or signed or are not supported by
requisite earnest money are to be summarily rejected and a record of such cases to
be kept in the register of the tenders received.

4. Comparative statement of tenders

Comparative statement of percentage rate and lump sum tenders are made out by
the officer opening the tender. It contains the information regarding the name of
the contractor, date of receipt of tenders, percentage above or below the rates
entered in the tender document, amount in case of lump sum tenders. The
recommendations or orders regarding acceptance or rejection of the tender are
recorded on it.

5. Acceptance of tender

After investigation the comparative statement the lowest tender shall be accepted
as a rule by the competent authority. If for any reason, economical or otherwise,
the lowest tender is not accepted, reasons should be recorded confidentially and
reference shall be made to the tender committee or next higher authority for order
as to which of the contractors the work should be given. No tender can be accepted
or the circumstances under which lowest tender may be rejected.

Followings are the conditions under which the lowest tender may be rejected:

1. When the tender is informal (i.e. not submitted in the form as prescribed by the
department or within due date),

2. If it is not technically sanctioned or exceeds the sanctioned amount for the work.

3. If it involves liabilities exceeding the amount of the expenditure sanctioned.

4. If there is any uncertainty or any condition of an unusual character.

5. If it exceeds the amount up to which he is empowered to accept tenders.

6. If any provision infringes any standard rule or order of higher authority.

7. If adequate competition and fair rates are not received.

Execution of contract agreement:

After the acceptance of the tender the preparation of contract document, it the
contractor is required to pay a the security deposit before the contract agreement is
signed. The contract agreement should be executed in the prescribed form and
signed by the contractor or is authorised representatives and the authority on the
behalf of Government.

Work order:

This type of agreement is used for petty works. In this case No formal agreement is
drawn up with the contractor as in the case of piece work, when the work is
awarded by the work order. It can be used in situations where it is not possible to
call tender for petty works. The money limit is different in different states.
Sometimes in work order time limit with in which the work is to be completed can
be specified. Contractors are usually selected by taking quotations. payment is
made on the measurement of work and 10 percentage of total amount is deducted
from the running account bill as security deposit and which will be refund date in
the final payment on the satisfactory completion of work.

Site order book

The contractor shall within 10 days of the received of the return order to take up
work, He has to supply one site order book to the sub divisional officer/ Assistant
Executive Engineer concerned. The site order book shall have machine number
pages in triplicate and will be initialed by the Assistant Engineer Incharge. This
site order book shall be kept at the site of work under the custody of the Assistant
Engineer or is authorised representative. important points related to site order book
are:

1.Directions or instructions from departmental officers to be issued to the

contractor, will be entered in the site order book( except when the directions or
instructions are given by separate letters).

2. The contractor or his authorised representative shall regularly note the entries in
the site order book and may take any of the duplicate page of the site order book
for his own record.

3.In case of supplementary( extra climes) five terms of claim shall not be
entertained unless supported by entries in this site order book or any written order.

4. The site order book shall be enclosed along with the Final bill to verify the
Supplementary climes.

Earnest Money Deposit (EMD)

It is the amount, which the contractor has to deposit with the department at the
time of submitting a tender. This accompanies the tender form and this is usually
2% of the total estimated cost of the project. This serves as a check to prevent the
contractor from refusing to accept the work when the tender has been accepted.
The other objects of collecting earnest money are:

1.To reduce unnecessary competition: If no earnest money is collected, heavy

competition may start among the tenderers. The contractors who do not have sound
financial status may also offer their tenders, which increase the unnecessary
competition among the tenderers.
2.To act as a tool for punishment: In case the contractors quote lower without
intention of doing work, the earnest money shall be forfeited by the department as
a punishment to such contractors.

3.To act as compensation: When the lowest contractor refuses to take up the work,
the work can be allotted to the second lowest contractor. The earnest money
forfeited from the first lowest contractor compensates to loss of the department.

