Chapter 5:

Contract Management

1
 5.0 Introduction to the construction
contracts: Definition
 A contract intends to formalize an agreement between two or more
parties, in relation to a particular subject

 "A contract is a promise or a set of promises for the breach of

which the law recognizes duty". This amounts to saying that a
contract is a legally enforceable promise (Jackson 1973).

 A contract is a legally binding agreement. It is a bargain and each

side, or party to the contract, must contribute something to it for it
to be valid (Gahlot et al, 1996)

A Contract is “an agreement concluded between two

or more parties for performing or not performing
any act which could be executed according to law.”
(Nepal Contract Act,1999, Section-2) 2
 Introduction to the construction
contracts: Definition
Construction is a services activity with business side as
one of its dimension
The construction industry is almost unique
amongst commercial endeavors where the
"Project is sold before it is made"
Construction Contract
A construction contract is a mutual agreement
negotiated between two (or more) parties for the
purpose of undertaking, on a commercial basis, certain
clearly specified Construction work.
3
 ELEMENTS OF CONTRACT

OFFER
ACCEPTANCE
INTENTION OF LEGAL CONSEQUENCES
CONSIDERATION
MUTUALITY
LEGAL CAPACITY
WRITING REQUIREMENT

4
 ELEMENTS OF CONTRACT

OFFER
 There must be a definite, clearly stated offer to do
something. For example: A quotation by sub-contractor to the
main contractor and an offer to lease.
 An offer does not include ball park estimates, requests for
proposals, expressions of interest, or letters of intent.
 An offer will lapse:
 when the time for acceptance expires;
 if the offer is withdrawn before it is accepted; or
 after a reasonable time in the circumstances (generally the greater the
value of the contract, the longer the life of the offer)

5
 ELEMENTS OF CONTRACT
ACCEPTANCE
 Only what is offered can be accepted. This means that the offer
must be accepted exactly as offered without conditions. If any new
terms are suggested this is regarded as a COUNTER OFFER which can
be accepted or rejected.
 There can be many offers and counter offers before there is an
agreement. It is not important who makes the final offer, it is the
acceptance of that offer that brings the negotiations to an end by
establishing the terms and conditions of the contract.
 Acceptance can be given verbally, in writing, or inferred by action
which clearly indicates acceptance (performance of the contract). In
any case, the acceptance must conform with the method prescribed by
the offerer for it to be effective.

6
 ELEMENTS OF CONTRACT
INTENTION OF LEGAL CONSEQUENCES
 A contract requires that the parties intend to enter into a legally
binding agreement. That is, the parties entering into the contract
must intend to create legal relations and must understand that
the agreement can be enforced by law.
 The intention to create legal relations is presumed, so the
contract doesn't have to expressly state that you understand and
intend legal consequences to follow.
 If the parties to a contract decide not to be legally bound, this
must be clearly stated in the contract for it not to be legally
enforceable.
.
7
 ELEMENTS OF CONTRACT
CONSIDERATION
 In order for a contract to be binding it must be supported by
valuable consideration. That is to say, one party promises to
do something in return for a promise from the other
party to provide a benefit of value (the consideration)
 Consideration is what each party gives to the other as the agreed
price for the other's promises. Usually the consideration is the
payment of money but it need not be; it can be anything of value
including the promise not to do something, or to refrain from
exercising some right.
 The payment doesn't need to be a fair payment. The courts will
not intervene where one party has made a hard bargain unless
fraud, duress or unconscionable conduct is involved.
8
 ELEMENTS OF CONTRACT
MUTUALITY
 The contracting parties had “a meeting of the minds” regarding
the agreement. This means the parties understood and
agreed to the basic substance and terms of the
contract.
 When the complaining party provides proof that all of these
elements occurred, that party meets its burden of making a
prima facie case (the establishment of a legally required rebuttable presumption. It is generally
understood as a flexible evidentiary standard that measures the effect of evidence as meeting, or tending to
that a contract existed. For a
meet, the proponent's burden of proof on a given issue )

defending party to challenge the existence of the contract, that

party must provide evidence undermining one or more elements.

