CHAPETR Four

PROCUREMENT AND
CONTRACTUAL MANAGMENT
 CHAPETR IV
Out line
• Procurement and Contract Management Process
• Procurement and Contract Delivery Systems
• Types of Construction Contracts
• Stages in Construction
• Contract Documents
• Term of Reference ( TOR)

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 Introduction
 Construction Industry involves procurement and contract management systems
in order to ensure fair competition and distributions of obligations and rights
among stakeholders.
4.1 Procurement and Contract Management Process

 Procurement and Contract Management involves three major processes:

Contract Planning,
Procurement Management and
Contract Management
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 …Con

Delivery System Contract Formulation

Procurement Method Contract Administration
Contract Types Contract Closing

Contract Procurement Contract

Planning Management Management

Procurement Preparation
Tendering
Tender Evaluation & Notice of Acceptance

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 4.1.1 Contract Planning:

Contract planning:
Delivery Systems,
Procurement Methods and
Contract Types
Procurement and Contract Management processes shall be based upon the
approved contract planning provisions; contract delivery system, the
procurement method and contract types decided upon.

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 …Con

 The approved contract provisions can only be changed following the change
process stated in the contract planning document and if and only if:
I. the Environment and Context considered are not correctly analyzed or
changed,
II. their application can remarkably affect the objective of the project, and
III. procurement management process justifies change of the Contract Types.

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 4.1.2 procurement management

 Procurement is a process used to select the lowest competitive and qualified

bidder for procuring services or works or goods from potential competitors
based on reasonable relevant criteria.
 It is carried out based on the provisions made during the contract planning
phase of the Procurement and Contract Process.

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 …Con

 Physical infrastructures are cost extensive and appropriate savings obtained

through competition are the main factor behind the procurement process.
 An effective and efficient procurement method ensures the following rights
called the "Five Rights". These are
The Right Quality,
The Right Quantity,
The Right Cost / Price /,
The Right Counterpart and T
he Right Time.
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 …Con

1. The Right Quality: It is indeed wasteful and not necessary to spend time,
money and all the efforts for procuring unqualified services or goods or works.
quality can be insured by the provisions of specifications and checking their
conformance reliability of the intended job.
This implies that a tender document should, as much as possible, clearly specify
the quality requirements and allow participation of qualified and experienced firms
for tendering

9
 …Con

2 . The Right Quantity :

The quantity should be computed carefully and included in the BOQ correctly.
Because it has an effect on the project cost and site organization which is the bases
for offering the right price.
Two major factors that can play important role in providing the right quantity
are
Take - off - Sheet Measurements and
Resources Allocations .

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 …Con

3 . The Right Cost / Price / : In strict terms the right cost usually relates itself very
much to the quality expected to accomplish the task .
 It is clear to say that it is difficult to get the right cost, however to approach it,
is a possibility. Competition is the bases for determining the Right Cost or Price.
4. The Right Counter Parts: This is to guarantee that the parties agreeing to
accomplish the task shall be fit to the job.

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 …Con

5. The Right Time: The right time for the provision of resources and
accomplishment of obligations of each party shall be set and agreed.

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 4.1.2.1Types of procurement

There are six bases for classifying procurement methods . These are:

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 Bid Qualification
Procedure
(Tendering)

Competitive Bid Negotiative Bid

Financial Proposal
Short-Listed Bid Open Bid

Financial Pr.

One-Stage Two-Stage Procedure

Procedure
Financial Proposal

Pre-Qualification Post Qualification

•Technical Proposal
•Financial Proposal
•Financial Proposal
•Technical Proposal 14
 4.1.3 Contract Management:

 Contract Management: is a process of reaching contractual agreement for

implementation, its administration and finally concluding the contract. Similar
to the procurement management process, it shall be based on the provisions
decided during the contract planning phase. It involves negotiation based on
tender evaluation recommendations and signing of contractual agreement
followed by its administration for contractual implementation, progress
tracking, and changes, claim and disputes administrations.

