PROJECTS ANALYSIS

AND IMPLEMENTATION
ASSIGNMENT-ii

Group no: 4
Maneesha (09yacma038)
Madhumeetha (09yacma036)
Jyoti malpani (09yacmao26)
Vinutha.s (09yacma100)
Bindu shree.b (09yacma012)
Date: 11-04-2011

Question 1:TYPES OF CONTRACT

Solution:

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MEANING OF CONTRACT:
An agreement between two or more competent parties in which an offer
is made and accepted, and each party benefits. The agreement can be formal,
informal, written, oral or just plain understood. Some contracts are required to
be in writing in order to be enforced.

An agreement between two or more parties which creates obligations to

do or not do the specific things that are the subject of that agreement.

Examples of a contract are a lease, a promissory note, or a rental

agreement.

DEFINITION:
1) An agreement between two or more parties, especially one that is written and
enforceable by law.
2) The branch of law dealing with formal agreements between parties

TYPES OF CONTRACT:
Types of contract operational for the execution of project :

1) Turnkey Contract
2) Non-turnkey Contract

Turnkey Basis –

In a turnkey contract, total responsibility of the execution of project is

entrusted to the contractor. The main features of turnkey contracts are as
follows:

A. Scope of work covers

Design, Engineering, Manufacturer, Supply of equipment, Structural
work, Erection, Establishment of performance guarantee test.
B. Execution on turnkey basis may be for the project as a whole or for
individual unit/sub-unit based on the contract package so decided.
C. The decision to execute the project on turnkey basis would require the
approval of competent authority.

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 D. The execution on turnkey basis is decided, when the knowhow is not
available.
E. Turnkey mode is also preferred to fix the single point responsibility for
the execution and completion of entire activities of a unit/package
F. It may be pointed out that the cost of execution on turnkey basis is
generally high as compared to the non turnkey approach. Therefore, the
decision to adopt the turnkey basis should be after the examination and
evaluation of all related aspects.

Non-Turnkey Basis –

 Supply contract including imports.

 Supply-cum-erection and commissioning contracts.
 Supply-cum-supervision of erection and commissioning.
 Works contract.
 Cost plus contract & Rate contracts.

Besides the above types of contracts, projects are also executed on

deposits work basis. Now, the process of execution of contract under each of the
above types is being discussed in detail.

Supply Contract:

Generally, for supplies, contracts are executed in the form of ‘Acceptance

of Tender’ (AT).

Description incorporated in AT are mainly as follow:

i. Name of the contractor.

ii. Code number of the supplier as per the codification of the suppliers and
supply items.
iii. AT no., excise code number, for Modvat claim purpose, date of AT.
iv. Description of items of supplies, quality, rate, amount, mode of dispatch
and delivery, rates and amount of excise duty, sales tax entry tax, freight,
etc..
v. General terms and condition including mode of payment etc. either under
a separate annexure or on overleaf of the AT.

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Supply-cum-Erection and Commissioning Contract:

It except with the addition in the scope of work ‘erection &

commissioning’ and with separate price break up for this item.

Supply-cum-Supervision of Erection & Commissioning Contracts:

It except with the addition in the scope of work for supervision of

erection & commissioning & with the separate price break-up for the same.

Works Contracts:

Work contract for civil engineering work, structural fabrication work and
erection and commissioning work are executed immediately after the tender are
finalised and approval of competent authorities obtained.

In respect of civil engineering work, the technical specification shall

include the details in respect of following items:

i. Quality & grade of material like steel, cement, bricks, flooring material &
timber, etc.
ii. Workmanship
iii. Norms of consumption of cement & steel
iv. Dimensional tolerance
v. Method of measurement
vi. Safety requirement for construction work
vii. List of IS & IRS codes to be referred

Cost plus Contract & Rate Contract:

When the project work is proposed to be executed on the above modes,

contract is executed similarly to work contract except for the rates & other
terms & conditions, which would be in line with the long term contract(Rate
contract) already existing for the rates & other terms & condition & the cost
plus contract, separately to be finalised.

Question 2: FINANCIAL MANAGEMENT

AND CONTROL

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Solution:
Financial Management and control is an important segment in the project
life cycle. It deals with all the financial aspects beyond the financial appraisal
and evaluation. The important activities associated are:

 Fund Flow Management

 Budgetary control
 Financial progress monitoring and reporting
 Cost control and monitoring of contracts
 Bill payments and accounting of expenditure on project

Thus, financial management and Control make the project management and
control a total job for the main objective of completing the project in time and
without any cost overrun.

The procedure for allotment of accounting codes shall be followed for

AMR schemes.