9
 ELEMENTS OF CONTRACT
LEGAL CAPACITY
 Not all people are completely free to enter into a valid contract.
The contracts of the groups of people listed below involve
problematic consent, and are dealt with separately, as follows:
– people who have a mental impairment;
– young people (minors);
– bankrupt;
– corporations (people acting on behalf of a company); and
– prisoners.

10
 ELEMENTS OF CONTRACT
WRITING REQUIREMENT
 Not every contract need be in writing to be valid and binding on
both parties.
 But nearly every state legislature has enacted a body of
law that identifies certain types of contracts that must
be in writing to be enforceable.
 In legal parlance this body of law is called the statute of frauds.

11
 CONTRACT

VALID CONTRACT
– If all the elements of contract are present, the contract is valid.

VOIDABLE CONTRACT
– Forceful contract
– Entered due to undue influence
– Contract involving fraud or misstatement

12
 CONTRACT
VOID CONTRACT
– Made by incompetent parties (e.g., under the age of consent,
incapacitated)
– Has a material bilateral mistake
– Has unlawful consideration (e.g., promise of sex)
– Concerns an unlawful object (e.g., heroin)
– Has no consideration on one side
– Restricts a person from marrying or remarrying
– Restricts trade
– Restricts legal proceedings
– Has material uncertain terms
– Incorporates a wager, gamble, or bet
– Contingent upon the happening of an impossible event
– Requires the performance of impossible acts
13
 Introduction:
Importance of Construction Contract
 Any one requires by law to sign a legal contract with other
party.
 Construction contract like any other contract contains details of
whole deal and comes to rescue you in case of any dispute.
 To protect your interest fully and avoid endless vicious cycle of
alterations to the original design, a legal contract is a
mandatory requirement.
 From contracting party's point of view the legal contract is
equally important. As they can take the legal route, whenever
they feel the actual work is not according to the terms
decided.
 It can be said, that construction contract is important for all the
stakeholders involved in a construction deal.
14
 Introduction:
Importance of Construction Contract
 Contract can be read as many times as you want, but once
signed there is no way back, So make sure you understand the
contract fully.
 Make sure that no such clause gets inserted in the contract that can
come back and haunt you later on.
 Most important thing in any construction contract is the amount
that is finalized to do the certain task. Amount must be as per the
mutual consent and also make sure there are no hidden
charges and no additional cost is written to be paid by you,
later on.
 Drafting, understanding and comprehending a construction
contract is not easy, especially if you are new comer to the field
and not so expert with legal matters 15
 Introduction:
Requirements for construction contract
 If you ask a layman what is the most important aspect of a
construction work you will get replies like engineers, labour,
machinery, architecture, material etc.
 but the domain experts will tell you the single most important
thing of all is a construction contract.
 Yes, the boring piece of documents that contains a lot of
technical terms is unarguably the most important document
for all the parties involved in the construction work.
 Although the people involved especially the technical staff knows
about the importance of the construction contract, still the
awareness and ability to identify the loop holes is quite
uncommon.
 Construction contracts are very important especially in the
scenario whenever there is a conflict among the parties on any
matter 16
 Introduction: Contract Management
 Contract management the process of ensuring that the supplier
honours their negotiated contract terms.
 Construction contracts management is the process of
negotiating and managing all contract agreements involved in
a construction project or company, such as those involving
vendors or clients.
 Contract managers must monitor cost, scope, quality, and time
frame and must ensure that all contract conditions are met.
 This important job affects both the financial and the actual success
of the project or company.
 When managing client contracts, a manager is mainly responsible
for ensuring that all deliverables are provided to the client on time
and ensuring that the client meets each payment date with the
correct payment amount.
17
 Introduction: Contract Management
 Effective contract management involves daily activity tracking,
performance management, and follow-up with the supplier.
 Administration of a contract can include many specific duties,
depending on the nature of the engagement.
 The contract manager is responsible for communication between
the parties, including status updates that track progress towards
goals.
 In many instances, he may act as the chief compliance officer for
the contract, making site visits and doing spot checks to ensure
nothing unusual is going on.
 Most often, the contract manager is responsible for the expense
budget, tracking expenditures, collecting receipts and liaising with
the finance department to create financial reports.
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 5.1 Method of Work Execution
No. Procurement Method Contract Size Contractor
1 Sealed Bidding
i. ICB Not mentioned International, International
Nepali JV, Nepali JV
ii. NCB/LCB More than 2 All
million
2. Sealed quotation up to 2 million All
3. Direct Procurement up to 5,00,000 All
4. Force Account up to 1,00,000 None
5. Procurement under Emergency / Depends on contract amount
special Special
circumstances Circumstances
6. Users' Committee up to 6 million Contractor cannot be used.
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 5.1 Method of Work Execution

