SIKKIM MANIPAL UNIVERSITY DEPARTMENT OF DISTANCE EDUCATION

ASSIGNMENT SEMESTER 4

NAME ROLL NUMBER LEARNING CENTER SUBJECT NAME MODULE NO DATE OF SUBMISSION AT THE LEARNING CENTRE FACULTY SIGNATURE

: : : : : : :

ABHISHEK JAIN 511035358 02882 CONTRACTS MANAGEMENT IN PROJECTS (PM0018) SET 2 31-MAY-11

MBA 4th Sem Assignment

Contracts Mangment in Projects PM0018 Set 2

Master of Business Administration-MBA Semester 4 Contracts Management in Projects PM0018

Assignment Set - 2
Q 1. Compare strategic level analysis & Operational level analysis for Make or Buy decision Ans: Strategic level analysis and operational level analysis The make-or-buy decision must be the most cost effective and efficient decision for the organisation. Make-or-buy decision should be analysed both at strategic level and operational level. In the book World Class Supply management 2003 edition by David Burt, Donald Dobler, Stephen Starling, it is recommended that the strategic level analysis and the operational level analysis should adopt the respective Rule of Thumb as under: Strategic level analysis: Items that fall under one of the following categories should be manufactured/produces internally, without being outsourced: o Items those are critical for the success of the product, including customer perception of important product attributes. o Items which require specialised design and manufacturing skills or equipment, and for which the number of capable and reliable suppliers is extremely limited. o Items that fit within the firms core competencies or within those the firm must develop to fulfil its future plans. Operational analysis: Items that fit into one of the following categories should be produced internally that is. should not be outsourced. When: o The items in house cost of making is less than the cost, if it is outsourced. o In house manufacture makes productive use of excess plant capacity, thus helping the firm to absorb fixed overheads. o In house manufacturer can achieve better quality control. o Design secrecy is to be ensured to protect proprietary technology. o External suppliers of the product are unreliable. o Union pressure exists to manufacture in house. o The firm desires to maintain a stable work force. Q 2. Write short notes on the following: [54=10 marks]. a. Design, Bid, Build (D-B-B) methodology b. Design and Build ( D-B) methodology Ans: a. D-B-B This methodology separates the design and construction functions. In this method you as an employer hire a designer to provide the complete set of drawing required for construction. This drawing approved by you is then passed to a contractor for executing the project. Figure 1 depicts the D-B-B set up with several construction contractors.

Figure 1: D-B-B Set up with Several Construction Contractors The responsibility for design and construction are spread between more than one entity in both these D-B-B set ups. The project is split into work packages (one work package given to one contractor). Interface needs to be maintained between the designer and each contractor as well as between the contractors. You (through the Engineer) should take responsibility for coordinating these work packages for example in a hydroelectric project, the designer, the civil and electrical contractors should be in coordination. The designer should plan the building with the required set of specification for a turbo generator and the civil engineer should understand

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Contracts Mangment in Projects PM0018 Set 2

the special design and use the right material that can withstand the vibrations of the turbogenerator. In the D-B-B mode, it is also possible to award the construction contract to one general contractor who in turn will award subcontracts for works in specific areas. For example, in a building contract, the general contractor may be essentially a civil works contractor who will award subcontracts to an electrical subcontractor, ventilation and air-conditioning subcontractor, fire protection system subcontractor, lifts subcontractor and so on.

