Module 2

The selection of the appropriate contract type and terms and conditions will
depend upon:
 The type of specifications
 The procurement risk assessment
 The market analysis and capability; The agency’s /organization’s/PE’s capacity
 The operational environment

The evaluation criteria:

 Will be specified in the tender documents/request for proposals
 Need to be appropriate to the type, nature, market conditions, and complexity
of what is being procured
 Must enable the agency/organization/PE to achieve best value for money.

Contract Management
Based on the above assessment it is important to foresee also the Contract
Management requirements:
1. Contract Management Plan must be identified in Procurement Plan.
2. Contract conditions to be included in tender document/RFP
3. Terms and conditions to be Fit-for-Purpose, with appropriate allocation of
risks, liabilities, roles, and responsibilities
4. Contracts to be managed throughout their duration against the Contract
Management Plan
5. Evaluation of contract execution to be carried out at contract completion to
assess performance

To determine whether VfM is achieved, PE monitors at least that:

 risks are managed or mitigated before they materialize
 contract is completed on time and within budget
 contract variations are properly justified
 contract outcome meets initial objectives
 Agency/organization’s requirements are met
 final contract price compares favorably with comparable benchmarks

COST ESTIMATING

NEED:
1- It helps to work out the approximate cost of the project in order to decide its
feasibility with respect to the cost and to ensure the financial resources, if the
proposal is approved.
2- is used for framing the tenders and helps in the tender evaluation process.
3- From quantities of different items calculated in detailed estimation, resources
are allocated to different activities of the project and ultimately their durations
and whole planning and scheduling of the project is carried out.
4- It is mandatory by the public procurement regulation
ESTIMATING METHOD:

Actual Cost Approach:

This approach requires the estimator to have a good working knowledge of
manufacturing/ construction methods. (based on Standard Norms)

Historic Data Approach:

The use of historic data from recently awarded contracts is a cost-effective method
to develop the estimate, however, solely relying on historic data may not be
appropriate when the data is based on a noncompetitive bidding environment.

Combination Approach:
This approach combines the use historic bid data with actual cost data and other
source (Market Survey).

Let us take some examples of risks and possible mitigation measures:

 Market risks are high where several unqualified bidders attempt to win public
contracts; some of them succeed and fail on delivery
 Products that are readily available in the market may not easily meet the Procuring
Entity’s needs and requirements.
 The sector is suffering from sharp fluctuations in raw material prices hindering
efficient participation in bidding.
 The Procuring entity has limited experience in evaluating bids in this particular
sector and risks making wrong award decisions.
 The supplies are urgently needed with not a single day of delay can be tolerated
beyond the set schedule.
 Use Prequalification to make sure that only suppliers capable of delivering the
requirements are invited to submit tender.
 Specification – make sure the PE clearly states the performance requirements and
provides the supplier with freedom to use its expertise to be innovative in its
delivery.
 Use suitable procurement arrangements (contract type, conditions of contract,
pricing mechanisms, etc.) to ensure a fair risk distribution (e.g. allow for price
adjustment).
 Resort to expert support during evaluation; such expertise can be provided from an
affiliate entity or the private sector as long as no conflict of interest exists.
 Include in the contract a clear statement to this effect and increase the daily
damages (liquidated damages) in case of delay. Also, the Procuring entity should
mobilize sufficient resources to ensure smooth implementation with no obstacles.
For mitigating the risks, the following actions in different procurement steps
should be ensured:

1. Prequalification – make sure that only suppliers capable of delivering the

requirements are invited to submit tender.
2. Specification – make sure the Procurement Entity clearly states the detailed
specification or performance requirements and provides the supplier with
freedom to use it’s expertise to be innovative in its delivery

1- RISK MITIGATION
3. Procurement arrangements (contract type, conditions of contract, pricing
mechanisms, etc.) - make sure tenders are competitive and ultimately deliver
value for money
4. Evaluation – make sure the most appropriate supplier is selected and all risks
are managed and
5. Contract Management – make sure suppliers fulfill their contractual obligations
and any issues are dealt efficiently and effectively in a fair and transparent
manner

The PE should consider the following factors in assessing their capability:

A. previous experience/track record (good and bad) in implementing similar

procurements and implementing World Bank Projects

B. contract Management capacity and capability

C. market reputation for making contractual payments on-time

D. complaints Management and dispute resolution systems

E. technical capability in designing and preparing specifications and tender

documents, experience in supervision of construction contracts (if applicable),
testing of procured items

F. reliance on consultants to augment PE capability

G. administrative arrangements, including delegated authority levels to facilitate

timely decision making
Procurement Procedure

 Formation of procuring Unit

 Formation Evaluation Committee
 Preparation of procurement Plan/strategy
 Preparation of Estimate
 Preparation of Bid document
 Opening of Bids
 Evaluation of bids
 Handling complaints
 Award of the contract
 Completion/Termination of the contract

