Difference among EPCM, Multiple Packages and EPC Contracts (2)

In the last post we discussed Contract Classification based on the Mode of Project Delivery (i.e. Level of Integration). We read that depending upon the mode of project delivery; contracts are classified as EPC, EPCM and Package Contracts. Further we discussed EPC Contracts in more detail in the previous post. Please click here to read that post: http://www.rkstrainings.com/difference-among-epcm-multiple-packages-and-epc-contracts/

In this post we wish to discuss EPCM and Multiple Package Contracts in further detail. Both posts together shall bring out more clarity on the distinguishing features each type. A careful analysis and comparison among EPC, EPCM and Multiple Package Contracts shall reveal the appropriate usage of each one

Contract Classification based on Mode of Project Delivery:

Please re-read the example of Construction of Ramesh’s House in the previous post by clicking the above link

EPCM and Package Contracts in more details:

B) Multiple Packages Contracts

In the last post we discussed that EPC Contracts are best option if Owner intend to award the entire scope of works to a single agency. This is done to minimize the interfacing issues and holding single agency responsible for completion of the entire job within agreed cost and timelines.

However, another Owner may not prefer to award the entire scope of work to a single agency. This Owner may be cost conscious or desire to have better control on the project. Further, a single agency (i.e. EPC Contractor) may not have enough experience in all disciplines of the project. Accordingly, such EPC Contractor also ends up subcontracting certain parts which are outside his portfolio.

In view of the above, Owner may find it better to split the work into various packages keeping in view the nature of work and/or availability of contractors (e.g. Civil, Mechanical, Electrical, Supply, Installation etc.). As a result, Owner may appoint a separate agency for the execution of each package.

In the above contracting mode, Owner supervise the work of each contractor. Further, Owner also assumes responsibility for coordination and interfacing between different contractors. Under Package Contract, each package is executed separately as per the scope under individual packages and communication between various contractors is through the Owner.

C) EPCM Contracts:

EPCM means Engineering, Procurement and Construction Management.

This is not a third type rather it a modification of other types to remove its disadvantages. Multiple Package Contracts offer advantages of overall lower cost. This is because Owner is awarding each package directly to an entity who is most competitive for the given scope under individual package. However, coordination between so many agencies and resolving interfacing issues is a major problem in this model.

EPCM is a hybrid model and could help the Owner to take the benefits of Multiple Package Contracts plus the convenience of resolve interfacing issues. Under EPCM Model, Owner appoint EPCM Contractor in addition to various Package Contractors and place him in between Owner and Packages Contractors

EPCM Contractor work as agent of the Owner; complete the design; support the Owner in procurement of Project Plant and Equipment and manage the Construction Services. Construction Contractor work under the supervision of EPCM Contractor. EPCM Contractor responsible for interface management and advise. Owner Responsible for all technical and commercial matters associated with the Project  

EPCM Contracts are most suitable for smooth execution of project when;

i) Owner does not have enough experience for execution of similar projects
ii) Owner is not very skilled in monitoring the contractors
iii) Owner lacks expertise in resolving interfaces between various agencies
iv) Owner intend the cost the construction cost and ready to take reasonable risk

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Difference among EPCM, Multiple Packages and EPC Contracts

In the last post we covered Contract Classification based on the Nature of Transactions. We discussed that based on the kind of transaction, contracts are classified as Supply, Services and Works Contracts. Please click here to re-read last posts: http://www.rkstrainings.com/difference-among-supply-service-and-works-contract-2/

In the business world, every business entity is dependent on other firms for procurement of goods, services or works. Organizations undertake such procurement activities through mutually agreed Contract Agreements. However, the contracting philosophy of each organization may be different. One organization may prefer to appoint a single agency for entire scope of work and the other one may choose to break the scope into number of work packages. In the second situation, organization prefers to break the scope based on the nature of work and availability of good number of contractor for that work. As a result, they wish to appoint a separate contractor for each package

So depending upon whether Owner intends to execute the work by integrating or breaking the scope, contracts are classified as followings;

A) EPC Contracts
B) Multiple Packages Contracts
C) EPCM Contracts

In this post, we shall cover EPC Contracts. Package and EPCM Contracts shall be covered in next post

Contract Classification based on Method of Project Delivery

Let us try to understand the concept of Level of Integration with a common example. Suppose Ramesh want to construct his dream house on 500 SQM plot. He may prefer to execute the work by awarding a single integrated contract for the entire scope of work. In this situation there will be only one contractor (called EPC Contractor) who will be responsible for design, supply of all materials and provisions of all services that are necessary for the construction of house including foundation, structural works, finishing and MEP works etc.

