TYPES OF CONTRACTS

Contract is defined as a mutual relationship between

parties.
It is an agreement between two or more parties which is
intended to be enforceable at law and is constituted by
acceptance by one party of an offer made by the other
party to do or abstains from doing an act.
Classification based on purpose

Item Rate Contracts

Percentage rate contracts
Lump sum Contracts
Cost Plus Percentage Contracts
Cost Plus Fixed Fee Contract
Cost plus fluctuating fee contract
Incentive Contracts

Mode of execution
PPP
EPCC.
Item Rate Contracts
Nature of Agreement :
An item rate contract is one in which the contractor agrees to carry
out the work as per drawings, bills of quantities and specifications in
consideration of a payment to be made entirely on measurements
taken as the work proceeds, and at the unit – prices tendered by the
contractor in the bill of quantities.
A bill of quantities is prepared giving, as accurately as possible, the
quantities of each item of work to be executed and the contractor
enters the unit rate against each item of work.
The basis of agreement in thus the unit-rate of each item, certain
reasonable variation in the quantities being accepted by both parties.

The two parties are not bound by the total value of work. They are
bound by each individual rates

Payment is based on actual measured quantity of work

The schedule with item description and quantities is given with bid
form.

The bidders fill in the rate column for each of the item.

The rate or unit price includes the contractor’s overheads and profits.

By totaling all the arithmetic products (Quantity x Rate), the

estimated total cost of the project is obtained.

The project is awarded to the lowest responsible and responsive

bidder; i.e. the bidder with lowest estimated cost who satisfies all pre-
conditions.

As the actual work progresses, the payment is made on quantity of

work physically measured.

If no changes are made in nature of work, the quantity of work

actually performed can vary from the quantities in BOQ (subject to
limits), without change in rate.

If the quantity of work changes beyond limits, the rates may be

The final contract price will depend on the actual quantity of work.
The estimated value of contract is not binding.

For new items of work, not in original schedule, the rates need to be
separately negotiated.
Contract Documents :
All the documents as mentioned earlier are in variably included in the
agreement.

Notice Inviting Tender

Instruction to the Bidders
Qualification Criteria
General Conditions of Contract
Special conditions of contract
Project Details
Bill of Quantities
Basic Drawings
Specifications
Details of Bid Bonds
Mode of Payment to Contractor :
The contractor has to take measurements of the work carried out,
prepare and submit the bill periodically ( generally every month ) .
The engineer and the contractor or his representative calculates the
the payable quantities.
If no discrepancy is found recommends the bill for payment.
The amount recommended by the engineer is the cost of the work
less retention money and the cost of material supplied to the
contractor by the owner and actually used on the work during the
period under consideration.
If any item occurs during execution which is not included in the bill of
quantities, It is usually possible construct that item by a combination
of other items already in the bill, otherwise It is paid for as an ‘extra’
item as a specially analysed rate.
Advantage :
(a)The owner can avoid the delay that would be necessary in making
a large number of contract drawings to show details everything that
would be needed as in the case a lump sum contract. The detailed
drawings can be prepared after the contract is awarded but
sufficiently advance to enable the contractor to secure all information
in time.
(b) Bill of quantities which forms a part of the contract documents
greatly assists in keeping the tendered sum as low as possible. This
is obvious because in absence of the bill of quantities (e.g. Lumpsum
contract) , every contractor submitting the tender has to assess the
amount work involved , usually in a very short period, in addition to
the normal work . Under these circumstances the contractor, unless
he is in great need of a work, is almost bound to price high he is in
order to allow himself a sufficient margin of cover for any items which
he may have missed.
(c ) This type of contract allows within limits variation in the
quantities of different items. Thus what the owner pays to the
contractor is the actual cost of the work at the agreed rates. This
arrangements is fair to both the parties. Easier to accommodate
(d) Tendering process, Mobilization, etc. can be carried out in
parallel with design & drawing.

(e) Less risk of contractor making error in quantity estimation

during short time period available during bidding.

(f) Less tendency of contractor to bid conservatively.

(g) What the owner pays to the contractor is the actual cost of the
work at the agreed rates. This arrangements is fair to both the
parties.
Disadvantage :
(a) The owner cannot be absolutely sure of the total cost to him , until
the work is completed. In case the quantities mentioned in the bill
are found to be inaccurate the cost of the work will vary considerably
from the estimated cost. If the actual cost increases the owner may
be put in the financial difficulty leading to even suspension of the
work.
(b) Both the owner and the contractor have to do considerable
computation and book-keeping during the progress of the work. Both
the parties are required to appoint staff to record the measurements
of the work done.
(c ) As the quantities are likely to vary there is a possibility of the
contractor submitting an unbalanced tender on the basis of shrewd
anticipation or perhaps outside information. If the contractor’s
anticipation proves to be correct the owner would stand to lose
heavily. A contract of this nature therefore requires very careful
scrutiny and consideration by a skillful and experienced engineer or
architect before it is entered into.
(d) The ‘extra items’ are often a source of trouble.
(e) Can lead to huge cost escalations

(f) Needs lot of book keeping. Increases overheads

(g) No incentive on contractor to reduce quantity / cost. No scope

for value engineering

(h) Malpractices (Insider trading)

(i) Front loading

Dispute regarding extra items

The contractor invariably presses for higher rates than he would

have tendered in the beginning.
May threaten not to perform the extra items if his demand not
made. Difficult to get the extra items done by another contractor.
In most cases owner has to meet the demands.
Malpractices
The bidder, by bribing an insider, can get information on an item,
which has more probability of increase in quantity.
He may bid high rate for that particular quantity, and bid low for
another which he knows may decrease in quantity.
He may be awarded the contract on becoming L1, and on actual
completion, the payment made may be much more than what
would have been made if project was awarded to the L2 bidder.
Through corruption the quantities can even be intentionally
changed to facilitate such malpractice.

Front Loading
The contractor may put a higher rate for works to be completed
earlier, and a lower rate for ending items.
This ensures that contractor becomes cash rich upfront, and can
manage his working capital better.
However if the bid is heavily front loaded, contractor may run
away, after completing the profitable items.
Suitability of Item rate Contract :
The item rate contracts are widely used in the execution of large
works financed by the public bodies or the government. This form of
contract is suitable for the works which can be split into separate
items and the quantity under each item can be estimated with
reasonably accuracy.
With careful scrutiny to avoid acceptance of an unbalanced tender
this type of contract can be conveniently used for the works which
are unsuited to the lump sum contracts.
Percentage Rate Contract
Another type of measurement contract.

Devised to get rid of unbalanced / front loaded bids.

This form of contract differs from the item rate contract in respect of
the method of tendering the unit rates.
The bills of quantities supplied to all the intending and detailed
description, the unit rate as estimated by the engineer .
While tendering the contractors have not to write the rate of each
item but a percentage figure by which the estimate unit rates are to
be increased or decreased, the same percentage figure being
applicable to all the items.

Rates of all items will be increase/decreased by the percentage

quoted by the bidder.

The bids will be compared based on value of work derived based on

the revised rates.
• No scope for
• Unbalanced bids
• Front loading
• Malpractices through insider tips
• used in preference to the item rate contract for the works where the
estimated quantities are uncertain and likely to change
considerably.

• Documents
• Same as item rate, only rate column of BOQ filled by owner and
not bidder
• Mode of payment
• Same as item rate
Lump Sum
Contracts
Nature of agreement :
In a lump sum contract the contractor agrees to carry out the entire
work as shown in drawings and described by specifications, supplying
labour and materials, all for a specified lump sum.
The value of the works is estimated by the contractor based on the
drawings and specifications provided.
The lump sum amount can be decided by negotiation or competitive
bidding.
Sometimes the agreement makes provision to adjust the ‘fixed sum’
allowing for the cost of extra work, variation , omission, etc.
The main features of the agreement is that the contractor agrees to
fulfill all his contract obligation for the stipulation payment no matter
what trouble and expenses he encounters in doing so.

Fixed price contract needs complete and accurate set of drawings

and specifications.

Even with complete drawings, estimation of the fixed price in short

time available for bid preparation becomes difficult.
Deviation schedule
The work is broken into a no. of items, as in a BOQ
Gives a complete break-up of the fixed price, including item
description, quantity and rate
In case of variation, the amount payable for that particular item is
decided based on the deviation schedule.

