Embed Size (px)
Citation preview
An interaction on
Types of Contracts and the Distinctitive
Approaches and Methodologies in Audit
according to the type of Contracts,
interpretation of Contract Clauses
sharing the experiences
Procurement
What do we buy or sell ?
Some Basics
What we buy or sell? (Goods, Services , etc to meet our needs)
Satisfaction ! (In terms of quality, quantity, rates and convenience)
What is required exactly should be clear to both buyer and
seller? (Often vague in new type of procurements ? Will get better response (go to
him he knows the job?)
Expectations of both the sides should be crystal clear :
DMS (Computerisation case- SRS), IGNOU (ERP), DDA (Bakkarwala)
(Requirements formulation)
Clarity will help better competition , bid evaluation process
and contract execution.
(To understand above clearly by both the sides :Pre bid conference)
Basics
How balancing of Interests/Expectations : by following
rules & procedures (Bidding/tendering Process).
The two sides have conflicting interests/expectations but a
Win- Win situation when satisfaction is there on both the
sides. (In terms of quality, quantity, rates and convenience- creates issues later if any of
these is vague).
CONTRACT : DEFINITION A contract is defined as
• An agreement between two or more parties, with some
• legal binding enforceable in the court of law.
• A contract is a promise or a set of promises :
• for the breach of which, the law gives a remedy or
• the performance of which, the law in some way
recognizes as a duty.
• There are many stages involved in the formation and
acceptance of a legal contract. The basic stages of any
contract includes :
proposal,
offer,
acceptance,
agreement and
consideration.
Types of Contracts
• There may be contracts for procurement of :
• Works,
• Goods,
• Services or
• Consultants/manpower
• PPP, etc
Some of the common types of contracts used in the
engineering and construction Projects are :
• Lump Sum Contract
• Cost Plus Contract
• Unit Price Contract
• Percentage (of Project cost ) or Fee
• Incentive Contracts
Lump Sum Contracts • Percentage (of Project cost ) or Fee
• Incentive Contracts
The contractor agrees to do a described and specified project
for a fixed price.
Often used in engineering contracts.
Also named "Fixed Fee Contract".
It is suitable, if the scope and schedule of the project are so
clear and sufficiently defined as to allow the consulting engineer
to estimate the project costs.
Cost Plus Contract• A contract agreement wherein the purchaser agrees
to pay the cost of all labour and materials plus an
amount for contractor overhead and profit (usually as
a percentage of the labour and material cost).
• The contracts may be specified as :
Cost + Fixed Percentage Contract
Cost + Fixed Fee Contract
Cost + Fixed Fee with Guaranteed Maximum Price
Contract
Cost + Fixed Fee with Bonus Contract
Cost + Fixed Fee with Guaranteed Maximum Price
and Bonus contract
Cost + Fixed Fee with Agreement for Sharing Any
Cost Savings contract
Cost Plus Contract• This type of contracts are favoured where the scope
of the work is indeterminate or highly uncertain and
the kinds of labour, material and equipment needed
are also uncertain.
• Under this arrangement complete records of all time
and materials spent by the contractor on the work
must be maintained.
Cost + Fixed Percentage Contract
Compensation is based on a percentage of the cost.
Cost + Fixed Fee Contract
Compensation is based on a fixed sum independent the
final project cost. The customer agrees to reimburse the
contractor's actual costs, regardless of amount, and in
addition pay a negotiated fee independent of the amount
of the actual costs.
Cost + Fixed Fee with Guaranteed Maximum Price Contract
Compensation is based on a fixed sum of money. The total project cost
will not exceed an agreed upper limit.
Cost + Fixed Fee with Bonus Contract
Compensation is based on a fixed sum of money. A bonus is given if the
project finish below budget, ahead of schedule, etc.
Cost + Fixed Fee with Guaranteed Maximum Price and Bonus
Contract
Compensation is based on a fixed sum of money. The total project cost
will not exceed an agreed upper limit and a bonus is given if the project is
finished below budget, ahead of schedule etc.
Cost + Fixed Fee with Agreement for Sharing Any Cost Savings
Contract
Compensation is based on a fixed sum of money. Any cost savings are
shared with the buyer and the contractor.