Alternately, Ramesh may divide the works into 3-4 packages based on the nature of work e.g. Civil Works (Foundation and Structural Works), MEP Works and Finishing Works and could award each package to three separate contractors. Further, there is a third approach which is in between and a mixture of the two. Here, Ramesh may follow multiple package approach and additionally could also appoint an experienced consultant, in between, to undertake engineering services, for supporting the owner in procurement and to act as Owner’s advisor to manage the construction contractors. This consultant is called EPCM (Engineering, Procurement and Construction Management) Contractor and type of contract is called EPCM Contracts

Now let us discuss each type in further details

A) EPC Contract

EPC Contracts are the contracts entered between the parties for turnkey execution of works. The party who execute the work on turnkey basis is called EPC Contractor and party who is the owner of the work is called Owner or Employer. Under EPC Contractor, owner intends to award the entire scope of the work to one contractor and such contractor is a single point responsibility for design, construction and completion of the project in all respect so that owner could operate the facility just by the turn of a key.

As the entire work is being done by a single agency, EPC contracts are fully integrated contracts. Mostly these contracts are executed through two parties approach, i.e. Owner and Contractor so as to reduce the interfacing and associated risks. Under EPC contracts, Owner does not interfere much and only concerned with on-time completion of work and within agreed Contract Price. Under this type of Contractual arrangements, Contractor takes all risks and remain fully responsible and accountable to meet the critical project parameters such as time, cost and quality. In-fact, Contractor is responsible to meet the outlined or performance specification of Owner rather than detailed specifications.

As all risks under EPC Contracts are assumed by the EPC Contactor, such contracts result into higher cost for the owner. However, such contracts de-risk the owner from the contractual claims of additional cost and time. This is because there are no interfacing issues and no opportunity for the EPC Contractor to blame the Owner for claiming additional cost or time. Therefore, in this type of contractual arrangements, Owner is certain about the cost and time for completion of the project.

Difference among Supply, Service and Works Contract (2)

Hi Readers In the last post we discussed briefly the types of contracts under the broad category called Nature of Transaction. We discussed that based on the Nature of Transactions; contracts are classified as Supply, Service and Works Contracts. Also we further explained supply contracts and their key characteristics.  To read the post again, please click: http://www.rkstrainings.com/difference-among-supply-services-works-contracts-1/

In this post, we are going to discuss other two types: Service Contracts and Works Contracts. Eventually two posts together will bring out the underlying differences among Supply, Service and Works Contracts

Service Contracts

These are the contracts for PROVISION and RECEIPT of SERVICES between the parties. The party who provides the SERVICES is known as Service Provider. Party who receive the services is known as Service Receiver.

The Finance Bill provides the Definition of “Service” under Service Tax Act as follows: Service means any activity carried out by one person for another for consideration but does not includes: a) an activities which constitute merely: 1) transfer of title in GOODS or IMMOVEABLE PROPERTY by way of sale, gift or in any other manner; or 2) a transaction in money or actionable claims; b) a provision of service by an employee to the employer in the course of or in relation to his employment; c) a fee taken by any court or tribunal established under any law for the time being in force

Now the Service Tax Act has been replaced with GST Act

Under service contacts, service provider does something of some value, benefit or advantages to service received for money consideration and transaction between them is known as Provision of Services. The key differentiator is that in Service Contracts nothing moves physical from one party to another and there is no transfer of property between the parties.

Services are intangible products rather than physical goods. Services include all such actions, deeds and effort performed by one person for another to satisfy a need/desire (of another person) in the course of business or commerce. Service Contracts involves only the exchange of services between the parties without any involvement of sale or purchase of goods between them

Examples of Service Contracts

We deal with Service Contracts daily sometime consciously or sometime even not know that we are doing so. Few examples of Service Contracts are as follows;

  • Receiving transport facility such as cab, bus, train and flight for moving one place from another; requesting someone for installation of AC, rectification of electrical fault or cleaning our house are typical examples of a service contracts in our personal life.
  • In our work life, we engage design consultants, manpower consultants, legal advisors, Installation Contractors and Transport Agencies as required. These are good examples of service contracts in work life
  • All above examples are pure service contracts which do not involve physical possession or transfer of anything between the parties