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 …Con

 For a successful Contract Management phase:

We should have to know contract related National and International laws,
rules and regulations,
adherence to the provisions made during the contract planning phase
ability to administer changes, claims and disputes.

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 4.2. Procurement and Contract Delivery
Systems

 Is the way Project Owners together with Project Regulators and Financiers
determine the assignment of responsibilities to Project Stakeholders along the
Construction Process.
 Often determined during the Basic Planning phase of Construction Project.

17
 …Con

Generally, there are six types of Procurement and Contract Delivery

systems. These are:
 Force Account,
 Design Bid Build (DBB),
 Design Build (DB) or Turnkey,
 Finance / Build Operate System (BOT),
 Construction/Facility Management Consultancy, &
 Alliances and Outsourcing.

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 …Con

 Procurement and Contract delivery systems are developed overtime and

development was done based on problem solving for the previous type
o Force Account - Since development started
o Design Bid Build (DBB) – 1950s / 1987
o Design Build (DB)/ Turnkey - 1970s Onwards / Mid 1990s
o Finance / Design Build Operate - 1980s /……
o Alliances & Outsourcing– 2000s / 2000s
o CM / Facility Management - Mid 1990s / 2000s

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 …Con

4.2.1. Force Account:

 When the Project Owners engage themselves to undertake the project, it is called a force account
delivery system.
 Promoted if the Project Owners believe that there is a comparative advantage in Cost, Time and
Quality issues.
 when there is a lack of capacity from the private sector to undertake very large and
technologically new projects,

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 …Con

public companies do undertake such projects using Force account delivery systems.
 These days this type of delivery system is often used when projects are small and places are
remote such that reaching them is difficult and in general they are not attractive enough to call
the attention of Bidders.
 Besides when projects are spatially scattered and maintenance are to be done for schools,
colleges, health centers etc., such cases can be applied.

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 …Con

4.2.2. Design Bid Build (DBB):

 This is the most practiced type of delivery system in the Construction Industry of Ethiopia
since the 1987.
 After project owners did prepare the Basic Planning that identifies construction project
programs, they call upon the participation of Design and / or Supervision Consultants either
by tender or negotiated contracts.
 This consultant will carry out the design together with the necessary tender documents which
will be the bases for

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 …Con

tendering to select contractors.

 projects are divided into different packages.
 Though the design and supervision consultant will be the prime professional on
behalf of the owner and largely the administrator of the construction contract; the
employer takes the responsibility of coordinating the various project packages.
 Designers have not been required to guarantee results but rather methods.

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 …Con

 They are held accountable on the basis of their superior knowledge and sufficient competency
and ability to design with a reasonable degree of technical skills.
 Contractors are also responsible to construct works with due care and diligence and complete
them in accordance with the contract, but they are not held responsible for design deficiencies.
 Since the 1980s, this traditional approach becomes less popular due to the following factors:

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 …Con

 Severe Adversarial relations between the design and contract administration consultant and the
contractor .
 Fragmented contract for the project owner .
 Project owner responsibility for risks associated with the design and contract administration
 Non - Impartiality of the Design and Contract Administration services.
 The inability of design and contract administration consultants to cope up with new
construction technologies and constructability issues of their designs

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 …Con

 Severe adversarial relationships between Urban Planners and Architects on the one hand; and
Architects and Engineers on the other hand on building projects
 The indirect contractual obligation assigned for the Design and Contract Administration
consultants
 The incompatibility of consultancy fee to the desired activities they are required to provide, etc.
 The following standard forms of DBB Conditions of Contract are known for use for such
delivery system:

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 …Con

 The following standard forms of DBB Conditions of Contract are known for use for such
delivery system:
o FIDIC White Book for Consultancy Services (Design and Supervision) and Red Book
for Construction Works
o Standard Conditions of Contract for Construction of Civil Works, 1994; MWUD

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 …Con

4.2.3. Design Build (DB) / Turnkey

 Design Build or Turnkey by principle reduces numbers of procurement processes engaged in
the fragmented process and employ only one procurement process and a single contractor to
provide the entire Construction Implementation Process (Design and Construction
Implementations).
 In the 1970s, large firms began to offer both design and construction services in order to
provide project owners with a single source for project delivery.

