Kesom6/PSBTB Paper/ 20151 PROFESSIONAL PSPTB ANNUAL CONFERENCE Challenges of international procurement contracts management in Tanzania: the practioner’s

Kesom6/PSBTB Paper/ 2015 1

PROFESSIONAL PSPTB ANNUAL CONFERENCE

Challenges of international procurement contracts management in Tanzania: the

practioner’s view

December 7-8, 2015, Arusha International Conference Centre

By

Kesogukewele M.I.M Msita, Freelance Consultant Email:[email protected]


OUTLINE

Introduction Contract management process Contract management practice Challenges and remedies


INTRODUCTION

The Public Procurement Act, CAP 410 (PPA) defines a “procurement contract” to mean “any license, permit, or other concession or authority issued by a public body or entered into between a public body and a supplier, contractor or consultant, resulting from procurement proceedings for carrying out construction or other related works or for the supply of any goods or services.”

The Public Procurement Regulations, GN No 446 (PPR), have a more direct definition which reads; ““Contract” means a contract or agreement made between the procuring entity and a tenderer as a result of procurement proceedings.”


INTRODUCTION

In relation to the theme of this paper, a procurement contract is the one involving a procuring entity or public body and an international (foreign) supplier, contractor or consultant. The management of such a contract is the one being referred to as international procurement contract management

Projects which are the subject of international

contracts management are frequently complex, may involve multiple actors, may last a long time and may consume many resources from a number sources, locally and internationally.


INTRODUCTION

Furthermore, poor scoping, funding constraints, price escalations, difficulties in compliance with some of the contractual obligations and the law governing the contract pose challenges during implementation.

Contract management is meant to ensure that the parties to the contract and the professional advisors meet their contractual obligations in order in the end to derive value for money for the contracting authority and reasonable profit for the other party.


INTRODUCTION

Based on the experience of the author, discussion will mainly be based on the management of international works contracts, under three broad headings, namely; the process of contract management, contract management in practice, and challenges and remedies.


CONTRACT MANAGEMENT PROCESS

The contract management process can be broadly grouped into three areas: delivery management, relationship management, and contract administration.


Delivery management

Delivery management ensures that whatever is ordered is delivered to the required level of quality and performance as stated in the contract. Delivery management may include checking the nature, quantity and quality of: goods supplied – on delivery and also, when

appropriate, at the time of manufacture; works carried out – including conformity with designs

and drawings, quality of workmanship and materials Services performed – including checking that required

service levels and timescales are met.


Relationship management

Relationship management seeks to keep the relationship between the parties open and constructive, with the aim of resolving or easing tensions and identifying potential problems at an early stage, while also identifying opportunities for improvement.

Relationships must be wholly professional throughout and must include a professional approach to managing issues and dispute resolution.


Contract administration

Contract administration covers the formal governance of the contract and any permitted changes to documentation during the life of the contract.

This area of contract management ensures that the everyday aspects of making the contract run effectively and efficiently are taken care of.


CONTRACT MANAGEMENT PRACTICE

In practice the contract management process that involves delivery management, relationship management, and contract administration is a creature of written contracts taking into account the requirements of the law.


General Conditions of Contract

In respect to international procurement contracts management, this is achieved through use of standard conditions of contract, namely: General Conditions of Contract published by the Public

Procurement Regulatory Authority (PPRA) Conditions of Contract for Construction for Building and

Engineering works designed by the Employer, published by International Federation of consulting Engineers (Fédération Internationale des Ingénieurs-Conseils or FIDIC)


General Conditions of Contract

General Conditions for Works Contract Financed by the European Development Fund (EDF)

General Conditions for World Bank/African

Development Bank funded projects which are the Bank Harmonised Edition of the General Conditions of Contract prepared by the International Federation of Consulting Engineers (FIDIC), in agreement with various Multilateral Development Banks.


General Conditions of Contract (scope)

The General Conditions of Contracts (GCC) are customized for each project, through preparation of Special Conditions of Contract (SCC), embody: General provisions covering definitions, interpretation,

communications, law and language of contract, priority of documents, contract agreement, assignment, instructions, compliance with laws, progress reports, site meetings etc

Employer’s (Contracting Authority) obligations and rights (rights of access to site, permits, Employer’s personnel, Employer’s financial arrangements)



Contractor’s obligations and rights (general obligations, quality assurance, safety issues, environmental protection, equipment, progress reports, etc)

Duties of the Engineer/Supervising Officer/Project Manager (duties and authority, instructions, delegation, determinations, progress reports, etc)

Arrangements for Subcontractors Staff and labour (engagement of staff and labour, rates

of wages and conditions of labour, working hours, facilities to be provided, Contractor’s superintendence of the works, avoidance of disorderly conduct, etc)



Plant, materials and workmanship (manner of execution, inspection and testing, rejection of defective plant, materials, workmanship, remedial work)

Commence of the woks, delays and suspension (include site handing over, time for completion, programme, extension of time, suspension of work and consequences thereof and progress meetings)

Tests on completion Arrangements for the Employer’s taking over the

completed works Defects liability (length of the period for defects liability,

Cost for remedying defects, consequences for failure to remedy defects)

.