Works Contract

Works contracts are nothing but integrated contracts of supply plus services. These are called composite contracts wherein scope involves the supply of goods and provision of services. This is not a third category, but, a combination of supply and services. In certain situation, it may not be possible to divide the scope of work into goods and services. Moreover, sometime one does not intend to break the scope into supply and services. So Works Contract seems ideal type for such situation

Under Work Contracts, the contractor supplies the materials and also render the services to the Owner for money consideration and transaction between the parties is knows as Execution/Performance of Work

Examples of Works Contracts:

We deal with Works Contracts daily sometime consciously or sometime even not know that we are doing so. Few examples of Works Contracts are as follows;

  • Repair of a computer along with supply of damaged parts; repair of house-hold electric fault including supply of damaged item; painting the house with supply of required paint are typical examples of Works Contract in personal life.
  • Design, supply & installation of a Power Plant on Turnkey Basis and Construction of a Residential Building with supply of all materials and permanent plant are typical examples of Works Contract in our work life

Difference among Supply, Services & Works Contracts (1)

Hi Friends,

In the previous posts, we have covered Basic Concepts and Definition of a Contract. Now the next step in the journey is discuss different kind of contracts and rationale behind their classification.

Contracts could be classified into various types based on the followings categories;

In this post, we will discuss various types of contracts based on: Nature of Transaction. Contracts types based on other categories shall be covered in the subsequent posts. After reading all blogs under this chapter, we will come to know the characteristics and application of each kind. Accordingly, we would be able to appreciate their distinguishing features

A) Contract Classification based on Nature of Transaction

There exists thousands of firms, companies or commercial organization across the world who are doing business locally, regionally or globally. Can we think off what exactly they are doing? You know that all business entities either sells goods or provides services or both. This is true irrespective of whether a firm is small, medium, large or local, national, multinational

At macro level, nothing exists beyond goods or services, a business entity may be doing or can think of doing. So, all commercial entities around the globe undertake transaction of selling goods and/or providing services to their customers. And they are earning profits out of such transactions.

So, depending upon whether the transaction is a Sale or Service or a combination of both, contracts are classified as Supply; Services or Works, as further explained below

1 Supply Contracts

There are the contracts for SALE and PURCHASE of GOODS between the parties. The party who sells the GOODS is known as Seller or Supplier and party who buy/purchase the goods is called buyer or purchaser.

[In the above, ‘GOODS’ means “moveable property” and as defined under the Sale of Goods Act. Sale of immoveable property such as residential house and others is outside the purview of this blog. As per Section 2.7 of Sale of Goods Act, ‘Goods’ means every kind of moveable property other than the actionable claims and money and includes stock and shares, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale]

[In the above, ‘GOODS’ means “moveable property” and as defined under the Sale of Goods Act. Sale of immoveable property such as residential house and others is outside the purview of this blog. As per Section 2.7 of Sale of Goods Act, ‘Goods’ means every kind of moveable property other than the actionable claims and money and includes stock and shares, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale]

Under supply contracts, seller transfers the property in the GOODS to buyer for money consideration and transaction between the parties is known as SALE (or Purchase) of GOODS.

Important ingredients of Supply Contracts are as follows:

  • Sale of moveable property (called ‘Goods’)
  • Transfer of ownership of ‘goods’ from Seller to buyer
  • Delivery of goods (or transfer of possession) from seller to buyer
  • Payment of money consideration from buyer to seller

The GOODS as described above may be readily available with the seller or alternately, seller need to procure or manufacture it before supply. Accordingly, Seller transfer the possession of goods to buyer if goods already existing or Seller agree to transfer the possession of goods at later mutually agreed date (if goods need to be procured or manufactured) as per the terms of Contract of Sale of Goods between the parties. So under supply contracts there is a physical movement of goods from one party to another. And this is key distinguishing features of Supply Contracts when compared with Service Contracts

Examples of Supply Contracts:

Supply Contracts are pure sale contracts without any element of service. We deal with supply contracts daily sometime consciously or sometime even not knowing that we are doing so. Few examples of supply contracts are as follows;

i) Procurement of general provision items from local retail shops; Purchase of furniture, mobiles phone, garments, TV & AC from a retail stores are typical example of supply contracts in personal life

ii) Procurement of raw materials, components, finished product or a complete package/system from our vendors by the organization byers are typical example of supply contract in our work life.