Figure 2: D-B-B set up with one General Contractor Following are the advantages of D-B-B mode: This mode is impartial to the construction contractors as they are selected by competitive bidding. It protects the interests of the owner (you), since the design details would have been substantially finalised before awarding the construction contracts. Incomplete, incorrect or missed items in the design will surface during comparative evaluation of bids and can be corrected. Quality of work is improved because of competitive bidding. Following are the disadvantages of D-B-B mode: The design team is responsible for cost estimates for the project with break ups for different areas and if the estimation is not up to date, the project cost will be increased. The general contractor gets involved only in post-design phase. Hence his inputs will have severe constraints to incorporate. If the general contractor hires subcontractors, he may possibly sacrifice quality in order to bid low for the project (this applies to mode shown in figure 2). b. D - B (Design and Build) This is also called the Turnkey method. This places the entire responsibility for the project that is. both design and construction on the Design and Build contractor. The turnkey method is often also called EPC (Engineer, Procure and Construct) .In this method you look no further than the D and B contractor for the accountability as to performance and quality. You neither get involved in any phase of the project nor coordinate. Following are the advantages of D-B mode: It minimises project risk for the owner. The general contractor retains the design phase thus reducing project delivery schedule. You (owner) need not get concerned with arguing whether a defect that is observed is due to design or workmanship because single point responsibility is on the contractor. Constructability is taken into consideration in the design phase in an effective manner when design and construction are performed by the same entity. Following are the disadvantages of D-B mode: The cost estimate can be premature, since D-B contracts are often written keeping allowance for unexpected situations. Regulatory review can lead to design changes resulting in change orders in project since both design and construction are being performed in parallel. If the D and B contractor resorts to short-cut design methods, the project scope gets illdefined. 2011 Abhishek Jain - 511035358 Page 3 of 7

MBA 4th Sem Assignment

Contracts Mangment in Projects PM0018 Set 2

You are distanced from the design aspects and hence it is difficult to exercise variation power.

Q 3.List and describe in brief the four types of consultancy contract. [10 Marks] Ans: Types of Consultancy Contracts General considerations The following considerations determine the type of contract to be adopted: The nature of the assignment. The distribution of risks between the client and consultant. The level of capacity of the client in contract management and consultant supervision. We discussed the general consideration for a contract now we will study in detail the types of contracts. Lump sum contract Under Lump sum contracts you pay to the consultant a fixed sum of money for the services given such as study report, project design and so on to be delivered within a specified period. The risks of cost overruns are borne by the consultant. Where best suited This contract is best suited for assignments where the content and duration of the services and the expected output of the consultants are clearly defined such as: Planning and feasibility studies Environmental studies Detailed design of infrastructure Cases of sophisticated and clear cut assignments of short duration in which external factors generally are not expected to influence (delay or substantial change) the outcome. Time based contract You learnt that the lump sum contracts are beneficial when the scope is well defined. Under the time based contract, the consultant provides services on a timed basis according to quality specifications, and the consultants remuneration is based on: Agreed staff month remuneration rate multiplied by the actual time of deployment of staff on the assignment. Reimbursable expenses using actual expenses or agreed unit rates. Cost risk which will be transferred to you. Hence the consulting firm would be keen to deploy staff for more periods. Where best suited Time based contracts are usually adopted for the following type of assignments: The nature and scope of the services cannot be precisely incorporated in the TOR, since the assignments are complex for example management of complex institutions or studies of new approaches. The duration and quantity of resources depend on variables that are beyond the control of consultants. The output required of the consultants is difficult to assess in advance (example, technical assistance, organisation development and others). Capacity building program forms part of the assignment. Examples of this type of contract are preparation and compilation of data, complex studies, supervision of contract, training, advisory services and so on. Percentage contract In the previous section you learnt that the time based contract is beneficial for complex projects. In the percentage type of contract, consultants receive an agreed percentage of the actual project cost as their fees for their services Where best used It is mostly used for architectural services and engineering services. The drawback of this type of contract is that there is no incentive to lower the cost of the project as the higher the cost more will be the consultant fees. It may encourage the consultants to adopt more expensive design solutions to increase their fees.