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 …Con

 At the beginning, this delivery system was limited to complex projects such as industrial, big
plants and big infrastructural constructions.
 DB delivery system is common worldwide specifically for Private projects.
 This led lead contracting firms to form a team or consortium of designers and specialty
contractors who work together to meet the entire demand.

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 …Con

 The project concept should clearly define the performance criteria such as output,
input, waste and any other performances the employer may desire.
 This makes an additional responsibility to the contractor which is ¨fitness to
purpose¨ according to the Orange Book of Fidic. Fitness to purpose is beyond the
professional duty of care and places liability on the contractor for any failure of
the design to perform the standards required.

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 …Con

 Typical advantages of this system include:

o reducing fragmentation and adversarial relations between designers and constructors;
o minimizing Project owners’ risk transferable due to Designers’ faults;
o accountability and entire responsibility for both design and construction which entitle the
employer to receive completed project is onto a single contractor;
o employers’ responsibility to co-ordinate interfaces between different project elements is
avoided;

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 …Con

o Single point responsibility minimizes the opportunity to claims by the contractor due to
design related issues;
o coordination between design and construction processes will also be enhanced (both in
communication for constructability as well as in fast tracking); and
o the client budget or financial requirement is defined early enough in the development
process.
 For this type of delivery systems, either joint ventures or firms with large design and
construction capabilities were able to participate.

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 …Con

 The disadvantage of this delivery system is loss of control, cost of tender and cost
of risks.
o Since limited supervisory role by the employer representative is practiced; which is
relatively flexible and makes the employer distanced from the whole process, the employer
has little chance to understand what is developed and entertain variations in requirements
implying loss of control.
o Contractors in order to provide reasonable offer, their tender cost is higher than in the case
for DBB delivery system. This is because they need to carryout acceptable design for project
cost offers.

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 …Con

o World Bank suggested a Two staged procurement method based first on technical merit
and followed by financial competition and not for more than six bidders.
o The increase in risk transferred onto the contractor will be counter balanced by the increase
in contract prices which can be taken to include these costs of risks.
 Projects carried out using DB delivery system are often called Turnkey Projects because a single
contractor is responsible to

34
 …Con

hand over the completed facility and let the Project owner to turn the key and gets
in. Often Turnkey projects use Lump-Sum contract type which will be discussed
in section 4.3.
 The following standard forms of DB Conditions of contract are known for use for
such delivery systems:
 FIDIC Orange Book
 ENAA Model Form International Contract
 ICE Design & Construct Conditions of Contract
 EIC Contract and
 AIA Contract Form A191
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 …Con

4.2.4. Finance / Build Operate Transfer (BOT)

 Build - Operate - Transfer is a form of procurement and contract delivery system that promotes
Public Private Partnership (PPP) in which a private company is contracted to finance, design,
construct, operate for a certain period (usually 10 years) and transfer.
 BOT contractors look to project financiers for the realization of projects through equity
contributions or credits. Such provisions are different from budgetized finances such that they
involve no or limited re –course which means the project owner is not responsible for any
liability other than force majeure and agreed upon claim adjustments.

36
 …Con

This obliges that projects should first be viable for revenue generation in order to payback its depts.
 The Typical BOT contract is the process whereby a government grants a concession to a project
development company to develop and operate what would normally be a public sector project,
for a given period of time known as the concession period.
 The Operation period between completion and transfer gives the contractor an opportunity to
verify the quality of the output of the services and works, and train the employer personnel on
how to manage the facility afterwards.