ACOOUNTING CODE: (Asset Code)

Accounting codes will represent the type of asset being procured. The
asset may be a building, machinery, carne, truck, etc.

WORK IN PROGRESS CODE:

Similarly, codes for work in progress will be developed for the work on
scheme till under process at the end of financial year.

Monitoring and control of contracts

During the course of execution of contract, regular monitoring of the
contract is done. These monitoring functions are:

 Total payment made to the contractor.

 Contract period. In case the extension is required, same has to be justified
for the delays.
 Monitoring of bank guarantees for advance payment, security deposit, for
its validity period and its extension timely before the expire date.

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  Monitoring of the insurance policy for validity period and extension
before the expiry dates.

Payment For The Turnkey Contracts

All the payments in the turnkey contracts are made as per the terms of
payments agreed and incorporated in a contract. If advanced payment is agreed,
the same is made against submission of bank guarantee for equal amount. No
payment is made until & unless the contractor has deposited the bank guarantee
towards the security deposits, which is normally equal to 5% of the contract
price.

Like works contracts, measurement books are maintained in the case of

turnkey contracts also and these are jointly signed by the contractor, &
employer’s representative’s i.e., engineer-in-charge.

Typical payments terms in turnkey contracts are given below

assuming that the turnkey contract is on divisible contracts basis.

1) Indigenous Contract
a) Design & Engineering
b) Supply of Equipments
c) Erection & Commissioning
2) Foreign Contract
a) Design & Engineering
b) Supply of plant & Equipments
c) Commissioning Spares

Payments:

Payments are made according to the stipulation made in the regard in the
respective A/T’s. The payments are generally of the following three categories:

A) Advance payments – 80%, 90% or 100% against proof of dispatch.

B) Final payment – against the receipt notes issued by stores officer.
C) Other claims – adjustment/recoveries/supplementary claims.

Payments For Consultancy Contract Including For Feasibilities Reports &

Detailed Project Reports.

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 Main jobs for which consultants are appointed are:

1) Preparation of feasibility report.

2) Preparation of detailed project report including by foreign consultants.
3) Detailed engineering & consultancy services.

Project accounts Section

This section in project finance & accounts sections does the functions of
overall accounting for all the projects separately & watches in completion of
each scheme so as to transfer the work-in-progress balances to the assets section
in the main accounts section of the finance & accounts department for passing
the entry of capitalisation.

Guidelines For Capitalisation Of Assets

1) Capital & Revenue Expenditure

The expenditure is booked in the books of accounts on accrual basis & is

classified or revenue for proper accounting of transaction.

The expenditure which is incurred for carrying on the day-to-day

activities of the company & docs not result in the acquisition/creation of an
asset or a benefit of an enduring nature is treated as revenue expenditure.

Where an expenditure is made, which is non-recurring, with a view to

bringing into existence an asset or an advantage of enduring nature, the benefits
of which are expected to arise over several future accounting periods, the
expenditure is to be treated as capital expenditure.

2) Cost analysis and Rates analysis

One of the important functions in the spheres of project management and

control is the cost analysis and the rates analysis. Rate analysis is a control
function in the projects, exercised jointly by project and finance and accounts
departments of an organization. The contractors too prepare the rates analysis
for various jobs, while submitting the tender for a project.

Preparation of Capital Budget

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 Capital budget is prepared every year for the current year based on the
requirement of funds. In case of public sector companies, capital budget is
prepared each year in respect of current year as well as for next year.

Question 3: CLOSURE OF CONTRACTS

Solution:

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 When the project is completed and contractor fulfilled all his obligations
including defects liability period, the next stage in the project life cycle is to
close the contract. By closure it is meant that financial closure of the contract.

There are two types of closure of contract: physical closure and financial
closure.

1. Physical Closure: It is meant completion of work in the contract as per

the contractual milestones.
2. Financial Closure: It means total closure i.e., end of the contractors
liabilities. Once the financial closure of the contract is done, contractor
becomes free from the contractual obligation.

Need for Closure of Contract:

i. To work out the completion cost of the project.

ii. To know the amount recoverable from the contractor on account of free
issues, issues on cost recovery basis, recovery of liquidated damages, and
recovery on account of non-achievement of performance guarantee
parameters.
iii. To finalize the material accounts for materials issued to the contractor on
cost recovery basis or on free issue basis.
iv. Finally to close the financial liability in the contract and make the final
payment to the contractor.