Even though the fixed price is for the total completion of job, working
capital management becomes difficult if there is no interim payment.

Milestones are decided.

Payment is linked with completion of milestones.

Payment schedule is mostly back loaded.

In case the contractor abandons midway, he can only receive

payment for completed milestones and not the actual portion of work
done.

The engineer’s interim certificates form the basis of part payments to

Contract Document :
All the documents as outlined below except, ‘bill of quantities’ form
the basis of agreement.
A deviation schedule of rates is sometimes included to work out the
cost of extras or omission.

Notice Inviting Tender

Instruction to the Bidders
Qualification Criteria
General Conditions of Contract
Special conditions of contract
Project Details
Complete set of Detailed Drawings & site investigation data
Specifications
Details of Bid Bonds
Deviation Schedule
Payment Schedule
Mode of Payment to Contractor :
A lump sum contract is usually an ‘entire’ contract and as such no
payment can be recovered by the contractor until the whole of the
work is completed.
But invariably the agreements include a special provisions for series
of partial payments to contractor as work progresses, rather than
final settlement after acceptance of the work by the owner.
In case the contractor abandons the work he is not entitled to
payment for the portion of work already done, however substantial it
should be done.
The engineer’s interim certificates form the basis of part payments to
the contractor by the owner.
Advantages :

(a)If no extras are contemplated the tenders tell him exactly what the
project will cost him. This is a sound footing on which he can take
the decision whether to start the project or abandon the same.

(b) He need not employ the staff to keep periodical accounts of the
contractor’s materials, labour and output. All that the engineer
has to do on his behalf is to see that the work is being executed
exactly according to the terms of the contract and issue interim
certificates to the contractor.

(c ) From the contractor’s standpoint the greatest advantage of this

form of contract is that whatever benefits the contractor can gain
by excellent planning and efficient management on the site of
work are his own.
Drawbacks :
(a) Before a contract is let out the project has got to be thoroughly
investigated and all the contract documents kept ready in every
respect. This entails costly and time consuming work and which is
often difficult to accomplish.
(b) If the nature , extent, and details of the work are not properly
defined by the contract documents, many additional features may
have to be determined and provided for as the work progresses.
These features not being part of the original agreement give
opportunity to the contractor for claiming payment at abnormal rates.
To overcome this drawback a schedule of rates covering items not
included but likely to be provided for in the contracts is agreed to by
the owner and the contractor.
(c) The Contractors may submit high tenders , to protect themselves
from the uncertainties of the work.
Suitability of this form of Contract :
A lump sum contract can be used successfully for the construction of
works with which the contractors have had considerable experience
and whose cost they can predict with reasonable accuracy. Examples
of such works are public and private building, warehouses, workshops
, etc.
This type of contract is not suitable for works of which extent and
nature cannot be predicted in advance. It is then unfair to make the
contractor assume all risks and uncertainties. Example of works
unsuited to a lump sum contract are :
( a) Works involving difficult foundations : Where it is no possible to
know in advance the characteristics and quantity of excavation,
dewatering of foundations, shoring etc.
(b) Emergency projects that have to be rushed through without time
to prepare complete set of contract documents.
(c )Works, such as additions and alterations to existing structure
which involves the maintenance of operations while the work is being
performed.
(d) The works subjected to unusual and unpredictable hazards such
Cost Plus Percentage Contracts
Nature of Agreement :
In a cost-plus percentage contract, the owner agrees to pay to the
contractor the actual cost of the work plus an agreed percentage of
the actual or allowable cost cover overheads, profits , etc.
The items, expenses under which will constitute actual cost, are to be
carefully defined in the agreement.
Ordinarily, the percentage to be paid to the contractor should not be
applied on the costs of the following :
Salaries of the contractor’s supervisory staff.
Contractor’s general office expenses such stationery,
postage , telephone accounts etc.
Salaries or portion of salaries or traveling expenses of the
officials of the firm who may visit the work.
Charges for the use of any equipment that the contractor
would not normally use for the performance of the work.
Contract Documents :
Out of the various contract documents mentioned the bill of
quantities , drawings and specifications are seldom ready when the
contract is entered into.
The contractor agrees to execute the work in accordance with the
drawings, specifications and other necessary information that will be
supplied to him from time to time during the progress of the work.

Mode of Payment of Contractor :

The Contractor generally keeps all records of costs, and presents
them periodically to the engineer ( who also maintains similar
accounts ) for checking and approval .
The owner, on the advice of the engineer , makes the payments to
the contractor as the work proceeds.
Advantages :
Early completion of the work : The work can be started even
before the drawings, designs, estimates and specifications are
prepared; these being prepared as the work progresses. The
decisions can be taken speedily. These factors lead to the rapid
execution of the work.
Quality of Work : The contractor is assured of a reasonable amount
of profit even though the prices of materials and the labour charges
are subjected to fluctuations . Similarly , the use of inferior type of
materials than specified and hurried completion resulting in poor
workmanship do not increase the contractor’s profit. This induces
him to perform the work in the best interest of the owner. The final
result is therefore a better quality work.
Extra Works : No work or a portion thereof that the contractor is
directed to perform can be called an “extra work”.
This flexibility allows the adoption of alternative ways and methods
of construction from which to choose the most economic one for the
work as a whole. This may reduce the cost of the work.
Drawbacks :
(a ) Lack of Incentive :
There is no incentive for the contractor to complete the work
speedily, and effect economies in the construction cost by proper
planning and efficient management . On the contrary any increase in
the construction cost due to delay, wastage of materials, changes in
the drawings and designs result in increase of his profit.
(b) The Final Cost of the Work :
Like other contracts (except) the lump sum type ) here also the final
cost of the project to the owner cannot be foretold. This may lead the
owner to financial difficulties.
Since profits of the contractor are linked with cost of materials, labour
and equipment, a high cost gives the contractor a higher amount of
profits. This results in waste, inefficiency and extravagance by
contractors.
(c) Accounts Keeping : Both the parties have to do a lot of
accounts keeping regarding the materials purchased and used, the
labour and plant employed and other miscellaneous expenses
incurred on the work.
(d) Illegal for Public Works :Where the owner happens to be a
Suitability of Cost Plus Percentage Contract :
(a)When there is an emergency or any other condition that requires
constructing a facility in a hurry without time to develop plans for
it, neither the employer nor the contractor is sure about the cost of
construction, a ‘cost plus percentage’ contract is generally used.
There is a minor risk involved.
(b) Works ( in situations which are no emergencies )Where no one can
foretell with certainty just what troubles would be encountered in
the work, and correct decisions cannot be taken except during the
progress of the work.
(c ) Construction of expensive structures e.g. palaces, where the cost
of the work is of no consequences but the materials to be used and
the methods to be adopted are to suit the choice and taste of the
owner.
The owner (through his engineer/architect ) should exercise great
care in selecting a contractor to carry out the work for him. A
person or firm of known integrity , who will not exploit the
weakness of this type of contract to his advantages, will be the
best choice
A dam was washed out due to floods in the Naugatuck River Valley in
the U.S.A.

The work of replacement of the dam was awarded in 1955 to a

contractor on a cost plus percentage fee because no one could
anticipate the problems that would arise in the course of
reconstruction and decisions could be taken only as the work
progressed.

A normal condition attached to this type of contracts is, that the

contractor has to produce his books of accounts for the employer’s
inspection as and when required.

To make a contract, find out who can and will tackle the job and
make an agreement regarding the percentage to be paid to the
contractor.

This contract is also known as “time and lime” (i.e. labour and
material) contract.
Cost Plus Fixed Fee Contracts
In the cost plus fixed fee contract, the contractor is reimbursed the
actual cost incurred by him on materials and labour and is given a
fixed amount of money as his fee.

It is an improved version of the “Cost plus percentage” contract, as in

this type of contract, the profit of the contractor is not linked with the
cost.

The contractor receives only the stipulated sum for his part in
overseeing and doing the job, no matter what the cost of the project
may be.

The contractor will, therefore, try to complete the job as fast as

possible so that his men can be available for another contract
elsewhere.