37
 …Con

 In some BOT contracts, defect liability period will be included in order to ensure the quality of
the facility during transfer.
 This is because, operators in an attempt to save costs, may decrease operating and maintenance
expenditures towards the end of the concession period.
 This delivery system is advantageous because of three major factors:
o it minimizes owners’ scarcity of financial resources;
o It devoid of considerable risks from the project owners and lesson regulatory activities; and
o the facility is well operated and transferred with free of charge or minimum compensations to
project owners.

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 …Con

 It is advisable to start with small projects and tries to develop experience and expertise to make such
delivery system successful.
 Most BOT projects failed because of their built up and engagement in very large projects which is an
extremely risky business for contractors.
 Consortium of contractors is used to carry out such projects.
 The increasing popularity of the BOT project is largely due to a shortage of public funding and the
opinion that the facility will be more efficiently managed by a private entity.
 The following standard forms of BOT Conditions of Contract are known for use for such delivery
systems: FIDIC Yellow Book

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 …Con

4.2.5. Construction / Facility Management Consultancy

 Construction Management Consultancy Delivery System is a response to problems associated
with DB and BOT where the Project Owner was not well represented for its benefit and the
problem of fragmentation between Planning and Implementation.
 As a result, construction management consultancy firm is used to coordinate all activities from
concept inception through acceptance of the facility.
 Facility management consultancy adds operation of facility during operation to Construction
Management Consultancy.

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 …Con

 Construction Management service in such delivery system include the management activities
related to a construction program carried out during the Basic Planning, Design & Construction
Implementation and its completion process that contributes for the successful completion of
projects.
 The main difference of this delivery system is that, while all the others involve only during the
implementation phase after major decisions was made during the Basic planning phase of the
construction process, it is involved in the whole construction processes.

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 …Con

 Construction Management Consultancy service are particularly attractive to organizations that

involve in construction physical infrastructures such as MoE, MoH, Real Estate Organizations,
MoWRs, MoT&C, etc.
 Construction Management Consultants then represents Project Owners to carry out the following
services:
 Feasibility studies of Construction related services
 Plan and Monitor the Triple Constraints of Project Performances
 Lead and Organize regulatory systems of the Construction Industry
 Valuation, Quantity Surveying and Procurement and Contract Management Services

42
 …Con

4.2.6. Partnering, Alliances, Outsourcing (Running and Specialized Delivery System)

 The need for constructing quicker, cheaper and to a higher quality of physical infrastructure by
clients and at the same time with very minimized or no dispute questioned fragmentation of
packaging, costs related to wastes and overheads, single staged procurement systems, involving
in less competitive and comparative advantage for services and works and existing stakeholders
relationships.

43
 …Con

 As a result,
o running delivery system using Partnering and Alliances,
o ƒspecialized delivery system using Outsourcing,
o fast tracking, parallel and coordinated implementations using Concurrent Engineering and Just in Time
principles
 which focuses most on management of relationships and value adding to ensure quicker,
cheaper and quality services and products with less disputes are recent developments.
These systems require to overcome cultural and behavioral barriers among interest groups and
control motivated performance based management.

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 4.3 Construction Contracts

4.3.1. General Introduction to Contract

Contract is a written agreement between or among two or more parties whereby
each party promises to do or not to do something and agrees to terms (conditions
and Warranties) set out in the contract.
 According to Article 1675 of the Civil Code:
A contract is an agreement whereby two or more persons as between
themselves create, vary or extinguish obligations of a proprietary nature.

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 Reading assignment
Requirements of Contract?