Unit Price Contract
This kind of contract is based on estimated quantities of items
included in the project and their unit prices. The final price of the
project is dependent on the quantities needed to carry out the
work.
In general this contract is only suitable for construction and
supplier projects where the different types of items, but not their
numbers, can be accurately identified in the contract documents.
It is not unusual to combine a Unit Price Contract for parts of the
project with a Lump Sum Contract or other types of contracts.
Incentive Contracts
Compensation is based on the engineering and/or contracting
performance according to an agreed target - budget, schedule
and/or quality.
The two basic categories of incentive contracts:
Fixed Price Incentive Contracts (Lump Sum) :
Fixed Price Incentive Contracts are preferred when contract costs
and performance requirements are reasonably certain.
Cost Reimbursement Incentive Contracts (Cost Plus)
Cost Reimbursement Contract provides the initially negotiated fee
to be adjusted later by a formula based on the relationship of total
allowable costs to total target costs. This type of contract specifies :
Percentage of Construction Fee Contracts
Common for engineering contracts. Compensation is
based on a percentage of the construction costs :
Planning & Architectural Works
DPRs preparations
Consultations
Designing & Drawing
Audit of Contracts
Broadly Contracts relate to Procurement of :
A. Works
B. Goods
C. Services
D. Consultancy (manpower)
In PPP Mode
Accordingly,
• appropriate methods of procurement are adopted,
• contracts meeting the specific needs of the procurement are entered in to and
• Audit approaches and methodologies are decided.
We first discuss the common audit aspects and later share the Audit experience in each case.
Audit : Common Aspects
Info Analysis: Budget, Programmes and Schemes, Annual
Reports, Sanctions issued, Scrutiny of Govt Accounts received in
SAI office – especially the major payments , Internal Audit Reports,
Compliance with earlier Audits, Persistent Irregularities. Minutes of the
Project Progress/Review/ Evaluation/ Meetings
(incomplete/substantially time and cost over ran procurements,
arbitration cases, etc) , Quality Inspection Reports, Feed Backs
and Representations from Stack Holders, Media Reports, etc
Based on the initial study of the Schemes / Project Guidelines
select the Contracts and accordingly develop a strategy for
conducting contract audits.
Audit : Common Aspects
•Perform risk analysis of contracts to determine which ones
to audit. Contract risks include: Time and cost overruns; frauds; duplicate billing or billing of unrelated costs; compliance with government regulatory agencies; Abondoned/Incomplete procurementsSubstandard quality/benefit projectionsUnder arbitration,etc
Audit : Common Aspects Because of limited resources, it may be impractical or
impossible to audit all contracts. Resources may need to
be concentrated on new contractors and contracts over a
certain amount. Other factors to consider may be the
complexity of the contract, type of project, importance or
sensitivity of the project and regulatory issues.
Decide who will conduct the audits: Assign specific
contracts to specific auditors or audit groups.
Audit : Common Aspects Obtain information to plan specific audits. Auditors
should obtain contract files, budgets, project and/or
engineering plans, accounting records and any other
documents they need to plan the specific audits. These
documents are usually obtained from the organization
commissioning the audit. They should review these
documents and update themselves on the contract and to
develop the audit procedures.
Auditors will need to obtain documentation of direct costs
and indirect costs charged to the contract and records
documenting compliance with contract provisions,
regulatory matters and contract deliverables.
Audit : Common Aspects Auditors will execute the audit procedures.
They will verify billings from the contractor by examining the contract costs
incurred by the contractor.
Auditors will select samples of direct and indirect costs and test those costs
to determine if they are allowable to the contract in accordance with applicable criteria.
Audit of works Contracts
The aim of audit is to see that all works were executed within
the minimum possible cost and in accordance with the
procedure laid down for the purpose.
There are four main Stages connected with a project
clearance – which contain the contract management
problems which surface later:
1. Administrative Approval
2. Financial Sanction
3. Technical Sanction and
4. Appropriation or Re-appropriation of funds
The aim of audit is to see that all works were executed
within the minimum possible cost and in accordance
with the procedure laid down for the purpose.
There are four main Stages connected with a
project clearance – which contain the
contract management problems which
surface later:1. Administrative Approval
2. Financial Sanction
3. Technical Sanction and
4. Appropriation or Re-appropriation of funds
Audit Points: contd..