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MBA 4th Sem Assignment

Contracts Mangment in Projects PM0018 Set 2

Indefinite delivery contract In the previous section you learnt that the percentage contracts are best suited for architectural and engineering services. Indefinite delivery contract is used for procuring the services of individual consultants or a consulting firm to provide the services over a specified long period of time, say three to five years at mutually agreed rates to undertake the tasks as and when needed. Examples of the services for which this type of contract is appropriate are for on-call services of advisors for complex projects. Q 4. List the advantages & disadvantages of Mergers & Acquisitions. [10 Marks] Ans: Advantages and Disadvantages of Mergers and Acquisition In the previous section, we have learnt about the acquisition planning and strategies. In this section, let us analyse the advantages and disadvantages of M and A provided in the business environment. The following describes the advantages of mergers and acquisition: Mergers and acquisitions are capable of generating long term productivity for the joint company in the case of a merger, or the purchasing company in the case of an acquisition. A merger may be proficient tax-free for the parties involved. M and A can help a developing company through its expansion and development or generate a smoother production process or functioning system. A merger assigns the shareholders of minor entities to possess a smaller part of a larger pie, raising their general net value. A merger between a public sector company and a private company gives the smaller private company the status of the public sector company. A merger allows the seller to pass numerous expensive and prolonged aspects of asset purchases, such as the assignment of leases and bulk-sales notice. A merger is of substantial significance. If there are marginal or fewer stockholders, obtaining the votes for merger is easier. .The transaction becomes effectual and the disagreeing shareholders are appreciative to go along. Let us have a look on some of the disadvantages of mergers and acquisition: Higher cost will be incurred for excessively large business. The monopoly concerns in merger can have a negative impact on the market. Conflict among the altered types of business can occur, reducing the efficiency of the integration. Necessity of workforce redundantly, particularly at management levels, will have a consequence on motivation. Decisions are harder to make and cause disturbance in the management of the business when diverse business combine. Success is not always definite in merger. Sometimes there can be net loss of value because of issues related to technological inappropriateness, needless employees or poor supervision. Company acquisitions or takeovers contribute to several of the equivalent risks, where a company that acquires another company has to reconfigure the employee atmosphere and operations amongst other things. Risks concerned with the purchased company such as precedent and present debt, trouble, asset or liabilities that must be addressed by the new owners and organisation. Q 5. Explain the following [52=10 Marks] a. Indian Contract Act b. Indian Constitution . c. Article 19(1)(g) of the fundamental rights d. Codes, Manuals for Works and Goods Ans: a. Indian Contract Act The Indian Contract Act came into being in 1872. The Act deals with all aspects of contracts, including formation of contracts and damages in case of breach of contract. The Act was drawn on practices prior to 1872. The massive industrial and commercial developments in Europe and world over were yet to happen. Thus, the organising principles of the contract were simple. As trade and commerce developed significantly in the late 1800s, new types of cases came 2011 Abhishek Jain - 511035358 Page 5 of 7

MBA 4th Sem Assignment

Contracts Mangment in Projects PM0018 Set 2

before the courts, the lawyers and business community. As a result, contracts increasingly came to be in writing and included terms and conditions on a large number of issues. The courts in turn came to interpret the provisions in the contracts and gave decisions on them. Following this, each of the terms in a written contract was further detailed. The business and law community, worldwide, has been very quick to learn from one another. New clauses, following legal developments, got quickly distributed and copied by others. As a result of this, contract documents have become law-like, complex and dense. It is not surprising that it appears intimidating. World Bank, FIDIC and other professional bodies have developed standard conditions of contract for different types of contracts. b. Indian constitution The Constitution of a country describes the governing arrangements to be followed in the country. Constitution constitutes the society and the governing mechanism and thus is the basic law of the country. Indian Constitution provides for the democratic function of the Government of India (GoI). It is a written Constitution, adopted on the 26th November 1949 and came into force on 26th January, 1950. The Constitution defines and determines the relation between: Various institutions and areas of government. Executive, the legislature and the judiciary. Central government, State governments and the local governments. People and the government. Political, social and economic issues. c. Article 19(1) (g): This Article states that, All citizens shall have the right to practice any profession or to carry on any occupation trade or business. Thus all citizens have the right to practice contracting as a profession. The provision of this Article has been qualified by Article 19 (6) which reads as follows; 19(6): Notwithstanding in sub-clause 19(1) (g) shall affect the operation of any existing law in so far as it imposes, or prevents the State from making any law imposing, in the interests of the general public, reasonable restrictions on the exercise of the right conferred by the said sub-clause, and in particular, nothing in the said sub-clause shall affect the operation of any existing law in so far as it relates to, or prevents the State from making any law relating to: o The professional or technical qualifications necessary for practicing any profession or carrying on any occupation, trade or business. o The carrying on by the State or by a corporation owned or controlled by the State of any trade, business, industry or service, whether to the exclusion, complete or partial of citizens or otherwise d. Codes, Manuals for Works and Goods Central Public Works Department (CPWD) which is the premier organisation for the construction of public works of the Union has issued Manuals for its officers. These manuals detail the procedure to be followed for the award of the contracts and also the Forms of Contract. The Director General of Supplies and Disposals (DGS and D) which is the premier organisation for procurement of goods and equipment has its own Purchase Manual. Based on these manuals the Public Sector Undertakings (PSUs) of GoI have issued their own Codes and Manuals. GoI issued the General Financial Rules (GFR) in 1963 as a collection of instructions that act as guidance for Central Government Officers dealing with matters of financial nature. This GFR has been revised in 2005 to ensure transparency, accountability and effectiveness. GFR 2005 incorporates instructions for guidance for officers dealing with new areas of governance such as externally aided projects, government guarantees, engagement of consultants, outsourcing of services, and so on. These instructions were not included in the GFR 1963. The system of procurement, accountability and disposal of goods has been liberalised, bringing it inline with accepted international practices. These instructions of GFR are applicable only to the Central Government Departments and not for the multitude of GoI PSUs. Each of the States of the Indian Union has issued their own Financial Codes, Public Works Departmental Codes and Manuals, Store Purchase Rules and Contract texts. The Public Sector Undertakings of the States and the local administrations have issued their own codes, manuals, regulations and contract texts, though they are similar in most of the cases.