Security Money Deposit (SMD)

The contractor has to deposit about 10% of the tendered amount with the
department as soon as his tender is accepted. This is inclusive of the earnest money
already deposited by the contractor. This money is kept as a check so that the
contractor fulfils all the terms and conditions of the contract and carries out the
work satisfactorily in accordance with the specification and maintains satisfactory
progress for completion of the work. In case he fails to fulfill the terms of the
contract, the whole of the security money or part of it is forfeited by the
department. When the contractor completes the work as per drawings,
specifications and directions of the department within the specified time, the
security money is refunded to the contractor. Normally the security deposit is
refunded after the maintenance period, which may be 6 to 12 months after the
completion of work, and it’s handing over to the department.

Retention Money

Retention money is described as the sum of money held by the employer as a

safeguard for any defective or non-conforming work by the contractor. Retention
money safeguards the employer by defects which can occur during the defects
liability period if the contractor doesn’t response according to the contract terms.
Retention Money provides additional safeguard to the employer. Retention money
gives the idea of importance of completing the signed project as per it’s terms and
designs. With such retention held, the contractor takes the responsibility to
complete the construction project as per the design and quality stated in the initial
contract.
Bid submission and Evaluation process
Contract:

A contract is the agreement entered into voluntarily by two or more parties who
promise to exchange money, goods, or services according to a specified schedule
and are legally enforceable.

Contractor: A person or a firm who undertakes any type of contract.

Law of contract as per Indian Contract Act 1872:

The Contracts or agreements between various parties are framed and validated by
the Indian Contract Act. Contract Act is one of the most central laws that regulates
and oversees all the business wherever a deal or an agreement is to be reached at.
The following section will tell us what a contract is.

CONTRACT - According to sec.2(h), a contract is defined as an agreement

enforceable by law.

AGREEMENT - According to sec.2(e), every promise and every set of promises

forming consideration for each other. Consideration is the return benefit the parties
to the contract get.

Agreement = Offer + Acceptance

PROMISE - According to sec.2(b), a proposal when accepted becomes a promise.

CONSENSUS - AD – IDEM- According to Sec.13, meeting of minds or identity

of minds or receiving the same thing in same sense at same time.

Essentials of a Valid Contract

 There must be mutual agreement between the two parties,

 There must be an offer made by one party called the promisor.
 The other party called the “promise” must accept the offer.
 There must be considerations, which usually, payments in the form of
money for doing of an act or abstinence from doing a particular act by
 promisor for promise. The offer and the acceptance should relate to
something that is not prohibited by law.
 The offer and acceptance constitute an agreement that when enforceable by
law becomes a contract
 The contracting parties entering into agreement should be competent, i.e. not
disqualified by either infancy or insanity to make such agreement

Contract Formulation:

1. Letter of intent (LOI)

2. Award of contract
3. letter of acceptance and
4. Notice to proceed(NTP).
1. Letter of intent (LOI)
 Interim agreement that summarizes the main points of a proposed deal.
 Does not constitute a definitive contract but signifies a genuine interest in
reaching the final agreement subject to due diligence, additional information,
or fulfilment of certain conditions.
 The language used in writing a letter of intent is of vital importance.
 Memorandum of understanding' or pre-contract.

2. Award of contract
 Notice to a bidder of the acceptance of the submitted bid.
 Written confirmation of an award of a contract by client to a successful
bidder.
 Stating the amount of the award, the award date, and when the contract will
be signed.
 3. letter of acceptance
 Written communication by a successful bidder to client.
 Formal acceptance of the bided project.
 Confirms the details of the client's offer including the project cost,
perquisites, conditions and project duration.
4. Notice to proceed.
 Letter from the client/ owner) to a contractor stating the date that the
contractor can begin work subject to the conditions of the contract.
 The performance time of the contract starts from the NTP date.