Universal Audit Observations in India:
Time Over Run &
Cost Over Run Or
Efficiency : At the cost of Economy and Effectiveness
(anicuts)
Poor quality (Not yielding targeted results)
Incomplete/abandoned works; etc
Time Over Run :
Non Availability of the Project/Work Site
Change in Scope of Work – Inadequate surveys
Change in Design and Drawings – Inadequate
site/soil survey/technology-poor DPRs
Dispute with Contractor
Audit Points: contd..
Time Over Run continued :
Contractor has run away – Fin & Tech Bids /
inadequate capabilities.
For awarding work at Risk and Cost; formalities
are delayed or not completed.
Non/delayed availability of funds.
Progress monitoring mechanism not in place.
Delays in ATRs of quality monitors.
Works completed but final bill not setelled.
Cost Over Run: Adequate contractual capacity not available in the
States. Award at higher rates.
Adequate competition not generated:
e-procurement/tendering
Cost escalation due to time over run
Disputes with Contractor : Arbitration
Turn key Projects: Defective agreements/vague
terms and conditions.
LD charges are levied correctly and recoverd.
Some Examples: Administrative approval (A/A): Necessity for the work
by the administrative department for Air strip but later abandoned the
work due to technical reasons .
A/A issued based on Guestimates (46/24 quarters At Minimum possible
cost) and necessary preliminary plans (for land availability / basic
amenities) not provided.
Boulders/ Earth exacavated : for Land levelling – cost and cartage.
Transformers procured but remained unutilized due to change in scope
of work.
Quality control (Mckinzys comparison of observations of SQC and NQC)
and action taken on the quality related observations - effect in payment.
Maintenance – DLP –post construction : Pb case
DPRs/ Design and Drawings: To be based on proper field
and site surveys, necessary soil/field investigations
(seldom found/normally noticed at the execution stage in
the form of large deviations/variations in scope of
work/quantities)
Road alignments based on transact walk (normally
dispute with forest department/land owners)
Proper soil surveys in works (building , dams, canals
which do not come up timely or never used or
breached or washed away)
DPRs: Main problem in India. Quality
depends on accuracy of the data and facts
including technology (DPR preparation is
outsourced to consultants).
Comparison of work items and quantities
executed with those prescribed in the DPRs
(STAs view points, WBM v/s WMM, CD
works, CC works, etc.)
• Analysis of ALR and AHR in the financial bids,
justification/ markets trends (when prepared?)
• Bank guarantees genuine,
• Manintenace of contractor ledger, Inspection Book, Site
Register
• Comparison of items and quantities: between DPR & G
schedule and G schedule and MB (Normally financial
implications are checked)
• Final Bill pendency
When contractor leaves the work:
See his profile (works in hand)/financial standing
Technical evaluation
Recoveries
Invocation of BG and
Formalities for risk and cost award.
• Funds remain idle/Unspent Funds :Investment
Appropriateness of the action taken on the
observations of quality monitors
Comparison of observations of different quality
monitors
PPP
Huge infrasture being created
(roads/water/ellectricity, projects schemes etc)
their subsequent Maintenance and
Renewal
Huge funds are required and gain from the best
managerial and technical skills avalaible in the
private sector.
New ways of Financing
PPP contd….
Requirement of huge funds:
Tools for meeting funds requirement - Diferrent Models:
PPP - JVs and
Others:
BOLT (Built, Operate, Lease and
Transfer/MCA-TCS)
BOOT (Built, Operate,Own and Transfer)
BOT (Built, Operate and Transfer/TCS-
IGNOU)
SPVs (opens a company for the purpose)
PPP contd…
Financing:
Toll (Estimation of Receipts & Payments/
Cost Benefit Analysis)
Cess on users who can afford (Mining and
other commercial users)
Annuity (Where Toll/Cess not possible):
Bunching to ivite financially and
technically sound big players.
Thank you
Essentials Elements of a Valid Contract
Strategic (senior management/board of directors)
• Agreed exit strategy and agreed break options
• Premises (where the goods/services will be delivered)
• Sub contractor details
• Authorities responsibilities
• A good contract not only identifies clearly the obligations
of the provider, but also forms the foundation for a
productive relationship built on communication and trust
A formal legal advice is always recommended prior to making or
accepting a contract.