Please click on the link below to read and accept disclaimer statements:

Sale of Goods Act – Law Governing Supply Contracts

In the last post we discussed Indian Contract Act, a statue applicable to the contractual relationships between the parties. Please click on the link below to read the post again

http://www.rkstrainings.com/indian-contract-act-law-governing-contracts/

In this post we are going to discuss Sale of Goods Act, a specific law related to sale/purchase of good

Sale of Goods Act

Sale of Goods Act, 1930 is the another most important and relevant Business Law for Contracts and Procurement. This law was enacted in 1930 and known as Sale of Goods Act, 1930. The statue came into force on 1st July 1930 and was drafted based on English Sale of Goods Act, 1893

The Act defines set of rules with regards to Sale of Goods. The Statue deals with transaction of sale/purchase of moveable goods between buyer and seller. The term “Goods” is clearly defined under the law and hence statue apply to the things covered in the definition. This act provides the norms with regards to: Formation, Performance and Suit for Breach with regards to the Contract of Sale of Goods between the buyer and seller. It also provides stipulations regarding the rights of buyer and un-paid seller

Sale of Goods Transaction

Chapter VII of Indian Contract Act, 1872 also lay down certain provisions in relation to Sale of Movable Goods. However, subsequently, after few decades, environment of business & trade undergone substantial changes. Hence new relationships developed between business entities. So the provision of Chapter VII of Indian Contract Act appeared to be inadequate to address issues concerning mercantile transaction

Accordingly, need was felt to enact a new law that exclusively set forth the specific provisions in relation to sale/purchase dealings of modern business relationships/methods. However, general provision of Indian Contract Act will continue to apply to newly enacted Sale of Goods Act

Sale of Goods constitutes the majority share of all the business transaction undertaken across the globe. So a thorough understanding of this act is important to fully appreciate the subject

Relationship of Sale of Goods Act with Indian Contract Act

Indian Contract Act and Sale of Goods Acts are: related, interdependent & complementary. They are not totally independent statues. This is clear from the followings provisions of Sale of Goods Act 1930

  • Chapter 1, Section 2 – Definitions, Serial No (15) of Sale of Goods Act, 1930 says that the expression used but not defined in this act and defined in Indian Contract Act, 1872 have the meaning assigned to them in that act
  • Section 3 of Sale of Goods Act, 1930 titled Application of Provision of Act 9 of 1872 stated that all such provisions of Indian Contract Act, 1872, if not inconsistent with express provisions of Sale of Goods Act, shall continue to apply to the Contract for Sale of Goods
  • Sale of Goods Act uses terms such as Contract of Sale of Goods or Agreement to Sell, Offer, Acceptance, void & voidable contracts. The true meaning of such terms has been defined in Indian Contract Act, 1872
  • Sale of Goods Act refers to the Indian Contract Act at number of places. So, this act is a specialized branch of Indian Contact Act rather than a distinct act

Indian Contract and Sale of Goods Act not mutually exclusive

From the above, we can say that two acts are not mutually exclusive. Actually they do consist of common term and overlapping provisions. Hence both Acts must be read together to draw a full understanding on the subject. Sale of Goods Act, 1930 is subsequently step to provide specific provisions in relations to Sale of Goods while keeping the fundamental & general provision of Indian Contract Act, 1872 intact and applicable thereto

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Disclaimer Statements: http://www.rkstrainings.com/disclaimer-statements/

Significance of MOU and its most suitable use

Dear Readers,

In the last post we discussed what MOU is and how it is different from a contract. Please click on the link below to read it again

http://www.rkstrainings.com/2022/01/31/difference-between-mou-and-contract/

In this post, I wish to explain the significance of MOU and its most appropriate usage. Accordingly, we will realize its relevance for commercial and non-commercial agreements entered between stakeholders. Here, we shall cover the followings topics;

A) What is most suitable use of MOU
B) What is significance of MOU
C) MOU a first step towards contract formation

A) What is most suitable usage of MOU

Both, MOU and Contracts, set out the promises made by parties to meet certain objectives. Also, by signing such documents, parties make commitment to keep such promises. The only differentiator is whether the parties intends to be legally bound or not. In the event, parties are willing to create legal relationship, the document is called a Contract, otherwise, it is a just a MOU even if we name it otherwise. 