Under this form of contract, the employer can easily select a reliable
contractor to execute the work. The parties can work in harmony and
accomplish amazingly fine results.
The cost-plus –fixed –fee contract differs from the cost-plus
percentage type contract in respect of determination of the fee to be
paid to the contractor to cover overheads and profit.
The agreement specifies the fixed lump sum to be paid to the
contractor by the owner over and above the actual cost of the work.
The fee does not fluctuate with the actual cost of the work, This
factor overcomes the possible weakness of the cost-plus-percentage
type contract.
However, there is no incentive for the contractor to do the work
efficiently and effect economy in the cost of construction of the work.
If the fixed fee is to include the salaries of the contractor’s staff the
contractor will try to complete the work as speedily as possible so as
to make maximum profit.
In respect of all other points this form of contract is similar to the
cost-plus-percentage type contract.
Cost-Plus-Fluctuating Fee
Contract
By introducing an element of incentive for the contractor to carry out
the work in the most economic way an attempt is made in this form
of contract to overcome the main drawback of the previous two types
of cost-plus contracts.
This is achieved by suitably changing the nature of the agreement in
respect of the fee is determined by reference to some form of sliding
scale. Thus higher the actual cost, lower will be the value of the fee
that the contractor receives and vice versa.
From owner’s point of view this is one of the best of the ‘cost-plus’
type contract.
Contract Documents

Based on the scope of Work/drawings for each specific work, client

shall issue to the Contractor a
• Work Order detailing the scope,
• estimated quantities of work,
• required mobilisation and the time schedule

The Contractor shall at the same time

• prepare an execution plan for the specific work
• detailing the Plant and Equipment,
• Staff, direct material, labour etc., which shall
be reviewed and agreed jointly by client and Contractor.
On mobilisation, the Contractor will create Temporary Facilities such
as those described by clients and listed below

1. Office Building for Site Office and Site Detailed Engineering

Activities including Office Equipment communication equipment ,
Furniture’s and Fixtures , Computers (Hardware and Software) and
copying equipment for Site Office and Site Detailed Engineering
office.

2. Piping Prefabrication Shop

3. Structural Fabrication Shop

4. Stores and Fuel Facilities

5. Material Testing Laboratory

6. Maintenance Shop

7. Bar Bending Yard

9. Labour Colony inclusive of Land for setting up of Labour Colony for
Unskilled Labour

10.Power and Water (for Construction and Other Uses) distribution

lines and facilities

11.Sewage Distribution Facilities

Contractor shall be permitted free use of these facilities for the entire
duration of the Work.
Payments

Payment to the Contractor will be made on the basis of the Cost

Statement
submitted by the Contractor on site-wide basis once a Calendar
month.

The Cost Statement of Contractor will be arrived at on the following

basis:

a) Staff Salaries.
b) Common Site expenses.
c) Plant and Equipment.
d) Tools and Tackles and Staging materials.
e) Direct labour
f) Material, if any
g) Mobilisation and Demobilisation charges
h) Supply of Material and Sub-contract work to be carried out through
specialised agencies.
i) Engineering and Design fees.
a) Staff Salaries :
Contractor shall in consultation and agreement with client, promptly
deploy
at site adequate number of experienced staff and augment same
from time to time.
Any demobilisation of Contractor’s staff also shall be done by
Contractor
in consultation and agreement with Client.

Contractor shall notify Client Construction Manager(s) the actual date

of mobilisation and demobilisation of each staff within 2 days of such
mobilisation or demobilisation as the case may be.

Further, Contractor shall maintain records of all staff deployed at Site

and submit to clients Construction Manager(s) and Chief-of-
Construction a monthly statement of deployment of staff for
respective areas and Common services for verification and obtain
counter signature as a token of correctness of deployment in
accordance with clients requirements and prior agreement between
Contractor and client in this regard.
The payment schedule for various categories of workers will be fixed
by Client and will pay staff members deployed at Site at following on
man month rates ( inclusive of all the benefits) :

1. Senior Manager Salaries

2. Manager
3. DeputyManager
4. Officer
5. Junior Officer
6. Clerk
7. Senior Mechanic/ Senior Electrician
8. Mechanics/ Electrician/ Equipment Operator
9. Graduate Engineer Trainee
10. Assistants to Mechanics
11. Graduate Trainee

All of the above shall be payable from the date the Personnel reports
to Site and upto the date the Personnel is demobilised from Site upon
completion of his assignment.
These charges exclude cost of the following

* Unfurnished accommodation provided at Site

* travel/transfer expenses for initial reporting at site as per
Contractor 's
rules
* conveyance at site
b) Common Site Expenses:
Client shall reimburse Contractor the following monthly expenses for
common site operation on actual basis upon receiving the Cost
Statement.

1. Electricity/Water
2. Mess Expenses at site
3. Printing & Stationery
4. Books & Periodicals
5. Rates & Taxes
6. Local Conveyance
7. Car Hire Charges
8. Telephone, Postage, Telex & Telegram/Fax/Satellite link Charges
etc. Telephones at the residences of Contractors personnel shall be
as
per Company Policy of the Contractor.
9. Travel Expenses ( as per Company Policy of the Contractor )
10.Courier Expenses
11. Codes and Standards for Engineering and Construction.
12. Rent.
13.Repairs and Maintenance of office equipment
14.Repairs and Maintenance of temporary facilities and
accommodation.
15.Safety Helmets ,Safety belts & other approved safety items.
16.Security
17.Hotel and Guest House expenses
18.Statutory Charges.
19.Insurance Charges.
20.Unfurnished residential accommodation as per general policy of
the
Contractor

Contractor can provide to client (six-monthly budgetary estimate or

more )for such expenses under various items and actual expenses
incurred shall be monitored against the budget.

Client may, at its option, provide any of the facilities for Contractor 's
use and arrange for direct payment to third parties as applicable.

The above will exclude Security Deposit paid by the Contractor in

respect of services and facilities.
c) Plant and Equipment:

Contractor shall, in consultation and agreement with client deploy at

site
adequate Plant and Equipment which are in sound and working
condition and
augment the same from time to time.

Initially the contractor shall mobilise the minimum equipment list as

per mutual agreement between Contractor and Client.

Any demobilisation of Plant and Equipment shall also be done by

Contractor in consultation and agreement with Client .

Contractor shall notify Clients Construction Manager(s) the actual

date of mobilisation and demobilisation of each item of Plant and
Equipment within 2 days of such mobilisation or demobilisation as the
case may be.

Further, Contractor shall maintain records of all Plant and Equipment

deployed at site including expenses on operation and maintenance of
Contractor shall also meticulously maintain records in regard to:

i) assembling period for the first time after mobilisation and

disassembling period before the demobilisation of Plant and
Equipment like Batching Plants, Cranes, Workshop equipment etc.
during which period these items are not available for use.
ii) period of break down of Plant and Equipment and repair
iii) period during which the Plant and Equipment are at site although
the
demobilisation instructions are given by Client in writing.
Contractor shall submit to Clients Construction Manager(s) a monthly
statement of deployment of Plant and Equipment complete with
details of periods during which the Plant and Equipment were not
available for use and hence not chargeable for reasons mentioned
above, for verification and obtain counter signature as a token of
correctness of deployment in accordance with Clients requirements
and prior agreement between Contractor and Client in this regard.

Such approved monthly deployment statement shall form the basis

for billing

It is understood that for each item of Contractor Owned Plant and

Equipment a free maintenance period of 15 hour a month shall be
permitted.

This free maintenance period shall be considered as payable period.

Contractor may also, with the approval of Client, hire certain Plant
and
Equipment to augment resources at Site.

All requirements of maintenance of records and certification as

stipulated above for Contractor owned Plant and Equipment shall also
apply to the Plant and Equipment mobilised to site by Contractor on
hire basis.

Hire charges will be paid directly by Client.

Contractor shall also periodically submit utilization statement in

respect of Plant and Equipment.

The Operation & Repairs/Maintenance cost of all Contractor owned,

and Client owned Plant and Equipment will form part of Contractor 's
cost.

The cost of Repairs/Maintenance of Plant and Equipment shall be

reimbursed at actual ( as already agreed) subject to a ceiling at the
rate of 5 % ( Five Percent ) per annum of Original Purchase Value in
The cost of Repairs/Maintenance of Plant and Equipment owned by
Client shall be reimbursed at actuals.