Essentials Elements of a Valid Contract:
acceptance,
agreement and
consideration.
Essentials Elements of a Valid Contract:
1.Proposal and acceptance
2. Consideration -- lawful consideration with a lawful object
3. Capacity of parties to contract -- competent parties
4. Free consent
5.An agreement must not be expressly declared to be void.
Essentials Elements of a Valid Contract
6. Writing and Registration if so required by law
7. Legal relationship
8. Certainty
9. Possibility of performance
10. Enforceable by law.
The contract agreement should ensure :
• A definition of what is to be provided and requirements to be met
• An agreed level of service and mechanism for payment reduction if
not met
Means to measure performance
Pricing mechanisms including where appropriate, milestone payments,
incentivisation/rewards, retentions and, if the contract is for more than
2 years, price variation mechanisms
Essentials Elements of a Valid Contract
• A plan to cover implementation/transition/rollout
• Acceptance strategy/test plan
• Ownership of assets and intellectual property
• Escalation and alternative dispute resolution procedures
• Change control procedures
• Invoicing arrangements
• Communication routes , typically at three levels
Operational (end users/technical support staff)
Business (contract manager and relationship manager on
both sides)
Types of the works :
•Petty (not more than ` 50,000),
•Minor works (More than ` 50,000 but not more
than 50 lakh)
•Major works (More than ` 50 lakh)
Why and what of Contract Audit :
•Contract audits common in both public and private sectors. •There are many reasons for conducting contract audits, •all related to risk management. Contract risks include: cost overruns; frauds; duplicate billing or billing of unrelated costs; compliance with government regulatory agencies; and many more.
There are two general types of contract audits:
control audits and recovery audits.
Control audits are conducted either prior to the spending period or early in the spending period. The purpose is to gain an understanding of the contractors systems, controls and supporting documentation.
Recovery audits are conducted near the end of the spending period. The purpose is to determine if any costs charged to the contract are not valid and if there are any regulatory or contract noncompliance issues to be resolved.
Strategy Development
Develop a strategy for conducting contract audits.
Decide who will conduct the audits: internal auditors or an outside firm?
Determine criteria for which type of audit to conduct. For example, first-time contractors conduct control audits to learn
their systems, controls and documentation and also conduct a recovery audit.
All other contractors only perform recovery audits.
An interaction on
Essentials of a valid contract
and general principles
sharing the experiences
Essentials Elements of a Valid Contract:
Essentials Elements of a Valid Contract:
1.Proposal and acceptance
2. Consideration -- lawful consideration with a lawful
object
3. Capacity of parties to contract -- competent parties
4. Free consent
5. An agreement must not be expressly declared to be
void
6. Writing and Registration if so required by law.
Essentials Elements of a Valid Contract
7. Legal relationship
8. Certainty
9. Possibility of performance
10. Enforceable by law
The contract-agreement should ensure :
• A definition of what is to be provided and requirements to be
met
• An agreed level of service and mechanism for payment
reduction if not met
• Means to measure performance
• Pricing mechanisms including where appropriate, milestone
payments, incentivisation /rewards, retentions and, if the
contract is for more than 2 years, price variation mechanisms
Essentials Elements of a Valid Contract
• A plan to cover implementation/transition/rollout
• Acceptance strategy/test plan
• Ownership of assets and intellectual property
• Escalation and alternative dispute resolution procedures
• Change control procedures
• Invoicing arrangements
• Communication routes , typically at three levels
• Operational (end users/technical support staff)
• Business (contract manager and relationship manager on
both sides)
Essentials Elements of a Valid Contract
• Strategic (senior management/board of directors)
• • Agreed exit strategy and agreed break options
• • Premises (where the goods/services will be delivered)
• • Sub contractor details
• • Authorities’ responsibilities
• • A good contract not only identifies clearly the obligations
of the provider, but also forms the foundation for a
productive relationship built on communication and trust
• A formal legal advice is always recommended prior to making
or accepting a contract.
GENERAL PRINCIPLES TO BE OBSERVED
Cardinal principle of spending: Spend money as if it is from your ownpocket and document the spending procedure appropriately.