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 4.3.2. Types of Civil Engineering
construction contracts

The following contract types are so far practiced:

1. Lump Sum Contract,
2. Bill of Quantities or Unit Rate Contract,
3. Cost Plus Fixed Fee Contract,
4. Cost Plus Percentage of Cost Contract,
5. Item Rate or Schedule of Rates Contract,
6. Labor Contract,
7. Special Contract
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 …Con

1. Lump Sum Contract

Price is determined and quoted as a total sum of money without individual
ratings.
In such contracts: It is difficult to administer changes and amendments
Payments are agreed at different stages of works or services.
 A Lump Sum Contract is:
 more suitable for works of smaller in size and
where the contracting parties must have prior experience.
not advisable for projects with considerable uncertainties
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 …Con

2. Bill of Quantities Contract

Project or Tender price is determined and quoted from unit rates assigned to
detailed bill of quantities. It is called a Bill of Quantity Contract .
In such contracts:
It is relatively easy to administer changes and amendments

49
 …Con

3. Cost Plus Fixed Fee Contract

The project expenses will be recorded and a fixed amount which is agreed upon
by the contracting parties will be added as payment to the contractor

There is no way that the contractor can loose .

50
 …Con

4. Cost Plus Percentage of Cost Contract

Is similar to the Cost plus fixed fee contract but its fixed fee is made variable
using a percentage of the cost.
In such contracts:
Contract Administration becomes intense in order to protect the interest of the
owner. B/c the payment is made by determining the actual cost of the work plus a
certain percentage .
Its disadvantage is the tendency to increase the cost of the work to earn more
profit.
51
 …Con

5. Item Rate or Schedules of Rates Contract

Priced based on the unit rate approach for individual or groups of activities, not
the whole project.

6. Labor Contract
The Project owner is responsible for the provision of major resources such as
materials and Equipment other than labor, small tools and equipment and their
management

52
 …Con

8. Special Contract
In certain circumstances such as use of specializations , urgency , supplementary
nature and continuity of services or works ; remoteness and smallness of projects ,
etc. requires special arrangements.
It includes:
Packaged Contract
Continuing / Supplementary Contract
Running Contract, and
Sub Contract
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 4.4. Stages in Construction
i. Inception and feasibility: At this stage the owner puts his visions and wishes
and with this as the starting point, the various groups (professionals) try to
conceptualize the project and prepare a conceptual design.
the owner will heir a consultant to formally design and develop the concept into
a practicable project.

54
 …Con

ii. Planning and Design stage: At this stage the consultant plans and designs the
project based on the owner’s requirement and the possible constraints.
iii. Tendering stage: At this stage contractors are invited to offer their best
technical and financial offers as per the conditions and specifications depicted in
the contract documents. Usually a 2% of bid bond is required so as not let him
disappear.

55
 …Con

iv. Bid Evaluation / Evaluation of Tenders: The bids are evaluated

•based on:
Compliance with the contractual terms and conditions,
Correction of bid prices,
Detailed analysis.

56
 …Con

v. Award of Contract: After the negotiations have been successful, the contract will
be awarded to the successful contractor.
The formal Steps might include:
Write a letter of acceptance
Write the letter to proceed with the works
Performance bond: 10% a guarantee that he will do the job as per agreed.

57
 …Con

vi. Construction Stage: Here is where the actual execution of the works takes place
as per scheduled.
Vii. Commissioning and Acceptance: Commissioning is a process where by the
contractor makes sure that all installed mechanical or electrical parts are
operational.
During commissioning, therefore all such parts are run in the presence of the
client or his representative as per the conditions agreed.

58
 …Con

Acceptance has two stages:

a. Provisional acceptance: In this acceptance, the client accepts the completed
works on provisional basis for a period one year.
During this period all payments except the retention money are paid.
- The other option is to release the retention money and require for a bank or
insurance security.

59
 …Con

Final acceptance: At this stage the owner completely accepts the works executed
and the retention money is released to the contractor.
 But if the client found out some construction default during this period, he can
oblige the contractor to work out that default or the client himself worked it out
from the retention money.
The contractor is assumed to have completed his contractual obligation from
this time on.

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 4.5.2. Construction Contract Documents

- The five essential documents that makeup a contract

– The Agreement
– The General Conditions
– The Special Provisions
– The Specifications (Technical Provisions)
– The Drawings

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4.6. Preparation of Term of Reference (ToR)

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