Client shall pay to Contractor, on a monthly basis, the fixed charges at

the rate of 21% (Twenty One percent ) per annum prorata basis on
Original Purchase Value of Plant & Equipment owned by Contractor.

Contractor shall provide to Client a statement of item-wise Original

Purchase Value of Plant & Equipment deployed at Site duly audited by
Statutory Auditors of the Contractor.

Contractor will endeavour to provide necessary additional Plant and

Equipment, manpower facilities, materials etc. which are required to
execute the work in a compressed time as may be required by Client.

For Hired Plant and Equipment provided by the Contractor, Operation

Charges shall be reimbursed by Client to the Contractor at actuals.

The cost of Repairs/Maintenance, cost of mobilisation or demobilisation

if any of these Plant and Equipment hired / rented by the Contractor
shall be reimbursed by Reliance at actuals or included in the Hire/Rental
Rate in terms of the agreement with the Hirer.
d) Tools and Tackles and Staging materials:

Client shall procure and supply to Contractor all the necessary Tools,
Tackles and Staging materials as described below as Free Issue.

1. Scaffolding Material.
2. Grinding Machines.
3. Hand tools such as Chisels, Hammers , Levels, Measuring tapes, etc.
4. Lifting Belts and Slings.
5. D Shackles , Chain Pulley Blocks , Tun Buckles etc.
6. Files
7. Dumpy levels, Theodolites, etc.
8. Welding Helmets and accessories such as Aprons, Gloves, welding
goggles, Dark
/white glass, etc.
9. Cutting sets, Heating Torches, etc.
10.Spanners , Torque wrenches, etc.
11.Vibrator Needles,
12.Shovels, Pickaxes, Crowbars, etc.
13.Buffing Machines.
14.Pipe Threading Machines , pipe bending machines etc.
15.Meggars, etc.
Contractor shall provide all necessary services related to determining
the
requirement, specification and timely procurement of same.

In exceptional cases where Contractor requires urgently to mobilise

any Tools, Tackles and Staging materials to progress the work at site,
Contractor shall, in consultation and agreement with Clients
Construction Manager(s) mobilise such Tools, Tackles and Staging
materials to site through purchase of the same in which case Client
shall reimburse to the Contractor the cost of such Tools, Tackles and
Staging Material.

In rare cases where such Tools, Tackles and Staging materials are not
available in the market due to delivery constraints but are available
with the Contractor , then the same shall be mobilised by the
Contractor for the duration until such time the Tools, Tackles and
Staging materials ordered by Client are received.

In case of the use of the Contractor owned Tools, Tackles and Staging
materials at site then Client shall reimburse to the Contractor the
charges for the use of the same.
The charges for use shall be mutually agreed upon between Client
and the Contractor.

Contractor shall in all such cases notify Reliance Construction

Manager(s) the actual date of arrival at Site and release from Site of
each item of Tools, Tackles and Staging materials. Contractor shall
maintain records of all Tools, Tackles and Staging materials received
at site, which are under use and submit to Reliance

Construction Manager(s) a monthly statement for verification and

obtain countersignature as a token of correctness
e) Direct labour:

Actual cost of Direct labour and Sub-Contract labour will be paid to

Contractor as per Cost Statement to be submitted by Contractor .

The Contractor shall engage Sub-Contract labour for specific jobs only
on explicit authorisation by Clients Construction Manager(s) and not
otherwise.

Contractor shall furnish to Clients Construction Manager(s) a monthly

statement of surplus labour or shortfall thereof under different
categories and proposed plan for additional mobilisation,
demobilisation and utilisation as applicable.
f) Materials:
The Contract is basically a labour contract and Client shall provide all the
material required.

However, for the purpose of executing Contract, if the Contractor has to

procure any material, with prior approval of Client, in such case actual Cost
of Materials and Consumables (other than those provided by Client ) will be
paid to Contractor as per Cost Statement to be submitted by Contractor.

Client at its option may also direct the Contractor to procure such materials
from its designated suppliers. The Contractor shall do so and in this event
the Cost of materials shall be reimbursed by Client and this cost shall be
subject to Compensation as agreed in the Agreement.

It is understood and agreed that the Contractor shall not procure any
Materials or Consumables through their other offices on a Branch transfer
basis.
All Materials required for Site jobs will be procured and paid only from closest
available place from the site .

If there are any exceptions, the same shall be procured with prior
g) Mobilisation and Demobilisation charges:

The expenses for Mobilisation of Contractor owned Plant and Equipment to

Site from Contractors Yards and the expenses for Demobilisation of Plant
and Equipment from Site to Contractors Yard at Mumbai shall be
reimbursed by Client to the Contractor.

Demobilisation expenses comprising of

retrenchment benefits to labour and staff
return travel expenses of staff including transportation of their belongings
tackles, and other site facilities (dismantling, disposal/transfer of camp
equipment including office stores,
labour hutments, and handing over of site in the required condition)

shall be paid to Contractor at actuals and the same shall be claimed by

Contractor under the individual item head under "Common Site
Expenses".
h) Supply of Materials and Sub-contract work to be carried out
through specialised agencies:

Contractor shall, if required by Client, will arrange for specialised Sub-contract agencies
for supply of materials/services who shall be jointly selected by Contractor and Client.

In this connection Contractor’s Site shall co-ordinate closely with

Client Construction Manager(s) to:

1. Identify from time to time materials/services for which suppliers and sub- Contractors
are required.
2. Finalise Vendor(s)/Sub-contractor(s) list.
3. Evolve procedure/strategy for selection of Vendors/Sub-contractors for each of the
identified specialised materials and services.
4. Select Vendor(s)/Sub-contractor(s).

Contractor, shall be paid cost of such works/services or supplies (inclusive of all taxes,
duties whether payable by the Sub- contractor or by Contractor and freight charges).
i) Engineering and Design fees:

Client shall pay Contractor all-inclusive expenses incurred towards

Engineering and Design at the following man-hour rates (inclusive of
all benefits).
For Engineering/Design executed at Site : Rs/man-hour

Engineers : Rs. 175/- ( Rupees one Hundred Seventy

Five )
Draftsman : Rs. 100/- ( Rupees one Hundred )

In addition to above, expenses towards travel to and from Project

site, boarding, lodging and incidental expenses shall be
reimbursed at actuals.
CONSTRUCTION, MATERIALS AND SAFETY.

The Contractor shall deploy experienced personnel to the site in following

categories for effective Construction, Materials Control and Safety in
Construction:
1. Construction Managers for each unit / area duly assisted by qualified /
experienced construction and quality supervisors.
2. Construction Planning Engineer for each unit/area
3. Material controllers for each unit / area duly assisted by qualified / experienced
stores manager and stores officers
4.Safety manager for each unit / area

The Contractor shall submit overall construction organisation chart along with
resumes for Clients Construction Manager’s review and approval and
accordingly take steps to mobilise the personnel. The organisation chart shall
be reviewed from time to time and additional mobilisation or demobilisation of
persons as required shall be effected by the Contractor.
If in the opinion of Client , any of the Contractor’s staff is found unsuitable for
the assigned job, the Contractor shall take immediate steps to demobilise and /
or replace with alternate person.
DEFECT LIABILITY.

In the event of any defective work, Clients Construction Manager(s) shall

advise the Contractor of the same. Contractor , in turn, shall take
necessary steps to carry out the rectification work by mobilising necessary
resources.

The cost of such rectification work, including cost of any free issue
materials supplied by Client for this purpose shall be recovered from
Contractor .

The recovery of cost of free issue material shall in the aggregate not
exceed 5% ( Five percent ) of the amount of Compensation received by the
Contractor for the relevant scope of work.

However if rectification is necessitated due to reasons not attributable to

Contractor , the same will be recorded and certified by Client in each case
and the costs of such rectification shall be reimbursed by client and the
Contractor shall be entitled to Compensation hereon in terms of Article 8
of this Agreement.
PERMISSIBLE WASTAGE AND LOSSES.

Wastage allowance and weighment/rolling tolerances shall apply to

Free Issue
Cement Non recoverable
Wastage allowance 2%

Reinforcement Non-recoverable
steel wastage allowance 0.5%

Accountable wastage Note :

allowance 2.5% 1) Bar-bending
(less than 2 mtrs length) schedule shall
be approved by
Engineer-in-Charge
2) Cut lengths shall
be segregated
size-wise and
length-wise while
returning to
Clients Stores
Rolling tolerance To be determined
periodically as per IS 1786.