Types of Contract:

Contracts offered by PWD departments are mostly of following types:

1. Lump sum contract

2. Schedule contracts or Item Rate contract

3. Percentage Rate Contract

4. Labour contract

5. Materials supply contract

1. Lump sum contract (/Drawings and Specifications Contract)

In this type of contract, the contractor undertakes the construction work or the
execution of the specified work and completes it in all respects for a fixed amount
of money. detailed specifications of all items of works, detailed drawings, plans
etc., are supplied by the department to the contractor. The contractor on the basis
of given details, works out the total cost of the construction and quotes it in lump
sum. The design, shape and materials are as per the choice of contractor, but they
have to be got approved before the start of the work.

Advantages:

 The final price is known, by the owner, before the work commences.
 The contractor has more incentive to reduce his cost to increase the profit.
 The contractor hopes to complete the job as quickly as possible, to minimize
overhead, to maximize profit and to move to the next Job.
 When level of risks is low and quantifiable, and When the client does not
wish to be involved in the management of his project.That can be accurately
and completely described at the time of bidding such as residential and
building construction.
 When limited variation is needed.
 The materials used on the temporary works during construction are relieved
earlier resulting in their effective use in other works also.

Disadvantages:

 The owner tries to get the maximum work out of money he spends, whereas
the tries to get the maximum profit, this causes conflicting interests.
 It becomes very difficult to adjust the additions and alterations in the plan
and the specifications at a later stage.
 If the plans and specifications are not clear, the contractors will quote higher
rates, resulting in high cost of the work.
 The contractor carries much of the risks. The tendered price may include
high risk contingency.
 Competent contractors may decide not to bid to avoid a high-risk lump sum
contract.
2. Item Rate Contract (unit price)

In this type of contract, the contractor undertakes the work on the item rate
basis. The payment is done on the basis of quantities of items done and
payments are made on the basis of their respective rates. The quantities of
various items are worked out by detailed measurements. This type of contract is
also known as unit price contract. The approximate quantities of all possible
items of work are worked out and are shown in the tender form. Every
contractor quotes his rates against each item are arrives at the final total amount
of the work. This is the most common type of contract system, which is widely
adopted.

Advantages:

 The additions and alterations in the plan and specifications can be easily
made at any stage.
 As the contractor gets the payment against the actual quantities of items
done by him, the method is economical. No possibility for excess
payment.
 As the rates are item-wise the contractor is not worried regarding the
uncertainties in the plan and specifications.
 The work can be started after accepting the tenders without waiting for
all the detailed drawings and specifications.

Disadvantages:

 The total cost of the work can only be computed after completion of
entire project.
  In such case the owner may face financial difficulties if final cost
increases abnormally.
 Before preparing the bills for payment of money to the contractor, all
measurements of various items of work have to be carefully taken and
suitably entered in the measurement book.
 Great care shall be taken by the department officers to strictly enforce the
specifications during execution of work to avoid the using of substandard
materials by the contractor.
 Contractor raises prices on certain items if he apprehends the quantity of
those items is likely to increase during execution and make
corresponding reductions of prices on other items, whose quantity likely
to reduce during execution. This increases total cost of the project.

3. Percentage Rate Contract (cost-plus percentage)

In this type of contract the contractor agrees to take the work of construction for
fixed percentage over the actual cost of construction. This type of contract is
given when no contractor is agreeing to do work on other types due to
uncertainties and fluctuations in the market rates of materials and labour. The
department keeps the actual up to date records of the expenditure incurred on
the work and pays the fixed percentage as agreed over it to the contractor. The
contractor arranges for the labour, materials required for completion of the
work, and maintains proper account of the construction costs.