Activities Involved in the Closure of Contract:

i. Identification of supplies and services yet to be completed by the

contractor and ensuring completion of the same.
ii. To check whether all the spares as provided in the contract have been
supplied.
iii. To check whether contractor has fulfilled all his obligations as per the
contract and ensures compliance in respect of outstanding obligations.
iv. Issue of certificates:
a. Preliminary Acceptance Certificate
b. Commissioning Certificate
c. Performance Guarantee Test Certificate
d. Final Acceptance Certificate
v. Settlement of claims of the contractor:

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 a. For the extra items or additional work over and above the scope of
work of the contract.
b. Escalations based on the price variation clause (PVC) in the
contract.
c. Statutory variations for excise duty, sales tax, commercial tax,
entry tax, customs duty, exchange rate variation.
vi. Approval of final deviation and extra items statement by the competent
authority.
vii. Delay analysis for delay in completion of work if any and fixing the
responsibility for delay due to contractor or due to purchaser.
viii. Settlement of recovery of liquidated damages or payment of bonus for
early successful completion.
ix. Submission of material account for free issues, issues on recovery basis.
Materials may be steel, cement, equipment, structures, refactories, cables,
pipes etc...
x. To finalize recoveries on account of hire charges, electricity charges,
demurrage, port rent and other charges, if any.
xi. Extension of validity of insurance policy, bank guarantee for security
deposit and performance guarantee etc…
xii. Constitution of standing committee for finalization of closure of
contracts.
xiii. To organize the meetings of standing committee members.
xiv. Finalization of claims of the contractors and other issues like recovery of
LD, deduction for penalty for non-performance of guarantee parameter
and any other issue by the committee.
xv. Processing of recommendation of standing closure committee for the
approval of competent authority.

Procedure and Checklists for Closure of Contracts:

1. Procedure
a. To ensure the period of validity of the insurance and bank
guarantee till defect liability period i.e., say upto 18 months from
the date of preliminary acceptance test (PAT) or 12 months from
the date of commissioning whichever is earlier.
b. The project officer earmarked for the scheme from the works side
will be associated with various activities like PAT, rectification of
defects, commissioning and performance guarantee test.

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 c. In turnkey contracts where performance guarantee test is not
conducted for want of inputs arising out of operational constraints,
head of the user department shall issue final acceptance certificate
(FAC) based on continuous satisfactory operation of the unit or
suggest alternative methodology and duration of performance test
in lieu of 72 hours continuous run.
d. Constitution of standing committee:
a. General Manager (Projects)- Chairman
b. Chief Engineer (Contracts)- Member
c. Head of Construction Zone- Member
d. In-charge Officer (Finance-Project)-Member
e. Consultants Representative-Invitee
f. Head of operation unit-Member
e. After all the contractual formalities have been completed and the
stipulations, the closure of the contract will be formalized by chief
engineer (contracts).
f. Status of the cases pending for closure shall be reviewed by the
executive director on quarterly basis.

2. Checklists for Closure of Contracts

a) Name of work.
b) Name of the contractor.
c) Contract value.
d) LOI No. & date.
e) Award letter No. & date.
f) Contract No. & date.
g) Original contract period.
h) Actual date of start of work.
i) Actual contract completion date -
For L.D. purpose
For variation purpose
j) Last extension validity.
k) Position of bank guarantee.

l) Dates of -
 Preliminary acceptance test
 Hot trial

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  Commissioning
 Performance guarantee test
 Final acceptance test
 Completion of defect liability period
m) Performance guarantees details.
 Performance guarantee parameter as per contract
 Actual result of performance guarantee test
n) Whether material account settled.
o) Whether terminal benefits paid & Employee Provident Fund
clearance received.
p) Whether final discharge certificates furnished by the contractor.
q) Whether No demand certificates received from all concerned.
r) Payment position
s) Whether any extra item claim is made by the party, if yes:
 Amount claim by the party
 Approval obtained at the time of execution, if any.
 Consultant’s view, if it constitutes extra item and is not
covered in the original scope.
 Justification as to why the item could not be included in the
original scope.
 Consultant’s/operation’s view as to admissibility of extra
claim.
t) Whether there is any delay in completion of the work, if yes:
 Total delay
 Delay for which contractor is not liable.
 Delay for which contractor is liable & liquidated damage is
leviable.
u) Whether party has claimed any escalation, if yes:
 Amount claimed by the party.
 Amount of escalation within the contract period.
 Amount of escalation beyond the contract period.

v) Whether party has claimed any statutory variation, if yes:

 Amount claimed by the party.
 Amount of variation within the contract period.
 Amount of variation beyond the contract period.

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 w) Recommendation

Certificates Required To Be Submitted By The Contractor

Before making the final payment, contractor will have to submit the
following certificates:

i. Final discharge certificates.

ii. No lien certificates or an affidavit for lien.

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