Structural steel Non-recoverable

wastage allowance 0.5%
Accountable wastage
allowance 2.5%
(less than 2 mtrs length)
Rolling tolerance To be determined
periodically as
per IS 2062.
Steel Plates Non-recoverable
Wastage allowance 0.5%
Accountable wastage
allowance As per approved
cutting diagram.
Plate pieces
measuring 1m2 in
area and any side
not less than 200 mm
will be accepted as
good and usable
Electrical cables Non Recoverable 0.5% in peeled-off
wastage condition (Contractor
allowance. to return all cut lengths
to Client’s designated
place)

Sand Non-recoverable Will be decided

wastage allowance mutually.

Aggregate Non-recoverable Will be decided

wastage allowance mutually.

Paint Non-recoverable Will be decided

wastage allowance mutually.
In the event Contractor consumes any of above materials in excess of that
required to execute the works including permissible wastage allowances and
tolerances, Client shall recover from Contractor the Weighted Average Cost
of such excess consumption plus 20% charges thereon.

In the event of loss or damage of Free Issue Materials or any Contractor

supplied materials due to negligence on Contractor’s part, the cost of such
lost/damaged materials shall be recovered by client from Contractor on the
same basis as above but only to the extent they are not recovered from the
Insurance Cover to be provided by client.

Deductible/franchise amounts in respect of the insurance covers/policies

executed by client shall not be construed as amounts not recovered from the
Insurance Cover.

The admissible recoveries shall be completed vis-a-vis the reconciliation

statements to be submitted by the Contractor once in a quarter as per cost
verification.

The amount of such recovery shall be withheld from the payment due under
compensation which shall be reconciled every six months.
COMPENSATION.

Contractor will be paid in addition to the Cost as defined earlier compensation at

the rate of 20% (Twenty Percent).

This rate of compensation shall be applicable on the amount recoverable by

Contractor on items (a) to (i) Out of the above, 18% (Eighteen Percent) shall be
payable within 30 days of submission of monthly cost statement and R.A.Bill
( statement of work done along with joint measurement sheets ) and reconciliation
of Free issue materials and consumables.

Till the submission of R.A.Bill and reconciliation of Free issue material, any payment
released on weekly fund replenishment basis or otherwise shall be treated as
advance to Contractor in clients Books of Accounts.

The Contractor will submit reconciliation of free issue Materials and Consumables
every quarter.

If the Contractor fails to submit Reconciliation Statement and R.A.Bills

for two consecutive quarters, then the compensation payable as above shall be
withheld until such time aforesaid statements are submitted.
The balance 2% ( Two Percent ) will be paid to Contractor at the end of each calendar
year upon submission of a Bank Guarantee of an equivalent amount valid for One
year.

It is clarified that

no compensation is payable to the Contractor on account of the Plant & Equipment

provided by client and any free issue materials and consumables.

· no compensation will be payable on cost of rectification of defective work

attributable to Contractor .

· where it is stated that it shall form a part of Contractors cost and /or it is stated the
that the cost shall be reimbursed at actuals , it is agreed that this cost shall be
reimbursed by client and shall be subject to Compensation as per the percentage
specified in compensation of the Agreement and paid to the Contractor.

· On the completion of the total work, the compensation shall be adjusted on the
basis of material utilised in the work and no compensation will be paid on the value of
material unutilised and lying in the stock on which compensation has been paid.
EXCISE DUTY, ENTRY TAX AND OTHER STATUTORY
IMPLICATIONS.

a) Excise Duty, Entry Taxes, Sales Tax and Works Contract Tax, Purchase
Tax, Turnover Tax and any other Statutory levies wherever applicable,
presently and due to subsequent changes in laws, enactments, etc., on the
work performed by the Contractor shall be paid by client into Site
Account. In all such cases, no Compensation as per terms of payment will be
applicable.

Contractor shall not effect any such payments without prior approval from
client which approval shall not be unreasonably withheld.

b) However, compensation is payable on Contractor’s suppliers’ invoices

including Excise Duty, Sales Tax and any other levies which is a part of
Contractor’s cost, so long as the Contractor has exercised due diligence to
minimise their incidence as per law in accordance with the operating
procedure for joint procurement of materials and services.
COST VERIFICATION.

a) To facilitate audit and verification of Cost and material utilisation and cost
at any and all times during the currency of the Project execution,
Contractor shall maintain at Project Site records of all relevant details of
purchase of materials and services, details of materials issued and
utilisation of materials in the aforesaid work, payments to the Suppliers
and/or Sub-contractors and any credits received or recoveries to be made
or made from the Vendors and/or Subcontractors and submit same to
Reliance once in a month.

Contractor shall maintain all information at Project Site in

computerised form and provide full access to client at all times.
The Contractor shall, at clients request, provide all data base in floppy discs
for further use by client.

The Contractor shall give a quarterly declaration along with Cost Statement
that
i) all recoveries & credits received/receivable from their Vendors &
Subcontractors or other Third parties are fully reckoned in the Cost
Statement.

ii) they have not included Service or Management Charge in Cost Statement
on account of any bills from or payment to 3rd parties.

b) The Contractor shall submit monthly material movement statements for

all the materials and consumables along with the monthly Cost Statement
as per format.
c) Contractor shall submit reconciliation statements of Free Issue Materials and
selected Contractor supplied materials as identified below once in a quarter along
with supporting statements showing :

- Material in stock
- Material forming part of work in progress and
- Un-accounted wastage/loss.
-Accounted wastage

d) All scrap, surplus material and salvaged material paid for by client will be
handed over to client by Contractor .

e) If on verification of Costs, it is found that the Contractor has overcharged client,

then the same will be recovered from Contractor including compensation thereon.

Over and above this, there will be a back charge by client of 50% of
the Amount involved if it is found to be an intentional overcharging by the
Contractor .
Incentive
Contracts
This is an improved version of the guaranteed maximum price
contract.

In this type of contract, the target price of the work/finished product

is fixed somewhat below the maximum price.

The contractor is allowed a certain percentage of savings between

the maximum price and the target price.

This works as his incentive.

This type of contract has very often been recommended in cases

where the price is to be determined.
This form of contract is of recent origin. In it are combined the best
features of the cost-plus-percentage and cost-plus fluctuating fee
type contracts.
The contractor is paid on a cost –plus-percentage basis work
performed under the contract, plus or minus a certain amount, which
is an agreed percentage of savings or excess effected against the
target value. The target value is arrived at by measuring the work on
completion and valuing it at the rates agreed earlier.
EPC/Turnkey Contracts
• Some organizations specialize in designing and constructing projects.
• Employee signs an agreement with such organizations for planning, design and
construction of the project. This is called a turnkey type of contract.
•
• EPC  Engineering Procurement Construction.

• Turnkey  Ready to be commissioned at turn of a key.

• These projects include design as well as construction (i.e. Combination of A/E contract &
Prime Contract).

• The owner only provides preliminary conceptual drawings (Front End Engineering) &
specifications during bidding. Detailed Design & Working Drawings (Detailed Engineering)
is done by the contractor as per specifications provided by owner.
•
• A Construction Management Service or a Project Management Consultant may be
employed by owner to check progress and quality of works.
Such a contract may be made on the basis of the cost plus a fixed fee or cost
plus a percentage of the cost or whatever arrangement is satisfactory to the
parties.

Such combined contracts have been advantageously used in industrial projects

when there are specialists in the particular field of endeavor.

In some cases, they even assist in getting the plant into operation in order to
see that everything functions properly.

Under this type of contract, a manufacturer may also undertake to develop the
designs of any piece of equipment and then manufacture it.

The work can be greatly expedited under such contracts as extensive plans
and specifications need not be prepared by the employer. Further , there is no
division of responsibility.

In most cases specifications lay down the performance criteria only. Methods
decided by the contractor.
• An EPC project can be a complex one-of-a-kind product
development, made up of a large number of interconnected
subsystems and components, requiring considerable human
efforts and financial commitment. The EPC activities are time
phased according to specified precedence and resource
requirements and constraints.