In view of the above, MOU is perfect document to form related parties’ agreements. Whereas, contract is a right document for non-related parties’ transactions. Accordingly, MOU seems a perfect fit for the following types of agreements and relationships

  1. Inter-departmental agreements of big corporates
  2. Agreements between regional offices of large organizations or between different entities of a diversified Business Group
  3. Agreements between state governments or state-central governments
  4. Cooperation agreements between different countries through their governments or government entities as part of diplomatic relationships
  5. Agreements between different ministries or between a ministry & associated PSU (e.g. between MoP and Power Generation Entity)
  6. Community development agreements to meet common objectives for mutual benefits where there is no intention of profit
  7. Collaboration agreements to undertake social, moral or public cause as a volunteer

In the above cited example, parties do not want to drag each other to court for breach of promises, rather they wish to exist freely without any legal complication. Article dated 02-03-2018 published in The Time of India – “State signs MOU with Tata Trusts for Comprehensive cancer care network” is good example to realize right usage and significance of MOU. https://www.tatatrusts.org/article/inside/government-of-telangana-tata-trusts-sign-mou-to-provide-state-wide-cancer-care

B) What is significance of MOU

Importance of MOU is evident from the following points;

  • Though MOU does not bind the parties legally, but, it clearly outlines the understanding between them by putting in record the broad terms agreed. So, by signing MOU, parties bind each other with respect to agreed terms so that they discharge their respective duties smoothly
  • MOU being a formal document imparts full clarity about the requirements & responsibilities of the parties. It lay down the action to be taken by each one to achieve the common goal. Hence, it binds the parties morally and professionally. Also it makes the parties accountable to each other with respect to agreed terms
  • In view of the above and because of signed MOU in place, a party simply cannot back out from its commitments without losing its face value, respect and reputation. This demonstrate the significance of MOU

C) MOU first step towards contract formation

MOU is generally a first steps towards contract formation. It also paves the way to enter into a legally binding contract at later stage. Please see below few situations where commercial entities prefer to initiate the relationship through MOU before signing a formal contract;

  1. Emerging business scenarios where rules of the game are not settled
  2. New experiments/first time experiences where parties want to test the strength of their relationship through a non-binding MOU before entering into a formal contract. This is additional step to limit the risk exposure
  3. Business relationships where parties wish to enter into relationship initially through MOU to see how it work before getting into a legally binding
  4. Situations where parties first sign MOU to record broad level understanding. This could be followed by detailed formal agreement at later stage. Signed MOU will them become a base for drafting contract. And MOU become a reference document and facilitates the review, negotiations and finalization of the contract

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Disclaimer Statements: http://www.rkstrainings.com/disclaimer-statements/

Difference between MOU and Contract

Dear Readers,

MOU is a common term and we deal with it almost daily in our work life. Contracts and procurement professional regularly draft new MOU’s to records the mutual promises of parties. Also, they keep on referring/interpreting existing MOU to administer it or to know the duties of parties. So what is the relevance of this term with respect to the agreements made by the parties? In this blog, I shall try to explain meaning & significance of document and its relationship with Agreement and Contact

In this post we are going to discuss briefly the followings topics;

  1. What is a Memorandum of Understanding
  2. Difference between Memorandum of Understanding and Contract
  3. Relationship between Memorandum of Understanding and Agreement

1) What is a Memorandum of Understanding

The word memorandum means: a written message or a written note or a written report prepared for future use by parties or intended recipients. The term understanding means: agreement or mutual consent or in depth knowledge of a subject matter. Understanding is said to be reached when both parties agree something in the same sense (meeting of mind) and have full clarity of their own and each other’s promises

From the above, we can define Memorandum of Understanding as a written document describing an understanding and/or agreement between two or more parties. Parties signing the MOU assures each other to act as per agreed terms but do not intend to be legally bound for such terms. So, MOU expresses the promises made by the parties to achieve a common goal but such promises are not enforceable by the Law. Hence, MOU seems to be a more formal alternative to gentlemen’s agreement, but, lacks the binding power of a contract

If you wish to read what is a Contract and/or Agreement, please click on below link

http://www.rkstrainings.com/what-is-a-contract/

http://www.rkstrainings.com/agreement-meaning-and-definition/

2) Difference between MOU and Contract

Above points demonstrate how MOU is different from a Contract

3) Difference between MOU and Agreement

There is no major difference between MOU and Agreement and both terms have almost similar meaning because;