Every officer is expected to exercise the same vigilance in respect ofexpenditure incurred from public moneys as a person of ordinaryprudence would exercise in respect of expenditure of his own money.
The expenditure should not be :
prima facie more than the occasion demands; directly or indirectly to theauthority’s own advantage; for the benefit of a particular person orsection of people (exception:court/public policy and allowances not asource of profit.
Transparency in spending, ensuring equal opportunities to suppliers,maximizing competition
Value for money: Efficiency, Economy, Effectiveness (Ensure all or anoptimal mix of the three)
FUNDAMENTAL PRINCIPLES OF PROCUREMENT
Fundamental principles of public procurement :
Every authority delegated with the financial powers of
procuring goods in public interest shall have the
responsibility and accountability to bring
• efficiency,
• economy,
• transparency and
• for fair and equitable treatment of suppliers
• and promotion of competition in public procurement.
The procedure to be followed in making public procurement must conform to the following yardsticks:-
1. the specifications in terms of quality, type etc., as also quantity of goods to be procured, should be clearly spelt out keeping in view the specific needs of the procuring organisations.
2. the specifications so worked out should meet the basic needs of the organisation without including superfluous and non-essential features, which may result in unwarranted expenditure. Care should also be taken to avoid purchasing quantities in excess of requirement to avoid inventory carrying costs;
3. offers should be invited following a fair, transparent and reasonable procedure;
4. the procuring authority should be satisfied that the selected offer adequately meets the requirement in all respects;
5. the procuring authority should satisfy itself that the price of the selected offer is reasonable and consistent with the quality required;
6. at each stage of procurement the concerned procuring authority must place on record, in precise terms, the considerations which weighed with it while taking the procurement decision.
TRANSPARENCY, COMPETITION, FAIRNESS AND
ELIMINATION OF ARBITRARINESS IN THE
PROCUREMENT PROCESS
Arbitrariness in the procurement process: All government purchases should be made in a transparent, competitive and fair manner, to secure best value for money. This will also enable the prospective bidders to formulate and send their competitive bids with confidence. Some of the measures for ensuring the above are as follows:-
(i) the text of the bidding document should be self-contained and comprehensive without any ambiguities. All essential information, which a bidder needs for sending responsive bid, should be clearly spelt out in the bidding document in simple language. The bidding document should contain, inter alia;
(ii) the criteria for eligibility and qualifications to be met by the bidders such as minimum level of experience, past performance, technical capability, manufacturing facilities and financial position etc.
• eligibility criteria for goods indicating any legal restrictions or conditions about the origin of goods etc which may required to be met by the successful bidder;
• the procedure as well as date, time and place for sending the bids;
• date, time and place of opening of the bid;• terms of delivery;• special terms affecting performance, if any.
(iii) Suitable provision should be kept in the bidding document to enable a bidder to question the bidding conditions, bidding process and/ or rejection of its bid.
(iv) Suitable provision for settlement of disputes, if any, emanating from the resultant contract, should be kept in the bidding document.
(iv)The bidding document should indicate clearly thatthe resultant contract will be interpreted under theLaw of the Land.
(v)The bidders should be given reasonable time tosend their bids.
(vi)The bids should be opened in public andauthorised representatives of the bidders should bepermitted to attend the bid opening.
(vii) The specifications of the required goods shouldbe clearly stated without any ambiguity so that theprospective bidders can send meaningful bids. Inorder to attract sufficient number of bidders, thespecification should be broad based to the extentfeasible. Efforts should also be made to use standardspecifications which are widely known to the industry.
Public procurement procedure is also to ensure efficiency,
economy and accountability in the system. To achieve the
same, the following keys areas should be addressed:
To reduce delay, appropriate time frame for each stage of
procurement should be prescribed by the Department. Such
a time frame will also make the concerned purchase officials
more alert.
To minimise the time needed for decision making and
placement of contract, every Department, with the approval
of the competent authority, may delegate, wherever
necessary, appropriate purchasing powers to the lower
functionaries.
EFFICIENCY, ECONOMY AND ACCOUNTABILITY IN PUBLIC
PROCUREMENT SYSTEM
The Departments should ensure placement of contract within the original validity of the bids. Extension of bid validity must be discouraged and resorted to only in exceptional circumstances.