• Engineering and Design (E) is the process by which the needs,

wishes, and desires of an owner or developer are defined,
quantified, qualified into clear requirements which will be
communicated to the builders or contractors.
• The engineering and design phase has the highest level of
influence of the project, as many key decisions will be made
during the pre-project planning and engineering phases. These
decisions will lead to the commitment of a large sum of the
funds and other resources necessary for the successful
implementation and completion of the project.
• The engineering and design phase is closely followed by the
procurement (P) phase. A contractor begins to procure project
equipment and construction materials upon receipts of engineering
drawings, specifications and other relevant documents. The main
procurement/logistics activities include sourcing, purchasing,
contracting, and on-site materials management.

• A contractor begins to construct specified facilities in construction (C)

phase according to work packages prepared during the engineering
phase, and use equipment and materials obtained in the procurement
phase. The sequencing of construction will be initially planned to
reflect the most logical and cost effective approach to meet start up
and handover dates.

• Infrastructure projects are awarded to a single contractor who

undertakes to complete the entire project on a turnkey basis. This kind
of arrangement is commonly known as an engineering, procurement
Such a contract may be made on the basis of the cost plus a fixed fee or cost plus a
percentage of the cost or whatever arrangement is satisfactory to the parties.

Such combined contracts have been advantageously used in industrial projects when
there are specialists in the particular field of endeavor.

In some cases, they even assist in getting the plant into operation in order to see that
everything functions properly.

Under this type of contract, a manufacturer may also undertake to develop the designs
of any piece of equipment and then manufacture it.

The work can be greatly expedited under such contracts as extensive plans and
specifications need not be prepared by the employer. Further , there is no division of
responsibility.

In most cases specifications lay down the performance criteria only. Methods decided by
the contractor.
 FIDIC RISK DIAGRAM
RED BOOK- YELLOW BOOK – SILVER BOOK

Increased Increased
Employer's Contractor's
Risk and Increase Risk and Increase
Design Control Project Price, Time
Design Certainty & Cost Certainty
 Employer Contract between
Employer & Engineer
(possibly FIDIC White
Book)
Contract
between Engineer
Employer &
Contractor Engineer
administers FIDIC
Contractor Contract on
Behalf of
Employer
Note: Red and Yellow Books use the same
DAB arrangements
 Employer

Contract
between
Employer’s
Employer &
Contractor Representative

Contractor
• Commercial Terms can be
• Lump sum
• Item rate
• A combination of both
• Cost plus
• Mode of payment can be
• Measurement Based
• Milestone Base
• Combination of Both
• In case of LSTK (Lump Sum Turn Key), deviation schedule is mandatory
since in absence of all drawings, it is impossible for bidder to estimate the
final cost correctly.

• Hence the bid documents include a BOQ, which contains rates of all items
and initial quantities (estimated by the bidder), used as a back up to arrive
at the Lump sum. The BOQ is revised after all drawings are completed, and
the lump sum fixed based on previous rate.

• Lump sum includes design fees

• In case of unit price EPC contract, the BOQ contains all items of work,
including design services, escalation, etc.

• The quantities and rates are estimated and submitted by the bidders. The
rates are fixed, but quantities may be changed depending on the drawing
(to any extent)

• The payment is based on actual measured quantity

• In big projects, some portions may have lump sum price, and some
other portions may be item rate (i.e. some related items may be
bundled into a lump sum, other items stay unbundled and are paid
on unit price).

• Example: In a highway contract, excavation, earthwork, WMM,

asphalt, may be item rate (paid on per LM) whereas Flyovers, CD
structures, Toll Plazas may be lump sum.

• Invoicing schedule will contain both milestone and measurement.

• Bid Documents
• Notice Inviting Tender
• Instruction to the Bidders
• Qualification Criteria
• General Conditions of Contract
• Special conditions of contract
• Project Details
• Preliminary Drawings
• Specifications
• Details of Bid Bonds
• Invoice Schedule
• Bill of Quantities
• Milestone schedule
• Deviation schedule
• The work can be greatly expedited under such contracts as extensive
plans and specifications need not be prepared by the employer. Project
is fast track since design and construction can proceed in parallel.

• There is no division of responsibility, hence contract management is

simpler.

• Owner needs to employ less no. of professional staff.

• Enables the contractor, with specialized knowledge of his own

techniques, to design so as to produce maximum economy, and
therefore a leaner price, in a way that an architect or engineer without
knowledge of these techniques would not be able to produce.

• More scope and incentive for innovation and value engineering

In these contracts, the essential feature is that the employer does not
employ professional staff to produce the design of the building or project
which he requires.

Either by negotiation, or by outline specifications to tendering contractors,

the employer makes known his requirements and the contractor produces
the design, in the form of drawings, specifications and sometimes schedule
of rates to cover possible variations. Bills are not usually used in such
contracts.

In some cases, the project is of a “mixed package-deal” character, with

external works and foundations under the design control of the employer in
the usual way, possibly with bills of quantities, and the superstructure
provided under an “industrialized buildings” design of the contractor.

The justification for this system advanced by its advocates is, that it avoids
duplication and the expense of design staff, and enables the contractor, with
specialized knowledge of his own techniques, to design so as to produce
maximum economy, and therefore a leaner price, in a way that an architect
or engineer without knowledge of these techniques would not be able to
produce.
Pubic Private
Partnership
• The contractor undertakes to design, finance , construct ,
operate and maintain the works for a concession period.
•
• The contractor recuperates his cost from the collection of charges
levied on the beneficiaries who use the work and in some cases
annuity payment each year.

• The facility is returned back to the government and all rights of

concessionaire cease to exist.

• Depending on the type of ownership, this may be further

subdivided into different formats used in different countries at
different times.

• The cost of construction of the project is ascertained in the manner

of a lumpsum or item rate contract.

• The bidder then works out the cost of financing the project and its
recovery from the collection of toll or similar method till the cost of
construction together with the cost of finance and expected profit is
• The cost of maintenance of the project during the period in question
has also to be added to the basic cost.

• Each year’s income will recover the cumulative investment till the
net becomes zero or negative.

• The concession period worked out by each bidder will depend upon
the cost of construction worked out by each bidder and also the
rate of interest considered for financing the project and expected
profit.

• The bidder who submits the cash flow projections seeking the
minimum period of concession is generally awarded the contract.

• In some cases the total income predicted over any reasonable

concession period does not adequately cover the total cost (EPC +
O&M)+ interest + profit.

• The authorities can provide some grants to bridge the gap known
as viability gap funding.
The bidder expecting the least grant is generally awarded the
contract.

The grant may be in the form of annuity payment or released in a

phased manner as mutually agreed by the parties.

In some cases, the bidders do not need grant, and the cumulative
income from the years of concession fixed by the authority, far
exceeds the total cost.

In these cases, the concessionaire may quote an upfront negative

grant, or a share in revenues to the authority.

The bidder offering maximum negative grant or share in revenues will

be awarded the contract.
• Documents
• In addition to the usual contract documents cash flow
projections giving details of how the contactor intends to
generate finance and use it till the recovery of his capital,
investment cost and profit during the concession period ,
forms an integral part of the contract
• Pros
• public authority is not required to finance the project
immediately
• project is made to generate the funds and be self financing to
the extent possible
• greater autonomy for the contractor
• more scope for value engineering and innovation
• quality is assured since poor quality means increased
maintenance cost for the contractor
• Cons
• greater risk on contractor
• Contractor needs expertise in not only construction but other
areas like finance, O&M as well
• Ideal type of contract for highways and expressways, bridge ,
tunnels , electricity power generation and supply etc that
save the cost of operation or time of travel for which users
will pay reasonable charges.

• Not suitable for works that are not likely to generate capital
for self financing eg. rural water supply projects, village roads
, city roads, etc.
Some of the more common and accepted framework for private
participation

Build – Operate Transfer (BOT)

Build-Own – Operate – Transfer (BOOT)
Build-Own-Operate (BOO)
Build-Operate-Lease- Transfer (BOLT)
Build- Transfer – Operate (BTO)
Design-Build-Finance-Operate (DBFO)
BOT MODEL

BOT model is the most commonly used framework for private

participation in infrastructure projects

Build-Operate- Transfer projects involve a private company (also

known as concessionaire) usually a joint venture company or a
consortium led by an international construction company that
finances, builds, and operates an infrastructure system for a fixed
time during which the government has a regulatory and oversight
role.