1. Sealed Competitive Bidding

 National Competitive Bidding (NCB)
 Local competitive bidding
 Tender notice is published in national newspaper with a
period of at least 30 days shall be given.

 International Competitive Bidding (ICB)

 Tender notice shall be published in national newspaper in
English language providing a period of at least 45 days.

20
 5.1 Method of Work Execution

2. Sealed Quotation:
 Before inviting a sealed quotation, a form of sealed
quotation stating clearly therein the specifications, quality,
quantity terms and conditions of supply and time and other
necessary matters of goods, construction work.
 Notice shall be published in a national or local level news
paper by giving a period at least of 15 days.
 Sealed quotation once submitted cannot be withdrawn or
amended.
 Lowest evaluated sealed quotation falling within the cost
estimate after fulfilling the terms and conditions shall have
to be approved.
21
 5.1 Method of Work Execution

3. Direct Procurement:
 Section cannot be directly procured from the same individual
firm more than 1 time in a fiscal year.
 If only one company has the technical efficiency to
fulfillment the procurement requirement.
 If unique qualification is immediately needed for the
concerned work.

22
 5.1 Method of Work Execution

4. Users Committee:
 The main objective of the project is to create employment
and to have the beneficiary community involved.

5. Force account:
 Construction work to be carried out by a Public Entity Itself.
 Size, nature and location of the work being unsuitable for
competitive bidding.
 No contractor is interested in carrying out the works.
 Emergencies.

23
 5.1 Method of Work Execution

6. Special circumstances:
 Emergency/ Special circumstances
 depends on contract amount.

24
5.2 Contract Types

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 Construction Contract Types
• A construction contract is the warranty that the executed job will receive the
specific amount of compensation or how the compensation will be distributed.
• Construction contract types are usually defined; by the way, the disbursement
is going to be made and specifies other specific terms, like duration, quality,
specifications and several other items.
• There are a several types of construction contracts used in the industry
Classifications by the method of payment for the work
• Lump sum or fixed price contracts
• Schedule of rates or unit-price contracts
• Cost plus contracts
• cost + percent of cost
• cost + fixed fee
• cost + fixed fee + Profit sharing
• cost + sliding fee
• Sometimes, Part Lump sum and part Unit-Price Contract is also adopted in a single
project as a fourth type
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 Construction Contract Types
Lump sum or fixed price contracts
• Co, materials and indirect costs such as field and front office
supervision, secretarial support and equipment maintenance and support
costs and also includes profit of the contractor
• In "fixed price" contract, the contractor accepts responsibility for
all fluctuations in costs and charges due to escalation, delays and
other reasons and no additional payment will be made to cover such
costs
• Commonly used where the nature and extent of the work can be
accurately defined
• contractor based on the available complete set of plans and
specifications quotes one single price which covers all works and
services required by the contract plans and specifications
• The lump sum price includes all direct costs of the contractor for labor,
machines
Advantages and disadvantages
27
 Construction Contract Types
Schedule of Rates or Unit-Price Contracts
• The project is broken down into the work items that can be
characterized by units such as Cum, Sqm, Rm, and Nos etc.
• the contractor quotes the price by units rather than as a single total
contract price.
• The total price is computed by multiplying the unit price by guided
quantity and summing up the cost of whole the items.
• The lowest reasonable bidder is determined and the contract is
awarded. In this type of contract, it is important that the items in the
Schedule of rates or the Priced Bill of Quantities cover the whole of the
work and the method of measurement of quantities is clearly defined.
• Generally used where the nature and extent of the work can be
accurately defined but the quantities are subject to variation within
reasonable limits
• In unit price contractors, the progress payments for the contractors
are based on precise measurement of the field quantities placed.

