Public Procurement Principles and Applications Basic Level: Trainer’s Manual Inter – American Development Bank Chapter 4: Procurement of Works December 2006

2 IDB Training in Procurement: BASIC LEVEL Key topics of the Chapter are:  Procurement for Works  Other Types of Work  Degree of Influence and Risk for Works-type of Contract  Size of Contract  FIDIC  Technical Specifications  Currency Provisions  Payment Terms  Risks Forces of Nature  Insurance  Technical Documents  Performance Security  Price Adjustment  Settlement of Disputes Introduction

3 IDB Training in Procurement: BASIC LEVEL Factors Affecting Choice for Type Procurement for Works Nature and complexity of works Size and duration of contract Degree of definition of works and the element of risks Status of Design (Preliminary or Final) Technical Capability, design and supervisory resources of the Employer Financial resources available and/or budget constraints Previous experience of employer in a particular type of contract Practices and procedures of the associated funding agencies

4 IDB Training in Procurement: BASIC LEVEL Common Type of Works Contracts Procurement for Works TypeUsesAdvantagesDisadvantages 1. Lump Sum - Small Well Designed Works / Buildings of Short Duration - Large Industrial Process Plants - Fixed Sum for Budgeting - Easy to Administer Inflexible to Changes / High Risks 2. Unit Rate / Ad Re- Measurement Infrastructure Construction of Short or Long Duration - Equitable Basis for Bidding - Facilitates Bid Comparison & Evaluation - Adaptable to Changes - Periodic Payment follow Contractor’s Cash Flow - Little Difference: Estimate, Bids & Final Costs -Preferred by most IFIs -Problems with Unbalanced Bids - Preparing and Monitoring Detailed Bill of Quantities 3. Cost Plus -Emergency Situations -Project site posts high risk and Uncertainty -Defined projects; High ROI -Early mobilization and rapid start -Contractor assumes little of no risk - Not for competitive bidding - no incentive for quality or timely work - no incentive to limit costs -Additional staff to monitor costs - Not acceptable to IFIs

5 IDB Training in Procurement: BASIC LEVEL Other Types of Works TypeDescription 1. Supply & installation-Pumping Stations, Transmission Towers, Pipelines etc. - Part Goods, Part Works - Single Responsibility - Lump Sum or Combination of Lump Sum and Unit Rate 2. Design and Build/Construct- Major Bridges, Public Buildings, Monuments, etc. - Explores latest concepts in Design/Construction - Complex Bid Evaluation - Normally Lump Sum with Quantity & Price Variation 3. Turn Key- Complex Industrial Plants - Contractor delivers working package for Specified End Product - Normally two-Step Bidding - Normally Lump Sum with Price Adjustment

6 IDB Training in Procurement: BASIC LEVEL Other Types of Works TypeDescription 4. Target Cost- Conditions of High Uncertainty and un-quantifiable Risks - Cost + Incentive Fee - Savings or Costs Overruns are shared according to Final Target Cost 5. BOT / BOOT / BOO- Revenue Earning Projects - When Owner has limited budget or Borrowing Capacity - Costs and Risks are borne by Contractor/Investor - Proposed Tariff is major consideration in Bid Evaluation

7 IDB Training in Procurement: BASIC LEVEL Degree of Influence and Risk for Works-type of Contract BOT / BOOT / BOO TURNKEY DESIGN & BUILD SUPPLY & INSTALL ADMEASUREMENT COST REIMBURSABLE FORCE ACCOUNT

8 IDB Training in Procurement: BASIC LEVEL Size of Contract Large enough to attract international competition One contract for one project is not necessary Irrational splitting of contracts should be avoided To be decided at the stage of preparation of Procurement Plan

9 IDB Training in Procurement: BASIC LEVEL What is FIDIC? FIDIC Organization & Conditions of Contract  Formed in 1913 (over 90 years)  70 National Member Associations  28,000 Firms  1,000,000 Staff  US$ 100 billion in annual fees for services  US$ 1,500 billion in annual construction costs 70 Member Associations representing 1,000,000 professionals THE SUN NEVER SETS ON FIDIC

10 IDB Training in Procurement: BASIC LEVEL FIDIC’s Mission FIDIC Organization & Conditions of Contract To promote the business interests of members providing technology-based intellectual services for the built and natural environment, and while so doing, accept and uphold our responsibilities to society.

11 IDB Training in Procurement: BASIC LEVEL FIDIC’s 7 Key Focus Area FIDIC Organization & Conditions of Contract  Representativity  Business Best Practice  Ethics / Integrity  Image  Sustainability  Globalisation  Quality

12 IDB Training in Procurement: BASIC LEVEL Standard Forms of Contracts FIDIC Organization & Conditions of Contract Employer / consultant design Contractor design Various (Old) formatsUniform format and contents

13 IDB Training in Procurement: BASIC LEVEL Standard Forms of Contracts FIDIC Organization & Conditions of Contract Guide published 2001 published 1999

14 IDB Training in Procurement: BASIC LEVEL Standard Forms of Contracts FIDIC Organization & Conditions of Contract fair apportioning of risks, rights and obligations between the parties BALANCED WELL TRIED long case history for earlier contracts ACCEPTED known and recognised; in wide use for international contracts SUPPORTED recommended or required by development banks, ISPA, etc. EFFECTIVE clear and complete conditions; time limits; provisions for adjudication

15 IDB Training in Procurement: BASIC LEVEL Structure of FIDIC Conditions of Contract FIDIC Organization & Conditions of Contract Simple projects Design by either party Employer may appoint a Representative Valuation as appropriate; to be agreed Payments according to value of Works executed and Materials and Plant delivered to site No certification of payments