Strategic Procurement Planning

 Requires defining properly the procurement needs
 Requires assessing the environment in which procurement will take place (in
terms of risks, institutional environment, state of the market…)
 Requires specifying most appropriate market approach, contracting strategy,
selection methods and contract management approach
 Requires securing appropriate funding in a timely fashion
 Requires monitoring and adjustment
Type of contracts
1- Design and Build
2- Unit Rate - Remeasured with Fixed Rates
3- Lump Sum contract
4- Framework Agreement

Types of works contract

unit rate (ad-remeasurement)
Uses
Most common for infrastructure construction (large and small of moderate risks) of short or
long duration
Construction below ground levels

Advantages
Provides equitable basis for bidding
Facilitates bid comparison and evaluation
Adoptable to change
Periodic payments ease contractor’s needs
Can accommodate for Lump Sum items

Disadvantages
Problems with unbalanced unit rates bids
Risk of quantity variations
Need for precise measurement of work performed (associated risk of fraud)
Higher cost of preparation for detailed design and BOQ
Higher supervisory administration cost

Lump Sum Contract

Small, well-defined works / buildings of short duration
Not subject to large variations or risks
Any construction above ground
Large industrial process plants (turnkey) normally following 2 stage bidding process (design,
by Contractor)

Advantages
• Fixed sum for budgeting
• Easy to administer
• Little / no measurement
• Less documentation
• Price Breakdown to handle some quantities variations
• Price Adjustment mechanism can be accommodated
Disadvantages
Inflexible to change / high ridk
Reimbursable Cost plus fee (cost plus)
Uses
• Open-ended emergency situations (earthquakes, floods)
• High risk and uncertainty (war, tunneling)
• Ill-defined, high return/innovative plants (private sector)

ADVANTAGES
• Early mobilization and rapid start
• Contractor assumes little or no risk

DISADVANTAGES
• Inappropriate (in basic form) for competitive bidding (see target cost)
• With fixed fee, no incentive for quality or timely work
• With % fee, no incentive to limit costs
• Additional Employer staff needed to monitor costs

Turnkey (Engineering, Procurement and Construction - EPC)

• For complex industrial process plants, etc. (petrol refineries, steel mills…)
• Contractor delivers complete working package including detailed design meeting
and product requirements
• Preferably two step bidding
• Normally LS (Lump Sum) with price adjustment for long duration
• FIDIC EPC/Turnkey (1999)

Build-operate-Transfer (BOT)/concessionary (Public- Private Partnership PPP):

For revenue earning projects
(toll roads, power, water, hospitals, prisons...)
Essentially concessionary turnkey contract including financing
Useful when owner has limited budget or borrowing capacity
Costs and risks borne by BOT investors
Proposed tariff (revenue to investors) major consideration in bid evaluation
Variants (LROT Lease Renovate Operate Transfer, DBFOM Design Build Finance Operate
Maintain, etc.)
Concession agreement: 15-30 years a erwards transfer of facility to Employer (PS)

Type of contracts according to requirements availability

If the design (specifications, design drawings, and quantities) is available
• unit-price contract on a re-measured basis
• pay based on actual quantities delivered

If the design is not available but the key requirements and specifications are available
• lump-sum contract (design and build)
• pay on milestones based on progress

If no design is available but the key performance requirements are there

• performance contract
 • pay based on KPI’s + bonus or – penalty

Employer influence/risk in relation to procurement method/contract.

From high to low:

• Force Account - Force A/C (direct labor)

• Self design/construct/supervise/finance
• Advanced detailed design
• Ad-measurement
• Selection pre-qualified bidders
• Competitive bidding
• Variations require employer approval
• Supply & install / design & build
• 2-stage bidding or pre-qualification normal
• L.S. (Lump Sum) Includes major components / design / construction
• Turnkey
• 2-stage bidding normal
• L.S. (Lump Sum) Contract provides for specified end product
• BOT/concessionary
• All contract inputs and finance normally provided by investor group
• No operating revenues accrue to public authority

Pre-qualification
The PQ is the assessment of the Capability of firms to carry out a particular contract
prior to being invited to submit a bid.

When should prequalification (PQ) be used?

PQ IS APPROPRIATE FOR:
• Large and/or complex contracts
• Turnkey contracts
• Management contracting

Advantages of Pre-qualification
• Evaluation of bids on price and merit of bid itself are separate from the evaluation
of qualifications of bidders
• Prior assessment by implementing agency of bidders' capability to execute contract
• Better opportunity to form joint ventures to meet capability requirements
• Exposes conflict of interest between consultants, suppliers and contractors
• Promotes interest of leading contractors to compete with others of similar
capability.
• Reduce potential for controversies
• Address Sustainable, ESHS and Gender considerations

Purpose of pre-qualification (PQ)

The PQ is used to identify potential contractors, suppliers or service providers that are
most capable of performing a contract, thus restricting the number of companies to
be invited to bid. The suitability of contractors is evaluated by assessing their financial
status as well as their technical and professional abilities. Of course, this must be
carried out in compliance with the principles of transparency, non-discrimination and
equal treatment.