Advantages and disadvantages

28
 Construction Contract Types
Cost plus contract
• In a cost plus contract, the contractor is reimbursed
the actual costs incurred in carrying out the work
under the contract plus a fixed or variable fee to
cover overhead costs and profit.
• Four types of fee structure are common. They lead to
the following cost plus types of reimbursement
schemes:
• cost + percent of cost
• cost + fixed fee
• cost + fixed fee + Profit sharing
• cost + sliding fee
29
 Construction Contract Types
• Cost + percent of cost
• very lucrative for the contractor but is subject to abuse.
• There is little incentive to be efficient and economical in
the constriction of the project.
• Just to the contrary, the larger cost of the job, the higher
the amount of fee that is paid the owner.
• If the cost of the job is, $ 40 million and fee is 2%, then
the contractor's fee is $ 800,000. If the cost increases
to $ 42 million, the the contractor's fee increases by
$40,000.
• Advantages and disadvantages
30
 Construction Contract Types
Cost + fixed fee
• In order to offset the abuse of cost plus percent approach, the
fixed fee formula was developed.
• in this form of contract, a fixed amount of fee is paid
regardless of the fluctuation of the reimbursable cost
component.
• This is usually established as a percent of an originally
estimated total cost figure.
• The contractor's fee is fixed and does not change due to
variation of the project cost from the original estimated cost.
• This form gives the contractor an incentive to get the job
done as quickly as possible in order to recover his fee over
the shortest time frame.
• Advantages and disadvantages 31
 Construction Contract Types
Cost + fixed fee+ Profit sharing
• The fixed fee plus profit sharing formula provides a
reward to the contractor who controls costs, keeping
them at a minimum.
• In this formula, it is common to specify a target price
for the total contract. if the contractor brings the job
in under the target, the savings are divided or shared
between owner and contractor. a common sharing
formula provides that the contractor shares by
getting 25% of this under run of the target. If for
instance, the target is $10 million and the contractor
completes the job in $9.5 million, he receives a
bonus of $125,000.
• Advantages and disadvantages
32
 Construction Contract Types
Cost + sliding fee
• A variation of the profit sharing approach is the sliding fee,
which not only provides a bonus for under run but also
penalizes the contractor for overrunning the target value.
• The amount of fee increases as the contractor fails below the
target and decreases as he overruns the target value.
• One formula for calculating the contractor's fee based on
sliding scale is,

• Fee = R (2T-A)
• Where,
• T= target price, R= Base percent value, A= Actual cost
of the construction.

• Advantages and disadvantages

33
 Construction Contract Types
Based on selecting the Contractor
• Completely Tendered Contracts
• The owner invites a quote for the works to be performed
following a formal competitive tendering procedure.
• Negotiated Contracts with the selected contractors
• Negotiate directly with a contractor
– Level and amount of fee in additional to the charge schedule
– Quality of the works to be performed.
– Projected time for completion.

34
 Based on Technical and Admin responsibility
The traditional approach:
Design–Bid–Build
• has been the primary contracting method for the construction
industry for quite some time
• design is carried out independently of the construction
process.
• Once the owner agency approves the design, the project
proceeds to the actual construction phase.
• construction projects are awarded to the qualified bidder with
the lowest total price
• pay items are established on a unit-price basis
• specifications are strictly focused on materials and method
• the role of the owner or agent is to inspect and maintain
35
The traditional approach: Design–Bid–Build

Contractor

36
 The traditional approach:
Design–Bid–Build
• This process involves
– using detailed plans from the design phase,
– providing specifications and estimates for the work involved,
– soliciting of bids through public advertisement, and
– awarding the contract to the lowest responsible responsive
bidder.
• Authority to construct the project is obtained by the agency from
appropriate public entities prior to bid advertisement.
• All necessary right-of-way and construction easements are
determined and acquired prior to contract advertisement by the
public agency.