The responsibility of financing the project also lies with the

consortium, which may sometime get financial assistance from the
government depending on the terms of the contract. All debt
financing will remain the obligation of the consortium.

The BOT projects are designed to generate enough revenues to cover

the project company's investment and operating costs plus an
acceptable return on capital.
At the end of the project, which is usually in 15 to 30 years, the
system is transferred back to the government.

BOT projects were originally conceived to transfer commercial risks to

the private sector and free government funds for other uses.

The contractor recuperates his cost from the collection of charges

levied on the beneficiaries who use the work and in some cases
annuity payment each year.

The facility is returned back to the government and all rights of

concessionaire cease to exist
Mega projects such as expressways would require a totally different
approach.

The Government will have to carry out feasibility studies, acquire

land, develop the project to an advanced stage, give some cash-
subsidy or low-interest rate loan and only then can the project
become viable for funding through the private sector route.

Such projects would also require part funding from international

lending institutions, which may give long-term debt at stable and
reasonable interest rates.

These projects could become viable if they are developed as public

toll roads.
II. Build-Own – Operate – Transfer (BOOT): This scheme is
similar other variants to the above described BOT model in all
aspects except that the ownership of the facility until it is transferred
to the Government rests with the private entity.

III. Build-Own-Operate (BOO): Build-own-operate (BOO) are

projects in which, as in BOOT projects, a private entity is engaged for
the financing, construction, operation and maintenance of a given
infrastructure facility in exchange for the right to collect fees and
other charges from its users. However, under this arrangement the
private entity permanently owns the facility and its assets and is not
under an obligation to transfer them back to the host Government.

IV. Design-Build-Finance-Operate (DBFO): Like BOT, DBFO

does not entail ownership of the infrastructure facility by the private
sector. In the DBFO scheme the private sector is given the additional
responsibility of designing the facility apart from its financing,
construction, operation and maintenance.
V. Build-Operate-Lease- Transfer (BOLT): In these type of
projects, in addition to the obligations and other terms usual to BOT
projects, the private entity leases the physical assets on which the
facility is located to the Government for the duration of the
agreement.

VI Build- Transfer – Operate (BTO): In these projects there is

an explicit provision stating that the infrastructure facility becomes
the property of the host Government immediately upon its
completion, the project company being awarded the right to operate
the facility for a certain period.

Apart from the above there are also arrangements whereby existing
infrastructure facilities are turned over to private entities for being
modernized or refurbished, operated and maintained, permanently or
for a given period time. Depending on whether the private sector will
own such infrastructure facility, those arrangements are called either
"refurbish-operate-transfer" (ROT) or "modernize-operate-transfer"
(MOT), in the first case; or refurbish-own-operate" (ROO) or
"modernize-own-operate"(MOO) in the latter case.
• The main agreement contains several schedule
describing
• the project site
• project facilities
• site delivery schedule
• design requirements
• construction requirements
• operation and maintenance requirements
• cash flow projections
• annuity / grant payment schedule
• performance security
• state support agreement
• substitution agreement
• hand back requirements
ELEMENTS OF A BOT PROJECT

The various elements that are involved in the BOT projects are
identified as,
a. Project Identification
b. Ownership
c. Operation
d. Finance
Project Identification

First and foremost is to identify the projects that can be executed by

using BOT technique.

The work involved in preparing such a proposal is not only more

substantial than for a conventional tender, but depends from the
outset on a clear understanding of the economic viability and
commercial prospects of the project.

Such initiatives are therefore based not simply on the identification of

a requirement for a capital project, but on the evaluation of a revenue
stream which such a project would generate.
Operation

A significant difference between a bid for a BOT franchise and

traditional construction contracts is that the franchise offer must
include operating proposals.

Under the traditional tender, the contractors involvement is to all

intents and purposes to complete shortly after the end of the
construction period, but with a BOT franchise his involvement can be
lengthened considerably.
Ownership

A second element for contractors is the potential need to own the

assets they are going to build.

It is difficult to develop robust BOT proposals, which result in private

ownership of assets, which are built without at the same time
increasing the liabilities of the promoting contractors or their parent
companies.

Since the contractor will normally wish to minimize his equity

commitments, it is invariably necessary to establish a single purpose
company which can promise returns which are both sufficient and
secure enough to reward the risks being taken (including the
speculative business development commitment required) and also to
attract involvement from second other investors .
Finance
One of the most daunting aspects of developing a BOT project is that
of finance.

The financing plan will have as great an impact on the franchise

terms, which can be offered as the projects physical design or in
construction cost.

A low Construction cost will therefore be no good unless the financing

terms, which accompany it can be just as aggressive.

Aggressive financing terms will only be forthcoming if financiers are

satisfied with the predictability, stability and political acceptability of
the revenue stream.

Ultimately investors and lenders will normally require independent

and expert market analysis to give them comfort on this.
Design Bid Build

The person who needs a building constructed, or the project owner,

hires a designer to draw up the schematics and plans for the building.

The designer can then hire consultants as needed, who report directly
to the designer.

With plans in hand, the project owner gets bids from various
construction firms to construct the building. The project owner picks
the bid they like best and hires the contractor.

As with the designer, the contractor can hire subcontractors as

needed who would report directly to them, not the project owner.

Then, the building is constructed based on the schematics and

documents that the designer made.

Designers and contractors bear no contractual obligation to one

another and the owner bears all risk associated with the
completeness of the design documents.
Design build:

Under this method, an owner typically hires a single

entity, the design/builder, to perform both design and
construction under a single contract.

Portions or all of the design and construction may be

performed by the entity or subcontracted to other
companies.

DB is characterized by high levels of collaboration

between the design and construction disciplines, input
from multiple trades into the design, and a single entity
bearing project risk.

Typically, the general contractor is responsible

contractually for this delivery method.
In determining which project delivery method and contractual
arrangement to employ, owners should carefully analyze their:
 Capacity and technical capability to closely manage the process
 Individual project drivers
 Sensitivity to cost and schedule escalations
 Degree of comfort with bearing project risk

DB Outperforms DBB Based On Multiple Factors

Cost and Schedule: “Owner-submitted DB projects outperformed
DBB projects in cost, schedule, changes, rework and practice use.

Practice use factors include constructability, team building, zero

accident technique, design/information technology use and change
performance.

“…collaborative project delivery systems produce a more reliable cost

outcome for public owners.

An experienced DB team has the greatest opportunity of succeeding

in achieving goals in schedule maintenance, construction speed and
intensity.
when employing the more collaborative DB method, projects had significantly
lower schedule growth than DBB projects.

Further analysis of change order growth showed that DB projects also have
significantly lower total change order cost growth.

The DB projects took less time, had less cost growth, and were less expensive
to build in comparison to DBB projects.

A study by Penn State found that compared to DBB, DB projects had a six
percent reduction in change orders, delivered 33 percent faster overall, and
cost six percent less.

Reduced Risk: By involving the DB entity throughout design, the design and
construction disciplines are contractually obligated to work together to
complete a design that meets owner needs within constructability and budget
parameters.

The DB entity bears the risk for the design completeness thereby reducing the
need for change orders that can derail budgets and schedules alike.
When schedule is critical to project success and budget is still
unknown, the DB delivery method should be considered. DB relieves
the owner from warranting design documents and mediating
interpretations of those documents.

Higher Quality: A relatively short time of inoperability can quickly

negate any savings earned during design and construction.

The highest quality project outcomes analyzed were completed by DB

teams with experience working together. Overall, DB teams delivered
highest quality in terms of lower difficulty in start-up, fewer call backs
and meeting project needs.

Evolving project drivers:

The project delivery systems research study indicates “Owners who
see an advantage to continue to fine-tune the scope, up to and even
after the capital project has started, have a distinct advantage in
using a design-build contractor in lieu of other methods of execution.
Partnering
Alliance
Project Partnering Contract (PPC) UK

PPC is the standard form of multi-party partnering contract for

construction projects.

The main differences between PPC and other contract forms are:
- PPC integrates all project teams under one multi-party agreement
- PPC integrates the contractor as early as possible

Integrated team

The PPC multi-party agreement creates one integrated project team

consisting of all the participants of the projects.

The owner, the designer, the constructor and even some specialists
and subcontractors may be part of such agreement.

