Government Infrastructure A Business

Contracts Analysis
A Presentation By –
1. Barkha Gupta – PGP/22/125
2. Bikram Debnath – PGP/22/126
3. Chirag Chandak – PGP/22/127
4. Nikhil Chipade – PGP/22/129
5. Chirag Dua – PGP/22/130
 Contents
GMP What is PPP
Contracts Contracts

Design
Unit Price MMOPL Case Types of PPP
Build
Contract Study Contracts
Contracts
What are
PPP Contract
Government Analysis
Contracts?
Lump
Cost Plus MCA – 21 Case
Sump Advantages
Contract Study
Contract

Incentive Disadvantages
Contract
What is a Government Contract?

• A contract governed by Indian Contract Act, 1872 entered by or

with State or Central Government
• Under article 299, 3 conditions to be fulfilled by Centre or State:
 The contract must be expressed to be made by the President or the
Governor as the case may be.
 These contracts made in the exercise of the executive power are to be
executed on behalf of President/Governor as the case may be.
 The execution must be by such person and in such manner as the President
or the Governor of the case as the case may be, may direct or authorize
What is a Government Contract?

Reasonab
leness

Contract Principles
Public
ual of Govt. Interest
Liability
Contract

Equality
 Guaranteed Maximum Price (GMP)
Contracts

• A form of agreement with a contractor in which it is agreed that the

contract sum will not exceed a specified maximum
• What does it mean for contractors?
• Contractors Must Manage More Risk
• Customers Need to See Accurate Cost Reporting
• Customer Changes in Specifications Mean Reviews of the GMP
• GMP Contract Cost Savings Can Be Shared
• A GMP Can Help Accelerate the Bid Award and the Construction Schedule
• GMP Is Not the Only Choice -- The inflexible upper limit of a GMP
contract may be avoided by the use of an EMP or Estimated Maximum
Price contract.
 Design Build Contract

• It is used when both design and construction take place

simultaneously throughout the length of the contract
• When Are Design-Build Contracts Used?
• usually written by the contractor who is in charge of the design and is also
responsible for building the project.
• Reduces design time
• Simplifies construction drawings.
• Fast track schedule
• Customized to actual site conditions easily
 Cost Plus Contract
• The cost plus contract is an agreement which involves the buyer’s consent to pay the
complete cost for material and labour in addition to the amount for contractor
overhead and profit.
• This contract type is favoured where the scope of work is highly uncertain or
indeterminate in addition to the types of labour, material, and equipment being
similarly uncertain in nature.
• Here, the contractor's profit is set at a fixed amount.
• If actual costs are lower than the estimate, the owner keeps the savings.
• If actual costs are higher than the estimate, the owner must pay the additional amount.
• The advantage of a cost plus contract is that, generally speaking, the project will
result in the building that was envisioned, even if costs run high.
• The builder is less likely to cut corners or argue for less expensive materials because
his profit is not in jeopardy.

• CASE: Forrest Constr. Co., LLC v. Laughlin, 337 S.W.3d 211 (Tenn. Ct. App. 2009)
Incentive Contract

• Fixed price or cost reimbursement contract in which a target cost,

price, or fee (profit) is used as a point of departure for various
monetary-incentives (subject to a maximum amount).
• After completion of the contract, the incentive payment is
computed on the basis of the contractor's actual cost plus a sliding
scale of profit.
• The profit varies directly (in case of cost underrun) or inversely (in
case of cost overrun) with the difference between the contract
cost and the maximum allowable cost.
 Incentive Contract

EXAMPLE
• Assume a cost reimbursement contract with:
• Target Cost = 1,000
• Target Fee = 100
• Benefit/Cost Sharing Ratio for cost overruns = 80% Client / 20% Contractor
• Benefit/Cost Sharing Ratio for cost underruns = 60% Client / 40%
Contractor
• If the Actual Cost is higher than the Target Cost, say 1,100, the client will
pay: 1,100 + 100 + (1,000 - 1,100) * 0.2 = 1,180 (contractor earns 80).
• If the Actual Cost is lower than the Target Cost, say 900, the client will
pay: 900 + 100 + (1,000 - 900) * 0.4 = 1,040 (contractor earns 140).
• If Contractor Share = 1, the contract is a Fixed Price Contract.
Lump Sum Contract

• A lump sum contract (or stipulated sum contract) is the

traditional means of procuring construction, and still the most
common form of construction contract. Under a lump sum
contract, a single ‘lump sum’ price for all the works is agreed
before the works begin.
• It includes incentives/benefits for early termination and
penalties(liquidated damages) for late termination.
• This type of contract is preferred when a clear scope and a
defined schedule has been reviewed and agreed upon.
Unit Price Contract