37
 The traditional approach:
Design–Bid–Build
Advantages
• Familiar delivery method
• Simpler process to manage
• Fully defined project scope for both design and construction
• Both design team and contractor accountable to Owner
• Lowest price proposed and accepted; pricing, including contractor
fee and overhead, developed competitively: “best price”
• Creates most the bidding opportunities for general contractors and
subcontractors
• BEST SUITED FOR: less complicated projects that are budget
sensitive, but are not schedule sensitive and not subject to change.
• Owner can completely control the design
38
 The traditional approach:
Design–Bid–Build
Disadvantages
• Linear process means longer schedule duration than other methods
• Price not established until bids are received; may require redesign
and rebid if bids exceed budget
• Quality of contractors and subcontractors not assured
• Cost estimates change during design process
• No design phase input from contractor on project planning, budget
or estimates
• Not optimal for projects that are sequential, schedule or change
sensitive
• Change orders and claims may increase final project cost

39
• Need for Alternative contracting
Approach

– Reducing Construction Time

– Reducing Construction Cost
– Applying Improved Technology and
Techniques
– Deploying Contractor Innovation
– Reducing Impacts on the Public

40
Alternative approaches: Design-Build

Contractor

41
Alternative approaches:
Design-Build
• Design–build is sometimes compared to the "master builder"
approach, one of the oldest forms of construction procedure
unique type of project delivery system used in construction and
renovation projects
• from a historical perspective the so-called traditional approach is
actually a very recent concept, only being in use approximately
150 years ("Design-build Contracting Handbook" )
• the owner awards the entire project to a single company
• It is a method to deliver a project in which the design and
construction services are contracted by a single entity known as
the design–builder or design–build contractor

42
Alternative approaches:
Design-Build
• The owner is still given the right to approve or reject design
options, but is no longer responsible for coordinating or managing
the design team.
• Once the owner approves the design, the same contractor then
oversees the construction process, hiring subcontractors as needed.
• Most design-build contracts are awarded through negotiation rather
than through a bid process
• In the US, D&B was used on more than 40 percent of non-
residential construction projects in 2010, a ten percent increase
since 2005.(A 2011 study analyzing the design–build project
delivery method)
• In Nepal -
– Residential Buildings/ Colonies in Private sectors
– Bridge Construction in Department of Roads 43
 Design-Build : Advantages
• Single point of responsibility for design and construction
• Selection of contractor based upon qualifications, experience and
team
• Contractor provides design phase assistance in budget and planning
• Faster project delivery than traditional bid, slightly faster than
CMAR; fast track construction possible
• Guaranteed price possible earlier in process
• Price tends to match quality (also a disadvantage!)
• No change orders written for this Consultant errors and omissions-
covered through allowance in GMP. Owner still responsible for
other types of changes.
• BEST SUITED FOR: new construction projects that are highly
time sensitive, projects with smaller user groups or reduced need
for user reviews and mid-course design changes. 44
Design-Build : Research Findings
• D-B projects are delivered 33.5% faster than projects that
are D&B under separate contracts (D-B-B)- Victor Sanvido
and Mark Konchar of Pennsylvania State University
• D&B projects are constructed 12% faster and have a unit
cost that is 6.1% lower than D-B-B projects- Sanvido and
Konchar
• "Design-build delivery has been steadily increasing in the U.S.
public building sector for more than 10 years, but it is still
termed experimental in transportation- A study from the US
Department of Transportation
• A benchmarking and claims study by Victor O. Schinnerer, one
of the world's largest firms underwriting professional liability
and specialty insurance programs, found that, from 1995–2004,
only 1.3% of claims against A/E firms were made by design–
build contractors. 45
Design-Build : Disadvantages
• It limits the clients’ involvements in the design and
contractors often make on design decisions outside their area
of expertise
• a designer—rather than a construction professional—is a better
advocate for the client or project owner and/or that by
representing different perspectives and remaining in their
separate spheres, designers and builders ultimately create better
buildings
• the contractor is deciding on design issues as well as issues
related to cost, profits and time exigencies
• No check and balance between contractor and engineer/arch
• Difficult for Owner to determine whether the best price has
been achieved
46
Design-Build : Disadvantages
• Considered “sophisticated”: Owner must have a clear
idea of scope and concept before selection
• Owner has no input on selection of proposed design
team
• Over-emphasis on price may compromise quality
• Increased speed and fewer reviews increase potential
for mistakes, missed items, etc.
• Staff and users required to make quick decisions and
have reduced time for reviews and input
• Changes difficult and expensive to make once
construction begins,
47
Alternative approaches:
Construction Management
• The construction management framework is similar in many
respects to a traditional construction contract.
• The difference comes by way of the introduction of the
construction manager, who takes the place of the general
contractor and has a modified role.
• In a “pure” construction management structure, the owner again
contracts with a consultant to prepare a design and contract
documents
• The CM/Contractor competitively bids the various Bid Packages
representing the Construction Work required to complete the
Project. The Contract requires the CM/Contractor to comply
with the competitive bidding requirements
48
 Construction Management approach
• Process
– CM is hired by owner
– Architect is hired for construction documents
– The CM oversees design (cost, schedule and
constructability)
– Construction documents are to bid or negotiate the work
– Contractor is selected
– CM is on board through construction