  • Both documents emerge from the promises made by parties to fulfil a need or to have certain benefits or common goal
  • MOU and Agreement reflect the intentions or understanding between the parties
  • Both Terms differ from Contract in term of enforceability by law
  • Parties signing MOU/Agreement are responsible for each other for fulfilling their promises but without legal binding

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Disclaimer Statements: http://www.rkstrainings.com/disclaimer-statements/

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Difference b/w Contract Administration and Management

Dear Readers,

In the last post we discussed Contract Life Cycle and its 4 stages. Please click on below link to read this post again

http://www.rkstrainings.com/contract-life-cycle-and-its-various-stages/

In this post, we are going to discuss the meaning and definition of other key terms related to Contracts i.e. Contract Formation, Administration and Management. Contract life cycle explains the activities under Contract Formation and Administration.  This post will clearly bring out the difference between Contract Administration and Management

The above discussion will eventually give a clear overview of Contract Management Process

Difference between Contract Administration and Management

A) Contract Formation

This process starts after receipt of user requirements and ends when Contract is signed with selected vendor. Contract formation process commence upon sending RFQ/Enquiries to identified bidders/agencies. It continues until offers received, technical and commercial evaluation completed, price agreed and LOA issued. The process ends when both parties sign the formal agreement

Let us understand Contract Formation Process in context to painting example

We know that objectives in term of ScopeTimeBudget, and Quality are set under stage 1 of Contract Life Cycle. So, the next step is to identify and appoint a painter who is a best fit for meeting such objectives. We achieve this by undertaking following steps

  1. Identify 2-3 potential painting agencies
  2. Send RFP/Enquiries (with requirements: Scope, Time, Quality) and invite offers from agencies identified
  3. Receiving offers and evaluating against set requirements
  4. Shortlist agency who meets most of requirements & offer better price
  5. Discuss, negotiate and agree upon the final price and payment terms
  6. Put all agreed terms on a piece of paper and sign the agreement

Contract Formation is a pre-award process because it covers all activities until Contract Award. Because it starts with PR and ends with PO (Contract Award), we also call it Purchase Requisition (PR) to Purchase Order (PO) Process

Contract Administration

Contract Administration is a process that involves all activities undertaken by Owner to ensure receipt of goods/services or completion of works as per the contract thereby meeting the intended contract objectives. This process commences upon Contract Award. It continues until goods/services received or work completed, payment made, claim settled and all contractual obligations met by both parties. This Process ends when the contract is formally closed

In context to painting example, here painter carryout the painting work as per Contract and Raj makes due payment to painter. Once both parties have completed their respective obligations to the satisfaction of each other, they formally close the Contract and come out of the binding relationship

Contract Administration is a post-award process because it covers all activities after contract award. It is also called PO to Closeout Process because it starts with PO (Contract Award) & ends with Contract Closeout

The process focuses on getting goods/services/works of requisite quality, on time and within Contract Price

Contract Management

Contract Management is a process of entering into a Contract with vendor/contractor for meeting certain objectives and undertaking Contract Administration for achieving such objectives through performance by each party as per Contract. This is broader term which includes Contract Formation, Administration and Closure

From the above, we can say that:

1) Contract Management = Contract Formation + Contract Administration
2) Contract Management = PR to PO Process + PO to Closeout Process

The above explanation brings out the difference between Contract Administration and Management. In other words, Contract Management is a larger process and Contract Administration is one part of it

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Contract Life Cycle and its various stages

Dear Readers,

In previous posts we discussed the meaning and definition of Contract, Agreement and Consideration. Subsequent posts briefly touched Contracts Laws and Principles. To read last posts again, please click on link below;

http://www.rkstrainings.com/contract-principles-equity-justice-and-reasonableness/

In this post, let us discuss Contract Life Cycle and its 4 distinct stages as mentioned below

A) Stage 1 of Contract Life Cycle – Identifying Contract Objectives

This is first stage of Contract Life Cycle. This deals with WHY to enter into a contract and WHAT is the purpose of signing a binding agreement. This stage addresses questions such as: what a person want or desire to have. Accordingly, this want or need, when worded in the form of a statement, becomes the purpose or goal to achieve. Subsequently, the purpose emerges into clearly defined and measurable requirements called objectives. Accordingly, Contract Life Cycle starts when a person has certain need or desire and he wishes to fulfil the same

Let us illustrate the above with a simple example

Let us assume Raj wants to see his house painted before Diwali and Diwali falls 90 days from now. Therefore, Raj’s need or purpose is to get the house painted within next 90 days. In order to achieve the purpose, Raj needs to find out the followings