• Unit Price Contract is a type of contract based on estimated

quantities of items and unit prices (rates: hourly rates, rate per
unit work volume, etc.). In general, the contractor’s overhead and
profit is included in the rate. The final price of the project is
depending on the total quantities needed to carry out and
complete the work.
• Time and cost risk
• Owner: at risk for total quantities
• Contractor: at risk for fixed unit price
• Large Quantity changes ( >15%) can lead to unit price changes
• Require sufficient design definition to estimate quantity of units
to be produced.
 An
Public Private Partnership Contracts
Analysis

Attributes of PPP :- S. No. Contract PPP

1. A long-term agreement between a government entity and a

1 Government and private company Government and private company
private company, under which the private company provides are in principal-agent relationship are involved in joint decision
making and production
or contributes to the provision of a public service
2. The private company receives a revenue stream—which
may be from government budget allocations, from user 2 Government defines problem, Both parties develop joint
specifies solution and selects products that contribute to their
charges, or a combination of the two—that is dependent on company to deliver the service interests

the availability and quality of the contracted service. The

agreement therefore transfers risk from the government 3 Contractual transparency includes Relational transparency includes
entity to the private company, including service availability rules for tenders, bidding, service building trust to align interest
provision, inspection and goals and decrease opportunism
or demand risk. monitoring

The private company must generally make an investment in the

venture, even if it is limited, e.g., to working capital
 TYPES OF
Public Private Partnership Contracts CONTRACTS
 Advantage
Public Private Partnership Contracts Disadvantage

• Advantages:-
• Risk Transfer and Efficient Allocation
• Whole-of-Life Costing
• Harnessing Private Expertise
• Disadvantage:-
• No scope for uncertainity
• Not for Small Size Projects
Public Private Partnership Contracts MCA – 21
Case Study

• MCA – 21, an e-portal for improved Governance. Following were the

services :-
1. Business: to enable registration of a company and file statutory
documents quickly and easily
2. Public: to get easy access to relevant records and effective grievances
redressal
3. Professionals: to enable them to offer efficient services to their client
companies
4. Financial Institutions: to easily find charges for registration and
verification
5. Employees: to enable them to ensure proactive and effective
compliance of relevant laws and corporate governance.
Public Private Partnership Contracts MCA – 21
Case Study

• The contract has been clearly specified in this case including the
duration and outcome of tasks required on the part of the private
party.
• The project was completed in 78 weeks. In this case, the private
firm (agent) has an information advantage which is its efficient
technological skills whereas the government (principal) lacks such
expertise.
• However, adopting a PPP model and outsourcing desired services,
MCA-21 is a success with no apparent moral hazard problems
Public Private Partnership Contracts MMOPL
Case Study

• The implementation of a rail based Mass Rapid Transit System or

Mumbai Metro Line -1 along the 11.40 kilometres long Versova –
Andheri – Ghatkopar corridor on a PPP basis.
• In the month of June 2006, the Government of Maharashtra
awarded the Project to MMOPL, arm of Reliance Infra. Ltd.
• The parties executed the Concession Agreement under which
MMOPL was granted the right to develop, implement, operate and
maintain of the metro on a Build, Own, Operate, and Transfer
(BOOT) basis to MMOPL for a period of 35 years
Public Private Partnership Contracts MMOPL
Case Study

• As per the Order, the fare for the year 2014-15 ranged from Rs.
9/- to Rs. 13/-.
• The Metro O&M Act provides for the constitution of an FFC to
make recommendations to a metro railway administration (MRA)
for fixation of fares under Section 33 thereof.
• MMOPL contended that the original fares had lost their relevance
due to abnormal increases in applicable economic indices.
• The Central Government clarified that MMOPL was free to fix the
initial fares for the project as the first proviso to Section 33 of the
Metro O&M Act
Public Private Partnership Contracts MMOPL
Case Study

• Consequently, on May 29, 2014, MMOPL passed a resolution fixing

the initial fares at Rs. 10/- to Rs. 40/- despite the Order, causing
the MMRDA to seeking an injunction against MMOPL from revising
fares exceeding those in the Concession Agreement and the Order.
• The Bombay High Court observed that there was a marked
inconsistency between the Concession Agreement providing
powers to the parties to fix the fares and the powers prescribed
under Section 33 of the Metro O&M Act
• The Bombay High Court further elucidated that the GoM was not
entitled to set fares considering the extension of the Acts to the
metro project