49
Construction Management approach
• Construction manager added to team to oversee the
project
• Used for public and private projects that are more
complex
• Four players: owner, CM, architect, contractor
• Four phases
• 2 types / Roles of CM
CM as advisor
CM as constructor

50
 Construction Management approach
Advantages
• Selection of contractor based upon qualifications, experience
and team
• Contractor provides design phase assistance in budget and
planning
• Continuous budget control possible
• Screening of subcontractors allows Owner and contractor
quality screening
• Faster schedule than traditional bid; fast track construction
possible

51
 Construction Management approach
Advantages
• More teamwork between design firm and contractor
• Provides more ability to handle change in design and scope
• Reduced changes and claims once in construction
• BEST SUITED FOR: large new or renovation projects that
are schedule sensitive, difficult to define or subject to
potential changes; also for projects requiring a high level of
construction management due to multiple phases, technical
complexity or multi-disciplinary coordination.
• Used by owners that don’t have the time or in-house expertise
to oversee the process

52
 Construction Management approach
Disadvantages

• Additional cost for CM

• Confusion of traditional roles
• Relatively lengthy process
• More complex relationships
• No direct communication between owner/architect,
owner/contractor

53
Construction Delivery methods

54
 BOOT Definition
• Popular financing method for infrastructure
• Build-operate-transfer (BOT) requires the private sector
to finance, design, build, operate and manage the facility
and then transfer the asset free of charge to the
government after a specified concession period.
• BOT is defined as the granting of a concession by the
government to a private promoter, known as
concessionaire, who is responsible for financing,
constructing, operating, and maintaining the facility over
the concession period before finally transferring the fully
operational facility to the government at no cost.
55
BOT Basic Forms

BOT is a general term and has 3 basic forms and dozen

of variant forms
The 3 basic forms:
• BOT (Build-Operate-Transfer): no ownership
• BOOT (Build-Own-Operate-Transfer): the Project
Company has the ownership & BOT right -> lower
price/tariff & longer concession period
• BOO (Build-Own-Operate): no transfer,
lowest price/tariff & longest concession period

56
BOT Variant Forms

• BT (Build-Transfer)
• BOOST (Build-Own-Operate-Subsidy-
Transfer)
• ROT (Rehabilitate-Operate-Transfer)
• BLT (Build-Lease-Transfer)
• ROMT (Rehabilitate-Operate-Maintain-
Transfer)
• ROO (Rehabilitate-Own-Operate)
57
BOT Variant Forms
• TOT (Transfer-Operate-Transfer)
• SOT (Supply-Operate-Transfer)
• DBOT (Design-Build-Operate-Transfer)
• DOT (Develop-Operate-Transfer)
• OT (Operate-Transfer)
• OMT (Operate-Manage-Transfer)
• DBFO (Design-Build-Finance-Operate)
• DCMF (Design-Construct-Manage-Finance)
58
BOT: Advantages
1. Private firms are more efficient; hence project or service can be
delivered at lower cost.
2. Private firms are more innovative in selection of design and
operation phases of a project or service.
3. Private sector invests directly in the development of
infrastructure, thereby reducing public debt, balancing the
budget deficit, and reduced role of public sector.
4. BOT projects create business opportunities for the local private
sector, create employment avenues as well as attract substantial
foreign direct investment.
5. BOT projects help in facilitating transfer of technology by
introducing international contractors in the host countries.