Prequalification should be based entirely on the ability and resources of potential eligible
bidders to satisfactorily execute a particular contract, taking into account objective
and measurable factors, including:
1- relevant General and specific experience, as well as satisfactory past performance and
successful completion of similar contracts during this period
2- financial situation and, where appropriate
3- opportunities for construction and / or production facilities

Qualification Pass-Fail Criteria

1. Financial Situation and Performance
Average annual turnover: “minimum (2 - 1,5) of average es mated cost / year in last -
(three to five) - years”
eg: If a 2-year project's es mated total cost is $1M, then the requested average
annual turnover should not be less than $0.75M or $1M (ie $1M/2 years =
$500,000/year; so 1.5x$500,000 = $0.75M or 2x$500,000 = $1M).
The selec on between a factor of 1.5 or 2 is based on the project's nature and at the
Borrower's discretion or best practice.

2. General and Specific Experience

• Number years experience
• Scope of works:
• similar type/complexity & physical size of contracts
• similar conditions (e.g. climate)
“minimum number - (one to three) - of contracts (normally each of 80% value) during
last – (five to ten) – years

3. Produc on capacity
Size of works:
“minimum ¾ of estimated required production rate of selected key B.O.Q. item/s”

4. Personnel qualifica ons

Managerial and technical key positions:
• Minimum number of similar projects successfully managed by the incumbent
• Minimum number of years of experience (total and in position)
General/Specific
• Relevant Education, training and degrees obtained

5. Financial capabili es
• liabilities/assets. Financial soundness of a contractor can also be evaluated by
requesting financial information on a bidder’s assets and liabilities (from the audited
 balance sheets) and then requiring a minimum acceptable ratio. This is often called a
working capital ratio which defines the proportion of a bidder’s liabilities covered by
assets. A current ra o greater than 1.0 is considered good. This indicates that a
bidder has enough current assets to cover the cost of its current liabilities.
• pending litigations
• current contracts commitments/Works in progress
• financial resources
Cash flow requirement “minimum amount available for the period in months before
payment is received by Contractor":
A $240M project is to be implemented over a period of 48 months.
Adequate cash flow is required to be available for a minimum of 4 months before any
payment is made.
Monthly Es mate: $240 M / 48 Mois = $5 MTotal needed Cash Flow: $5 M * 4 Mois =
$20 M.
The Contracotr must have access to a minimum of $20 M in order to qualify.
Advance Payment (when applicable) is not considered here!

6. Equipment capabili es
Minimum key equipment listed
Ex: Trucks, Backhoes, Excavators, etc.

7. Current contracts commitments/Works in progress

A bidder’s ongoing contracts and commitments will give the PE an indication of his
current workload, thus an indication of the bidder’s availability to undertake the
works described in the tender. When a bidder is “overloaded” during the proposed
period of implementation of the works, this may be an early indication of potential
delays in time or shortfalls in quality and/or cashflow issues.

8. Legal status
• Ownership/Registration
• Joint venture /sub-contract arrangement/ manufacturer authorization
• Litigations

9. References (Cer ficates…)

Certificates of completion of similar projects are usually requested to be provided
within the bid. These should mainly include information on the successful
completion of projects within the contractual time limits and within acceptable
margins of the estimated budgets of each project. Such certificates are issued by the
beneficiary(ies) of such similar projects.
It should be noted that certificates of performance for a bidder’s ongoing contracts may
also be accepted if the percentage of completion at the time of bidding is deemed
indicative of a probable good performance in terms of both time and budget.

10. Code of Conduct

Compliance with the Environmental, Social (including sexual exploitation and abuse
(SEA) and gender based violence (GBV)), Health and Safety (ESHS) requirements.
 11. ESHS ( if required)
• Declaration of past performance
• Capacity to comply with Employer's ESHS Requirements
• Environmental, Social, Health and Safety (ESHS) Performance Security.
• Management strategies and Implementations plans

PRE-QUALIFICATION OF BIDDERS AND INITIAL SELECTION OF BIDDERS

Prequalification of bidders
• Used with Request for Bids
• Pass/Fail criteria
• No limit on number of qualified firms
• All participating firms to be informed of the result of the pre-qualification
• Verification of prequalification information shall be carried out by the
Borrower at the time of contract award
Initial selection of bidders
• Used with Request for Proposals
• Pass/Fail Followed by Rated criteria
• To select top ranked firms based on predefined range (Min & Max)
• All participating firms to be informed of the result of the Initial Selection
Verification of IS Information shall be carried out by the Borrower at the