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MBA 4th Sem Assignment

Contracts Mangment in Projects PM0018 Set 2

Q 6. Describe the actions that can be used to minimize the causes of disputes and claims in contracts Ans: Actions for minimising the disputes and claims in contracts Let us discuss about the actions that can be used to minimise the causes. You have to take actions in three phases that are mentioned hereunder: Phase I: Preparatory phase prior to invitation of bids You should take the following actions to minimise the disputes and claims in goods contracts: Incorporate appropriate qualification criteria so that competition is restricted to competent bidders (manufacturers) who can perform the contract satisfactorily. Adopt appropriate conditions of contract that will share the risks between the purchaser and supplier (such as liquidated damages and proper payment terms). Provide realistic delivery period. Provide detailed inspection procedures without ambiguity. Define risks and obligations of both purchaser and supplier and allocate the same equitably by adopting International Commercial Terms (INCOTERMS). Incorporate appropriate dispute resolution mechanism in the bidding document. You should take the following actions to minimise the disputes and claims in works contracts: Have a proper concept of the work with accurate planning and proper design. Carry out detailed geological and hydrological investigations including identification of quarries for materials and take responsibility for the same. Acquire the site suitable for the work. Obtain requisite permissions from statutory authorities. Incorporate appropriate qualification criteria so that the competition is restricted to competent bidders, who can perform the contract satisfactorily. Adopt appropriate conditions of contract with sharing of risks (such as price adjustment, compensation events, liquidated damages, proper provisions for payment of advances, payment for variations and extra items). Provide realistic completion period for the whole of the work as well as intermediate milestones by taking into account the ground conditions, climatic conditions, period required for mobilisation and so on. Incorporate an appropriate dispute resolution mechanism (appointment of mutually acceptable adjudicator). Phase II: Submission and acceptance of the bids A well balanced bid will go a long way in minimising the disputes and claims, since it is a well known fact that a low bid quoted intentionally or unintentionally is a fertile ground for disputes and claims. You have to take the following actions in this phase to minimise the disputes and claims: Provide sufficient time to the bidders to study the site conditions and other data before submitting the bids. Examine the background of the supplier/contractor, his experience, financial strength and reputation while accepting the bid to ensure that the supplier/contractor is able to perform the contract satisfactorily. Award the contract for supplies/works to the lowest evaluated responsive bidder who fully meets all the specified qualification criteria. Phase III: Execution of supply and works contracts Completion of supplies/works of desired quality and specifications without time and cost overruns and without major disputes and claims is the ultimate aim of any contract. This will be possible by: Careful planning and giving attention to details in all the aspects of contract management and taking timely corrective measures within the frame work of the contract. Consistent review of progress and plans, co-ordination, close monitoring, adherence to safety plans, tight operational management, good industrial relations, and strict financial control.

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