Measurement and evaluation (method of measurement, works to be measured)

Variations and adjustments (variation procedure, provisional sums, daywork, adjustments for changes in legislation, adjustments for changes in costs)

Payment (timeliness, consequences for delayed payment, discharge and cession of the Employer’s liability)

Termination of contract by either the Employer or the Contractor



Risks and responsibility for the risks (risks of each party, indemnities, limitation of liability)

Insurance of the works, people and plant and machinery

Claims, disputes and arrangements for settlement of disputes


Public Procurement Act (PPA) and Public Procurement Regulations (PPR)

The need for contract management is clearly stipulated in the PPR, under Regulation 114, as follows: A procuring entity (PE) shall be responsible for the

effective management of any procurement of goods, services or works for which it is undertaking

Shall monitor the costs and timely delivery of goods and services in the correct quantities and to the quality specified in each contract

Monitor the progress and timely completion of works in accordance with the terms of each contract


Public Procurement Regulations (PPR)

Take or initiate steps to correct or discipline deviations from observance of contract conditions; and

Ensure that the responsibilities imposed on it by the contract are fully discharged.

As far as the law is concerned, other contract management issues are with respect to the procedure for amendment of standard contracts, performance security, submission of contract documents, alteration and amendments to a procurement contract, time extension and liquidated damages, and termination of contract.



Procedure for amendment of standard contract (Reg. 108)

Every effort shall be made to use the standard contract

documents issued by the Public Procurement Regulatory Authority (PPRA). Any deviation shall require the prior approval of PPRA

In view of section 4 of the Act in respect of international obligations multilateral funding agencies and some bilateral funders of capital development projects, the above mentioned standard general conditions of contracts are the ones used



Alteration and amendments to a procurement contract (Reg. 110)

Once a contract agreement is signed; it shall not be

altered except when an alteration is necessary for the benefit of the procuring entity or when the alteration does not prejudice the procuring entity



Contract period (Reg. 74)

The contract period allowed shall be a realistic

assessment of the time in which a contractor could be expected to complete delivery of the goods or services or complete the works (Reg 74(1))

Where circumstances dictate a shorter contract period, the prospective tenderers shall be notified in the tender documents (Reg 74(2))



Time extension (Reg. 111) The order for extension of time shall only be issued by

the accounting officer. The order must state the section of the general conditions under which it is issued, the duration of the extension and the special circumstances which have been taken into account

The order for extension of time shall be treated strictly and fairly if the procuring entity is to have reasonable prospects of enforcing liquidated damages and if the contractor (tenderer) resorts to arbitration (Reg 111(4))



For purposes of avoiding invalidation of the procuring entity’s right to impose liquidated damages and claims for time extension, a contractor shall not be requested to carry further work on the contract where the contract completion certificate is issued (Reg 111(5))

Liquidated damages (Reg. 112) A PE is under obligation to impose on a contractor

liquidated damages due to late delivery. The rate of liquidated damages shall be specified in the tender documents and in the contract; the maximum amount shall be equal to the amount of the performance guarantee established in the contract



Termination of contract (Reg. 113)

Where a contract is terminated due to the contractor’s

failure to execute the contract within the specified time or due to failure to comply with the contract without justifiable and acceptable reasons, the accounting officer shall refer the matter to PPRA and the Attorney General for information and appropriate action


CHALLENGES AND REMEDIES

Practice has encountered a number of challenges in international procurement contracts management with respect to: start up issues, wrong amendments to standard conditions of contract, contract documents inadequacies, replacement of key staff, hurdles in importation of equipment, unforeseeable physical conditions, variations, fluctuations, funding constraints, tax exemptions and VAT refund constraints, termination of contract, claims and disputes, etc.



Start up issues: These are the ones the Employer and the Engineer/Project Manager/Supervising Officer would be required to do after entry into force of a contract with the Contractor. They include: Ensuring that the contract agreement is signed Giving possession of site to the Contractor Appointing the Dispute Adjudication Board (DAB) (in

case applicable) Payment of the advance payment, upon receipt of

advance payment bond Ensuring that the right arrangements for insurance are

in place



Ensuring that the Contractor has provided an acceptable performance bond

Ensuring that the Contractor has a full set of contract documents and all necessary information



The challenges here are with respect to: Failure to give the full site in time Failure to appoint a DAB until disputes occur Delays in payment of the advance payment Not all necessary information is availed to the

contractor; particularly setting out data and at times such data is erroneous

Poorly prepared contract documents are encountered which reflect as poorly prepared projects

These result into variations, extension of time, claims and disputes



Wrong amendments made to standard conditions of contract Wrong amendments are at times made to standard

forms that mutilate the envisaged interdependence of provisions and severely tempers with the envisaged risk sharing policy. In certain situations amendments are not done in spite of the situation demanding so. In one case, for design and build projects, involving six contracts, major employer’s risks were shifted to contractors; a number of credible contractor’s did not tender as a result. Almost all projects encountered problems.