59
 BOT: Disadvantages
1. High transaction costs (5 – 10% of total costs).
2. Not suitable for smaller projects.
3. Success depends upon successful raising finance.
4. Projects are successful only when substantial revenues are
generated during the operation phase.

Need for Government Oversight:

• Price and fees (tariff)
• Quality of service
• Adequacy of service

60
 Common Risks in a BOOT Project

• Political risk: especially in the developing countries because

of the possibility of dramatic overnight political change.
• Technical risk: construction difficulties, for example
unforeseen soil conditions, breakdown of equipment
• Financing risk: foreign exchange rate risk and interest rate
fluctuation, market risk (change in the price of raw materials),
income risk (over-optimistic cash-flow forecasts), cost overrun
risk.

61
 Comparison of Traditional & BOT
Traditional Financing Project Financing (BOT)
• Contract awarded based on • Contract is awarded base on lowest
cost cost & shortest time of transfer to
government
• Contractor’s main risks
include completion, political • Contractor/developer’s main risks
includes financing, revenue and
and performance risks
political risks + operational cost
• Financing risk and revenue • Contractor would gain benefit of an
risk are allocated to additional project that would have
government not been forthcoming under
• Financing is eventually traditional financing
covered by government bonds • user-based fee that is more equitable
• Helps govt. undertake more projects
62
 Best Suit BOT Projects
Any projects but best suitable for natural resource
exploring, infrastructure projects, e.g. (in order of
easy financing):
Mining/oil/gas/petrochemicals (product for export)
Power, water, waste treatment (government off-takes)
Telecommunications (high profit & int’l income)
Road, tunnel, bridge (separate facilities)
Mass transit e.g. rail, subway (relative stable)
Airport, seaport (affected by int’l politics/economics)
Mass manufacture, e.g. big ship, airplane……
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 BOOT Projects Experience in Nepal
No infrastructure projects except few Hydro Powers,
Policy and acts are in place but not so conducive,
obstructions
Small internal economy and market,
Political instability,
Lack of experience of BOOT concept in
infrastructure projects,
Unclear regulatory provisions,
Lengthy Procedure etc.

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 TENDERING PROCESS
A tender is a submission made by a
prospective supplier in response to
an invitation to tender. It makes an offer for
the supply of goods or services.

In construction, the main tender process is

generally for the selection of
the contractor that will construct the works.

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DETAIL INFORMATION IN TENDER NOTICE
 Name of the Authority publishing the notice.
 First date of publication
 Brief description of the job.
 Date, time and place where the tender
document is available and to be submitted.
 Cost of tender document.
 Cost estimate (optional)
 Earnest money and security deposit amount.
 Date, time and place where the tender will
open.
EARNEST MONEY OR BID SECURITY
It is the amount of money deposited while
bidding as a guarantee of the party's willingness
of carrying out the work if awarded to him.
2-3% of the Project cost is demanded as earnest
money.
This fund is refunded to unsuccessful bidder.
If a successful bidder fails to carry on (sign) the
contract, this amount is forfeited.
 PERFOMANCE GUARANTEE
It is the amount deposited by successful
bidder as a security for satisfactory
performance.
In Nepal, it is 5% of bid amount for
Nepalese firm & 10% for foreign party.
It is refunded after defect liability period.
If contractor fails to carry on his duty,
this amount is forfeited.
 TENDER DOCUMENTS CONTAINS
• Tender Notice
• Form of Contract agreement
• Conditions of Contract
• Drawing
• Specifications
• BoQ
• Special Provision ( if any.)
 BIDDING PROCESS
The Competitive Bidding process includes six
main phases:
1. Advertisement,
2. Preparation and Issuing of the Bidding
Document,
3. Bid Preparation and Submission,
4. Bid Opening,
5. Bid Evaluation, and
6. Contract Award
 PREPARATION BEFORE TENDER
Complete and receive the project design.
Get final project estimate.
Get the estimate approved by the approving
authority
Prepare tender documents and approved by
approving authority.
Prepare tender documents to be sold.
Equip the project office to handle all the quarries
of prospective bidders.
Ensure availability of fund for the project.
Employ supervisory manpower.
 CONDITIONS OF CONTRACT
Contract being the legal agreement all the
terms are clearly spelled out for easy
functioning and minimize the dispute.