Bring in the rate contract system more and more common user items which are frequently needed in bulk by various departments. The Central Purchase Organisation should also ensure that the rate contracts remain available without any break
Misconception of buying only the cheapest goods ignoring desired quality
From the above procedure, it is quiteclear that one need not always buythe cheapest articles/equipment.Where quality is an importantconsideration of procurement,substandard goods/undesirablesuppliers can be eliminated at the‘Technical Bid’ stage itself withoutopening their financial bids.
For inviting Bids/Tenders, a detailed document called “Bidding Document” is prepared.
Tendering/Invitation of Bids
Criteria for determining responsiveness of bids, criteria as well as factors to be taken into account for evaluating the bids on a common platform and the criteria for awarding the contract to the responsive lowest bidder should be clearly indicated in the bidding documents.
Bids received should be evaluated in terms of the conditions already incorporated in the bidding documents; no new condition which was not incorporated in the bidding documents should be brought in for evaluation of the bids. Determination of a bid's responsiveness should be based on the contents of the bid itself without recourse to extrinsic evidence.
Bidders should not be permitted to alter or modify their bids after expiry of the deadline for receipt of bids.
Negotiation with bidders after bid opening must be severely discouraged. However, in exceptional circumstances where price negotiation against an ad-hoc procurement is necessary due to some unavoidable circumstances, the same may be resorted to only with the lowest evaluated responsive bidder.
Bid Evaluation
In the rate contract system, where a number of firms are brought on rate contract for the same item, negotiation as well as counter offering of rates are permitted with the bidders. Contract should ordinarily be awarded to the lowest evaluated bidder whose bid has been found to be responsive and who is eligible and qualified to perform the contract satisfactorily as per the terms and conditions incorporated in the corresponding bidding document. However, where the lowest acceptable bidder against ad-hoc requirement is not in a position to supply the full quantity required, the remaining quantity, as far as possible, be ordered from the next higher responsive bidder at the rates offered by the lowest responsive bidder.
The name of the successful bidder awarded the contract should be mentioned in the Departments notice board or bulletin or web site.
Bid Evaluation
WEB PUBLICITY
Necessary in India
Thanks
CONTRACT : DEFINITION
• A contract is defined as
• An agreement between two or more parties, with some
• legal binding enforceable in the court of law.
• A contract is a promise or a set of promises :
• for the breach of which the law gives a remedy or
• the performance of which the law in some way recognizes as a duty.
• There are many stages involved in the formation and acceptance of a legal
contract. The basic stages of any contract includes :
proposal,
offer,
acceptance,
agreement and
consideration.
PROCUREMENT of GOODS
i. These are available in Chapter VI of the General Financial Rules (GFR), brought out by the Ministry of Finance, Department of Expenditure, Government of India, (GFRs 135 to 185). These rules have been adopted by IGNOU with the approval of Finance Committee and Board of Management. These rules have been circulated also by the Administration Division vide…. These rules are also available on the website of the Ministry of Finance , Department of Expenditure ( ….)
RULES GOVERNING PROCUREMENTOF GOODS AND SERVICES
In addition to this, the Department of Expenditure has also brought out a detailed Manual of Policies and Procedures for appointment of consultants which in fact details all the aspects relating to appointment of consultants.
This Manual is also available on the website of the Ministry of Finance, Department of Expenditure ( …).
Estimated Value of
Purchase
Prescribed Method/ Relevant GFR
1. Up to Rs.15,000/- Purchase of goods without quotations Rule 145
2. Above Rs.15,000/- and up
to Rs.1,00,000/-
Purchase of goods by Purchase Committee
Rule 146
3. Above Rs.1,00,000/-
a) Purchase of routine /
non-technical item
b) Special/technical
nature purchases
Purchase of goods by obtaining Sealed Bids:
Rule 149-53
a)Single Bid (Financial Bid)
b) Two Bids (Financial & Technical Bids)
3A. Above Rs.1,00,000/- and
up to Rs.25,00,000/-
Limited Tender Enquiry Rule-151
3B. Above Rs.25,00,000/- Advertised Tender Enquiry Rule 150
3C. Single tender enquiry Procurement from a single source in case of
proprietary articles, emergency necessarily to be
purchased from a particular source spare parts and
compatibility Rule 154
Purchase Rules at a Glance