16 IDB Training in Procurement: BASIC LEVEL Structure of FIDIC Conditions of Contract FIDIC Organization & Conditions of Contract Employer responsible for detailed design Engineer, working for the Employer Bill of Quantities Payments based upon measurements Certification of payments by Engineer

17 IDB Training in Procurement: BASIC LEVEL Structure of FIDIC Conditions of Contract FIDIC Organization & Conditions of Contract Contractor responsible for detailed design Engineer, working for the Employer Lump sum pricing Payments according to progress Certification of payments by Engineer

18 IDB Training in Procurement: BASIC LEVEL Structure of FIDIC Conditions of Contract FIDIC Organization & Conditions of Contract Contractor takes full design and execution responsibility Employer may appoint a Representative Fixed price, to cover risks taken on by Contractor Payments according to progress No certification of payments

19 IDB Training in Procurement: BASIC LEVEL The 3 Main Contracts’ Features (Similarities & Differences FIDIC Organization & Conditions of Contract General Conditions Guidance for the Preparation of the Particular Conditions Letter of Tender Contract Agreement Dispute Adjudication Agreements Twenty main clauses, covering similar matters Exceptions: Clauses 3, 5 and 12: Construction:Plant and D-B:EPC/Turnkey: 3. EngineerEngineerEmployer’s Admin. 5. SubcontractorsDesign 12. MeasurementTests after Completion

20 IDB Training in Procurement: BASIC LEVEL FIDIC Guides FIDIC Organization & Conditions of Contract The FIDIC Contracts Guide The White Book Guide Guide for the preparation of particular conditions (in the major contracts) Notes for Guidance (in the Short Form of Contract) Tendering Procedure and Pre-qualification forms Quality Based Selection

21 IDB Training in Procurement: BASIC LEVEL Use of FIDIC Contract FIDIC Organization & Conditions of Contract STRAIGHTFORWARD PROJECT ? EMPLOYER DESIGN ? CONTRACTOR DESIGN? plant and/or high unforeseen risks fixed price - lump sum little employer involvement no major unforeseen risks no DISCUSS IN DETAIL Employer ’s requirements with the Contractor, and negotiate a modified FIDIC contract no yes

22 IDB Training in Procurement: BASIC LEVEL Technical Specifications Standards of materials, workmanship & performance Sufficiently specific to elicit responsive bids No prejudice participation by any qualified bidder Merit in-country standardization

23 IDB Training in Procurement: BASIC LEVEL Objective Currency Provisions Remove currency risk from bidders – to get best price Permit bidders to use strong currency in bid – to protect participation by weak currency countries Ensure fairness to all bidders in currency conversion comparison Permit borrower to require local expenses to be quoted only in local currency

24 IDB Training in Procurement: BASIC LEVEL Bill of Quantities Currency Provisions Usually expressed in Borrower’s currency with portions payable in Foreign currency If so, protect foreign currency component Lump Sum Sum of amount in local currency and foreign currencies Payment In currencies specified in contract Foreign component – directly by bank; or Facilitate transfer of foreign currency payments

25 IDB Training in Procurement: BASIC LEVEL Payment Terms Usual Commercial Practices for WORKS: Advance Payment (Mobilization) – 10 to 20% of the price Recovery of Advance: Proportionate to Contract Payments Progress/Monthly/Interim Payment Monthly Bills – 100% less Advance Repayment and Retention Retention Money: 5 to 10% of Progress Payment Return of Retention At Completion of Works (Taking Over): 50% At Completion of Maintenance Period: 50% Securities and Guarantees

26 IDB Training in Procurement: BASIC LEVEL Risks of Forces of Nature Contractor is responsible for damage to works except if caused by “Excepted Risks” Excepted Risks:  Risks under Employer’s control  Various political or uninsurable risks  Forces of Nature  Contractor cannot foresee  Could foresee but cannot insure

27 IDB Training in Procurement: BASIC LEVEL Risks of Forces of Nature Unforeseeable Foreseeable BUT Contractor will unable to: Protect works against risks Insure against risks Employer’s Risks:

28 IDB Training in Procurement: BASIC LEVEL Risks of Forces of Nature Foreseeable AND Contractor will able to: Protect works against risks Insure against risks Contractor’s Risks:

29 IDB Training in Procurement: BASIC LEVEL Insurance Bidding documents must be clear on required insurance: Types Terms

30 IDB Training in Procurement: BASIC LEVEL Performance Security Professional ability and financial position of Contractor: Cannot accurately be assessed by the Employer Employer’s right to secure performance of the Contractor within the time limit in the contract Purpose

31 IDB Training in Procurement: BASIC LEVEL Performance Security Performance Guarantees Issued by banks 10% of contract value Irrevocable, unconditional, payable on first demand Performance Bonds Issued by insurance companies or bonding firms Up to 100% of contract value conditional Types

32 IDB Training in Procurement: BASIC LEVEL Price Adjustment Reduce risk for bidders Protect employer from speculative bidding Provide contractor reasonable compensation against price fluctuation Objectives

33 IDB Training in Procurement: BASIC LEVEL Price Adjustment Large Plant and Equipment contracts Large Civil Works Contracts with over 12 months execution Price Subject to Adjustment

34 IDB Training in Procurement: BASIC LEVEL Price Adjustment Documentary Proof or Invoice Method Formula Method Method

35 IDB Training in Procurement: BASIC LEVEL Settlement of Dispute Review Projects Manager’s Decisions contested by Contractor To be appointed at time of Contract Signing Decision is final unless referred to arbitration Adjudication System is quick – usually not contested Cost is to be shared by both parties Very good for developing countries Adjudication