Condition of Contract documents are

i) General Condition of Contract.
ii) Special conditions of contract.
 CONDITION OF CONTRACT
A. General
1. Definition of terms
2. Project manager decision
3. Language and law
4. Employer risk
5. Contractor risk
6. Type of contract
7. Access to the site
8. Procedure for dispute settlement and so on.
B. Time Control
1. Management meeting
2. Early Warning
3. Extension of intended completion date
4. Penalty

C. Quality Control
1. Test
2. Correction of defect
D. Cost Control E. Finishing the contract
1. Mode of Payment 1. Termination
2. Payment for variation 2. Payment on
3. Currencies termination
4. Security deposit 3. Release from
5. Advance payment performance
 CONTRACTOR’S PREQUALIFICATION
1. Prequalification
2. Post qualification
1. Prequalification
It is a kind of short listing of eligible contractor & avoids
crowding of bidders taking account of their;
a. Experience of contractor
b. Financial capability
c. Equipment Capability
d. Litigation history ( legal dispute)
Objective of Pre-Q
- List the experienced and interested contractor.
- Avoid rejection of bids.

Time as:
30 days for NCB
60 days for ICB
 2. POST QUALIFICATION
• No Pre- qualification is done.
• All participants are given chance for bidding
• May be selected by
a) single envelop system or
b) double envelop system
According to their Financial & Technical Proposals.
 TENDER EVALUATION
Opening of Bid:
 A Public Entity shall have to open a bid in the
presence of the bidder or its representative.
Preliminary Examination of Bid:
 The purpose is to identify and reject the bids.
 verification of signature
 registration
 J/V agreement
 Eligibility
 Bid security
 Completeness
 Qualification
 TENDER EVALUATION
 The purpose is the determine the lowest evaluated
bid in accordance with the terms and conditions of
the bidding documents.
 If any arithmetical error is found in a bid, the Public
Entity may correct such an error.
 Where there is a discrepancy between figures and
words in a bid submitted by a bidder, the amount in
words shall prevail.
 The qualification of the bidder of the bid having the
lowest bid price is in conformity with the qualification
evaluation criteria set forth in the bidding documents,
such bid shall be the lowest evaluated substantively
responsible bid.
 Within 7 days of the selection of the bid, the Public
Entity shall serve a notice of the intent of acceptance of
bid to the concerned bidder.
 TENDER EVALUATION
 COMMERCIAL REASONS FOR REJECTING BIDS:
 Bid security or bid validity period not in accordance with bidding
document.
 Inability to meet critical schedule.
 Failure to comply with minimum experience or financial capability.
 Conditional bids.

 TECHNICAL REASONS FOR REJECTING BIDS ARE

 Failure to bid for the required scope of work.
 Failure to quote for each item in BOQ.
 Failure to satisfy major requirement in the specifications.
 TENDER EVALUATION
 BID EVALUATION REPORT:
 The bid evaluation committee shall prepare a Bid evaluation report
within 15 days of staring of bid evaluation.
 If there is no donor involvement or the donor does not require no
objection, the Project manager of competent authority may enter
into negotiation or agreement process.
 AWARD OF CONTRACT
 Within 7 days of the approval of the recommendations the Bid
Evaluation Committee, the employer may issue the letter of intent to
accept the lowest evaluated responsive bidder.
 the information is to given to all bidders through public notice in
newspaper.
 If no any persons submitted any complain about the selection, the
contract is awarded to the selected bidder and called for agreement with
required performance bond within 15 days.