As a remedy or mitigating measure, guidance is provided for the amending the standard conditions through the preparation of the Special Conditions of Contract. For the PPRA published standard conditions contract, any deviation to the said conditions require the prior approval of PPRA as already observed above (Reg. 108).



Contract documentation inadequacies Contract documentations should be fair and adequate

to effectively save the particular contract strategy adopted. It is worth emphasizing the importance of avoiding ambiguous and contradictory documents.

Furthermore, what is put on paper in the contract documents must be workable in practice with room for flexibility and adaptability to match difficult situations that may eventuate. Documentation should equally be completed in time for unimpeded performance.



There should be proper examination and review of the contract documents, ensuring the documents are understandable, unambiguous and consistent.

Field personnel should become familiar with the drawings and specifications and other documents forming the contract and the purposes they are intended to serve, since they may be the first to notice any discrepancies.



Replacement of key staff

There are problems encountered in practice when some of the key staff had to be replaced with qualified staff. Replacement is at times made by bringing in unqualified staff.

In 100 km road, the key staff of the supervising consultant were all replaced with unqualified staff!



Hurdles in importation of equipment There are problems encountered in practice in

mobilizing all essential equipment during the mobilization period.

The problem relates to delays in ordering ( which at times is due delays in payment of the advance payment), and bureaucracy with customs and other requirements of the revenue authority.



Unforeseeable physical conditions Unforeseeable physical conditions mostly relate to

unforeseeable physical subsurface conditions as far as major works are concerned (dams, hydro power stations, roads, bridges, airports, etc). There is a decided trend toward (1) investing a little more money during project planning and design for the purpose of obtaining more geotechnical information and (2) making all of the geotechnical information available to contractors. It should go without saying that the more information a contractor has about subsurface conditions, the more accurate the bid – and less likely will be claims for differing site conditions



Failure to carry out adequate geotechnical investigation or to properly interpret the information resulting thereof, results into poor design and substantial increases in quantities and correspondingly high cost. Construction of Dam project, rehabilitation of a 100 km road project, and rehabilitation of the 6o km road project provide useful examples.

Dam project: due to inadequate geotechnical investigation, material envisaged within a kilometer radius of the site of the works was not enough. Thus, material had to be brought from 40 km away.



100 km road project: inadequate site investigation was carried out for the first 20 km, that resulted into wrong siting of the culvert; as a result the portion of the road where the culvert should have been rightly constructed was washed away by the rains. Further, adequate site investigation was carried out for the last 30 km and the resulting report was properly written. However, due to failure to properly interpret the resulting report, the design for last 10 km was poor/inadequate.

60 km road project: normal site investigation failed to discover a certain compound within the earth material that caused premature failure of the road pavement following its construction.



Furthermore, the choice of a good contractor requires no emphasis. But with tendering goes the provision of sufficient data and information on which tenders can be based. The aim being to look for a fair price which, takes care of substantial risks.



Variations The contract terms and conditions include mechanisms to

cope with permitted changes during the life of the contract. Contracting authorities must be very careful when

considering the possibility of varying an agreed contract, particularly outside a pre-agreed and transparent contractual cost variation mechanism.

From a contract management point of view it is advantageous to be able to address changing circumstances in a transparent, timely and efficient manner as they arise during contract execution.



This is a good reason for using the aforementioned standard conditions of contract, as they embody sound procedures for dealing with variations. But it is then more important that the contracting authority has thoroughly prepared the scope of the contract and worked out a sound, detailed and robust design, so that the possible variations are minimized.



Fluctuations With respect to price fluctuations, conditions of contract

embody formulae based methods for reimbursement to the contractor. Experience from practice is that, at times the formulas are wrongly applied and wrong indices are equally used. As a result, employer’s find themselves have to pay more than they should.

It is also important to train the project managers and officers on the rationale of fluctuations, the fluctuation formulas and their application.



Funding constraints Due to funding constraints, Contractors do not receive

payment in accordance with the provisions of contract. Thus, Contractors become entitled to receive financing charges on the amount outstanding, compounded monthly; irrespective whether payment is certified or not.

Unless otherwise specified, the interest rate is 3% above the discount rate of the central bank in the country of the currency of payment.

The remedy here is a call to PEs to ensure adequate budgetary provisions.