The cost plus or percentage contracts can be of the following types:

a. Fixed Percentage of Cost

Contractor is paid the actual cost of the work and agreed percentage in addition
to allow for profit.

b. Cost plus a fixed sum

The contractor gets actual cost of construction plus an amount of fee (in
percentage of construction cost) which is inversely variable according to
increase or decrease of estimated cost agreed first by both the parties.

c. Cost plus a fixed sum with profit sharing

In this type of contract the contractor is reimbursed at cost with an agreed upon
fee up to the GMP (Guaranteed Maximum Price) which is essentially a cap.
Beyond this point the contractor is responsible for covering any additional cost
within the original project scope. Additionally an incentive clause is there,
which specifies that the contractor will receive additional profits as reward to
the contractors who minimizes the cost.

d. Cost plus variable percentage

Contractor is paid the actual cost of the work and a variable percentage in
addition to allow for profit. Variable percentage allows the contractor to get
better profit for completing the work at minimum cost.

Advantages:

1. There is no chance of dispute for carrying out any extra. Item

2. The contractor can take the this independently and the work can be
completed quickly.

3. There is no major difference of opinion with the contractor and owner.

Disadvantages:

1. The final cost cannot be determined before the completion of the work.

2. The quality of work maybe poor.

3. It is very difficult to calculate actual cost incurred by the contractor. the

department/ Warner as to keep a check over labour, material cost and Quality of
work.

4. Labour contract

In this type of contract, all materials for the construction are arranged and
supplied at the site of work by the department or owner. The labour contractor
engages the labour and gets the work done according to specifications. The
contract is on item rate basis for labour portion only. The contractor is paid for
the quantities of work done on measurement of the different items of work at
the stipulated rate as in agreement. Contractor uses his own tools for working.
Plants and machineries are arranged by the department or owner. This system of
contract is not generally adopted in government works but preferable for private
sectors.

Advantages:

1. The materials stored by the government for the utilised.

2. Since materials are supplied by department, better progress and standard

quality can be maintained.

Disadvantages:

1. There may be a delay in obtaining the materials by the department.

2. A large Storage Area is required to store the different kinds of materials a
constant guarding etc are essential.

3. Theft from store, shortage of materials, accounting all the materials are
constant worries for a department.

5. Materials supply contract

In this form of contract, the contractors have to offer their rates for supply of
the required quantity of materials, inclusive of all local taxes, carriage and
delivery charges of materials to the specified site within the time fixed in the
tenders.

Contract Documents

Following documents are included in the contract documents.

1. Title page: Name of work, contract bond number, etc.

2. Index page: Content of the agreement with page references.

3. Tender notice: Giving brief description of work, etc. Usually 2% of the

estimated cost is deposited along with tender.

4. Tender form: Contractor’s rates and time of completion, penalty clause, etc.

5. Bill of quantities: Giving quantities and rates of each item of work and the
total cost of the whole work.

6. Schedule of issue of materials: Giving list of materials to be issued to the

contractor with rates and place of issue.

7. General specifications: Specifying the class and type of works.

8. Detailed specifications: Each item of work and of each material to be used
in the work.

9. Drawings: Complete set of drawings like plans, elevations, etc. and site plan,
of fully dimensioned

Conditions of Contract

Both parties of a construction team should be fully acquainted with their rights
and duties. So while preparing the contract agreement, certain clauses related to
the work are laid down and these will be binding on both parties. The main
purpose of the conditions of contract is to avoid dispute and keep the parties as
far as possible out of the court of law. Therefore it is imperative that all the
clauses of conditions of contract must be precise and definite and there should
not be any room for ambiguity or misconstruction therein.

The conditions of contract mainly depend upon the nature of the work. For most
of the civil engineering construction projects following clauses are mostly
provided in the contract documents:

1. Rates inclusive of materials, labour, etc.

2. Amount of security money

3. Time for completion of work

4. Progress to be maintained

5. Penalty for bad work

6. Mode of payment

7. Extension of time limit for delay

8. Termination of contract

9. Compensation to labour, minimum wages, etc

Factors Influencing Selection of Contract System

 Quantity and quality of work

 The appropriateness for providing an adequate incentive for efficient
performance by the contractor
 The ability to introduce changes
 The allocation of risks
 The start and completion date of the project