Placing all participants at the same level and binding them under the
same terms and conditions is very useful to unify their targets and
avoid any possible conflicts that might affect the project.
Early involvement

The PPC concept adopts the contractor early involvement

method. The main contractor, sometimes even
subcontractors and specialists, are being integrated in the
project since the design development stage.

The early integration of contractors can benefit the

project in several aspects
- Involve in the design development.
- Prepare value engineering alongside the design.
- Provide value management by proposing alternative
solutions.
-Contribute to the risk management analysis.
Multi-party approach

PPC integrates the owner, the designer, and the constructor in one
multi-party agreement.

These partners should also establish one team for jointly managing
the project. Subcontractors, consultants, and other service providers
may also be part of the agreement if the project requires.

Integrating all participants in one agreement under the same terms

and conditions has great benefits to the owner.

Rather than creating several two-party contracts with each

participant individually, this reduces the possibility of any contractual
gaps.

Moreover, the owner is not requested anymore to be the interface

platform between all project participants.

The multi-party approach creates direct contractual relationships

between the participants, which provide an opportunity for them to
Integrated process

The PPC provides a very good opportunity to use the knowledge and
experience of the constructor during the design development stage.

Since the constructor is already on board it is easy to integrate them also

in the design process.

The constructor may provide a valuable opinion in design review and

propose useful alternative engineering solutions that might reduce the
risks of the project significantly.

At the same time, the constructor benefit from their contribution in the
design development greatly.

They have the possibility to affect the project design and planning to
match their preferable method of working and their distribution of
resources during the construction stage.

Moreover, since PPC uses an open book policy, the owner and the
constructor will be able to build up their own price estimation and
integrate their profit for the project during that stage.
Joint controls

The PPC introduces different methods of project control. Considering

that the project is being managed by one integrated management
team. Also it covers the management and control of both pre-
construction and construction phases.

The pre-construction phase is governed by the “partnering timetable”

which summarizes all the roles and responsibilities of the partners
and their tasks during the time before the project is being mobilized
at site.

Whereas the “project timetable” covers the construction stage, it

describes the roles of the partners and their duties towards each
other’s and the project.

Both documents must be developed by collectively by all the partners

and they should be considered as part of the contract documents.
Alliance Contracting (Australia)

The project Alliancing integrates management team, collaborative

performance, open-book communications, and collective decisions
making.

An alliance is a project delivery method for construction projects in

such the owner or owners work collaboratively with one or more
service providers such as (planners, designers, construction
managers, contractors) in one integrated team in order to accomplish
a specific project.

In such form all participants work under a contract that aligns their
commercial interests with the outcome of the project in which they
share all the pain and the gain.

All parties are requested to operate under full trust, good faith,
integrity and open book policy.

All decisions are made unanimously and in the best-for-project

manners
The alliance required forming one integrated team to run the project
that consists of members from different organizational backgrounds;
however this team should operate as a one body with equal members
and take decisions for the best interest of the project only.

Therefore, an alliance removes the organizational differences and

enhances the trust based relationships between members and in
return between organizations.

The key factor of alliance contracts is risk sharing. All project risks are
being collectively shared and managed by all the participants. In a
pure alliance all participants:

a) Accept collective responsibility for accomplishing the project.

b) Take collective ownership of all the risks (and opportunities) that
are involved in delivering the project.
c) Share completely the “pain” or the “gain” of the project depending
on how the project ended up comparing to the pre-set targets that
were accepted by all of them
Under an alliance contract all the risks and opportunities are shared
equally between the participants, however the financial outcomes are
not shared in an equal way between the owner and the none-owner-
participants (NOPs).

This means that although the risk is collectively shared but there is a
limit of the financial losses that the NOPs would undertake.

Collaboration between owner and NOPs create an environment of

trust and sharing abilities and experiences for accomplishing the
project.

The integrated team and unanimous decision making enhance the

policy of risk sharing in which risks is no longer a burden on the
project rather than part of the process.

Variations are generally avoided except in specific cases and all the
time and effort spent on them is saved.

The time and effort of the management team is spent on value-

adding activities rather than contractual disputes
Alliancing Success Factors

Integrated and collaborative team: project team includes members

from the owner side and the NOPs. Those members must operate in
one integrated unit taking unanimous decisions for the best interest
of the project. Relationships among members should be based on
trust and equality.

 Project solution: the way project is planned or designed, the

possibilities of procurement, the method of construction and the
commercial targets.

 Commercial arrangements: are stated in the project alliance

agreement (PAA) in a way that align the interests of different
participants to the best benefit of the project.

 Target outturn cost (TOC): it is the estimated cost of designing

and constructing the project. It is part of the commercial agreement
and should be accepted by all the participants.
Alliancing key features

Sharing of risk and opportunity: the main aspect of alliance contracts

is the “collective assumption of risks” between all participants.

Risk sharing instead of risk allocation is the alliance approach where

all participants including the owner share all the design and
construction risks.

This approach avoid the misallocation of some risks into the weakest
party that might happen in the traditional contracting and in return
might have a bad impact of the project outcome.

However, owners should pre-check the risk profile of their NOPs

during the selection process otherwise they might end up bearing
more risks than they expected some of them are not even project
related.
 Commitment to “No Disputes”: alliance contracts are based on
trust and team work, therefore it usually include all participants
commitment to “no disputes”.
It means that all disagreements will be handled internally and none of
the participants will have the ability to litigate or arbitrate unless in
very limited cases.
As a result any claim-oriented behaviour will be avoided and the
focus will be on resolving any conflicts to the best of the project.

 Best-for-project decision making process: another significant

difference of alliance contracts from the traditional ones is that
owners are willing to share the risks in exchange for all participants to
align their commercial interests with the project interest.

Consequently all decisions that are made based on the best-for-

project principle.

A “no fault – no blame” culture: it is one of the main characteristics of

alliance contracts. It means that in case of error, poor performance or
none conformity participants will not attempt to blame each other
rather than finding the solution in a best-for-project way.
This is very useful for the owner because it encourages all participants not
to focus on avoiding the blame by hiding some of the problems.

 Operate in good faith and integrity: to operate under good faith

and integrity is a defining aspect of all alliance features.

It is usually the culture which characterizes the alliance project till

completion.

It means for all participants to operate cooperatively and to be fair and

honest in communication among them. Furthermore, a good faith culture
is expected from all participants even while resolving any disputes.

 Transparency; “open-book” documentation and reporting: all

participants in the alliance should commit to an “open-book” policy.

Where all documentations and reports are available for all other
participants to review and audit if needed.

This is very important in terms of reimbursed costs calculation, in such

NOPs are expected to have a very good record of all project activities
which need to be paid by the owner.
Also owners should have their own professional experts whom are
able to review and audit such documents, monitor the TOC, and
reimburse NOPs accordingly.

On the other hand, owner’s open-book record makes it easier for all
NOPs to understand why certain decisions must be taken for the best
interest of the project.

 A joint management structure: forming an alliance includes

forming one integrated management team.

These management team/teams should include member from all

participants and according to their abilities and experience.

In such arrangement all decisions are taken collectively and

unanimously and all members have equal votes.
Differences between Partnering and Alliancing

Partnering is defined as a management approach to make team working

across organizational boundaries possible.

Its main components include mutual objectives, agreed problem

resolution methods, and an active search for continuous improvements.

With partnering, aims and goals are agreed upon and dispute resolution
and escalation plans are established, but partners still retain
independence and may individually suffer or gain from the relationship.

With alliancing the alliance parties form a cohesive entity, which jointly
shares risks and rewards to an agreed formula.

Partnering only ties the commercial interests of the partners but it does
not state the way of achieving this interests or the relationships between
them.

Alliance all participants are expected to act in one integrated team and
good-faith is not a behaviour by choice but it is a contractually binding
In alliance trust, integrity and transparency are defining
aspects of the project and all participants commit to work
according to these qualities the moment they enter an alliance.

Partnership may decrease the number of disputes in project but

it will not eliminate them completely.

Partnering contracts still have legal statements in terms of

dispute resolution and still have the possibility to litigate and
arbitrate.

However, the essence of alliance contracts is “no disputes, no

litigate, and no arbitrate”.

Participants of an alliance work together in order to resolve any

problem in a best-for-project way before it escalates