Constraints with tax exemptions and refund of Value Added Tax (VAT) There are difficulties in ensuring compliance with the

law in respect of tax exemptions and VAT refund. It is common knowledge that there are a number of

situations in which contracts for works involving foreign contractors; particularly those funded by development partners are exempted from local taxes, duties, contributions or other charges imposed under the laws of Tanzania such as fuel levy.



The problems encountered by the contractors are: Lack of awareness on legal and procedural

requirements for tax exemptions and VAT refund, and getting refund from the Tanzania Revenue Authority (TRA)

Delay in getting exemption certificates Inordinate delays in getting refund from the Tanzania

Revenue Authority Where works are not completed in time and extensions

of time are given, the relevant Government Notices expire. The hurdle becomes then getting new exemptions for the extended contract period



Delayed refund of VAT by the Tanzania Revenue Authority is another key constraint.

The effect of delays in getting refunds from TRA greatly impacts on the contractors’ cash flows and results in financing charges payable by procuring entities.

It is important from the outset for the parties to understand the procedural requirements for getting exemptions and for receiving refund from TRA; and the need for high level of cooperation is paramount.



Contingency Owners need to understand, in advance, that changes

and cost increases are virtually inevitable. Accordingly, a reasonable contingency should be

incorporated into the budget to deal with inevitable changes during implementation.



Termination Most construction contracts contain a clause, which

empowers both the Employer and the Contractor in certain specified events, to terminate the contract or to exercise other rights over the works.

The right to termination should be exercised with care. Termination that does not comply with the requirements of the contract is likely to constitute repudiation entitling the other party to damages.



Thus, the following are points that must be observed: A power to terminate arising out of an express

condition of the contract must be exercised properly as stipulated in the contract

Notices for termination must be explicit as to the grounds of default.

If there is no time limit for which notices upon a party must be issued, the aggrieved party is duty bound to give his notice within reasonable time, so as to avoid change of circumstances giving rise to the notice.



Claims and disputes Standard conditions of contracts embody efficient ways

of resolving claims and disputes. In the resolution of disputes contractual procedures must be complied with.

However, in case there are needs for appointment of Dispute Adjudication Board, the institutions and corresponding procedural needs are new to the key players. They are not well understood by the parties and even supervising officers. Application of relevant provisions is problematic particularly regarding: appointment of members, frequency of site visits and costs involved.



Further remedies Review meetings: Review meetings between the

parties to the contract are another practical means of keeping control of a contract, particularly when it is complex or runs over several years. The frequency and coverage of the review meetings, if any, will depend on the nature of the contract.

Review meetings are a useful means of communication between the parties to the contract during its execution, and not having them can have negative consequences. They must be well prepared, focused and not too time consuming.



Reports: Timely high and/or summary level reporting is much more effective than accurate late information. It is essential that the information obtained is useful, either intrinsically or because it can be processed to provide knowledge on which to base decisions and activity.



Technical auditing (or procurement audit/review): Technical auditing of projects is increasingly becoming one of the ways of addressing risks during implementation.

The aim of audit is to provide top management and investors/financiers with an independent review, analysis, appraisal, recommendations and comments on those project management activities, which are adversely affecting successful project performance. Technical audit can be applied at any of the stages in a project’s life cycle i.e. pre-project, in-project and post project.



Establish good working relationship: From the very onset it is important to establish good communication and to ensure a sound working relationship. Due strained relationship between the supervising officer and the contractor’s site agent, in the construction of one hydropower station, a guest house built by the contractor could not be paid for by the employer; but in the end its removal was ordered



Ensure prompt action: When a constraint is discovered it is important for the parties to move quickly. Contractors should notify and make inquiries as soon as possible for instructions, delays, variations, unforeseeable conditions etc. Responsive answers to their inquiries should be given as early as possible.



Whenever possible, negotiation to resolve the constraint should be entered into before additional costs accrue. Impartial analysis by the parties and contractual review are preferable to permitting valuable time to be lost as the supervising officer and contractor argue the merits.


CONCLUSION

Contract management is as much as a matter of overcoming difficulties as it is of achieving results. These difficulties or constraints form a spectrum ranging from absolute certainties through familiar risks to happenings that no reasonable person could be expected to foresee or provide for.

These difficulties result into construction projects being vulnerable to a variety of factors that can result in time and cost increases.


CONCLUSION

Furthermore, the needs for value for money and operational efficiency have inspired an increasing recognition of the importance and benefits of effective contract management.

Public procurement reforms and new suites of contracts particularly for international procurement contracts are all supportive of sound contract management.

The paper has just highlighted some of the key pitfalls and remedies in international procurement contract management.

LASTLY

THANK YOU FOR YOUR AUDIENCE QUESTIONS?


Documents

Kesom6/PSBTB Paper/ 20151 PROFESSIONAL PSPTB ANNUAL CONFERENCE Challenges of international procurement contracts management in Tanzania: the practioner’s