  1. Detailed Scope for Painting Work (work items / quantities)
  2. Paint specifications, manufacturer & color and application requirements
  3. Amount of money he want to spend
  4. Time available to plan and execute the Work

From the above, we see that the purpose of having the house painted gets translated into followings “specific requirements”

  1. Scope of work (SCOPE)
  2. Color/manufacturer/specification (QUALITY)
  3. Budget and Funds Allocation (COST)
  4. Time for completion for entire Works (TIME)

Above requirements in term of Scope, Cost, Time & Quality are called Contract Objectives. These objectives shall become the basis of forming a contract with the eventual painter

Stage 2 of Contract Life Cycle – Contract Formation

It is second stage of a Contract Life Cycle. It starts upon finalization of contract objectives. Here Raj needs to identify a person/painter who can meet the above mentioned contract objectives. Subsequently, he will sign a legally binding agreement with selected agency

Above stage which ends with signing of agreement between the parties is called Contract Formation. Such signed contract shall become the basis of work execution. Here both parties commit to execute the work as per contract

It is also called planning stage because here;

  1. Works execution planned
  2. Requirements and responsibilities of parties frozen
  3. Price and payment terms agreed and
  4. Time period for work execution fixed

Stage 3- Contract Administration

The word administration means to executefollow upenforce or implement what has been stated in a policy or law or a rule book. This is third stage of Contract Life Cycle and is known as work execution stage. Work is actually performed and delivered here. During this stage, parties execute the work and discharge their responsibilities as per contract

For painting example, painter execute the work in accordance with agreed technical requirements and timelines. Accordingly, Raj see that, job has been performed as per the contract. Also, Raj make due payment as agreed. Here owner receives the painting services and painter receives the agreed money. Hence, parties receive what they wanted & intended contract objectives are met

Stage 4 – Contract Closure

This is final stage of the Contract Life Cycle. Here parties intend to come out of the binding relationship. This is because, there is no need to continue the contractual relationships anymore when

  • Owner gets the painting services to his full satisfaction and
  • Painter receive due payment
  • Intended contract objectives met for both parties

Once both parties have discharged their responsibilities under the contract, they need to formally close the contract. This is necessary so that parties are free from any further obligation towards each other. The cycle ends here upon formal contract closure

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Next Post – Contract Administration versus Management

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Contract Principles – Equity, Justice and Reasonableness

Dear Readers

In the earlier posts we covered two important acts related to Contracts and Procurements i.e. Indian Contract Act and Sale of Goods Act. To read this post again, please click the link below:

http://www.rkstrainings.com/sale-of-goods-act-law-governing-supply-contracts/

In this post we are going to discuss Contract Principles. These principles not only are the basis of enacting such laws, but, courts also apply them while deciding a case and arriving at the fair judgement

Contract Principles

Contracts and procurements transactions between the parties are governed by Indian Contract Act and Sale of Goods Act. Therefore, we should draft and administer a Contract in accordance with certain fundamental principle which applies to other laws. Any law whether civil or criminal is based on the principle of natural justice and equity. Accordingly, we need to give due importance to the following principles both during contract formation and administration stage

A) Equity

Equity means equal or even or fair. This essentially means each party of a contract have same status and no one is bigger or smaller. Accordingly, all parties should be treated equally, without any prejudice, bias or discrimination

A contract document is paramount with respect to rights and obligations of the parties. Hence, each party is liable to fulfil its respective obligations for the other one strictly as per the contract and no one deemed to be superior or inferior. All general duties (e.g. applicable laws; general defaults, indemnities and other) of a party towards other one and consequences for breach shall also apply on reciprocal basis

B) Justice

Justice means fair treatment for all and punishment for wrong doing. In context to contractual relationship, it implies that the defaulting person, who has broken the promises, should not be able to escape freely. Also, the genuine person (victim), who has been complying with the agreement in good faith, should get compensation for loss or damages suffered. Defaulting person who has failed to fulfil its obligations under the contract shall face consequences under the law

A contract writer needs to give due importance to this principle while drafting an Agreement. Accordingly, he should incorporate remedial provision in the contract for all possible breach of promises. This is necessary to compensate the party who has sustained loss or damage due to other party. Similarly, during Contract Administration stage, both parties should attempt to resolve their disputes by applying the sense of right and wrong and fair play

C) Reasonableness

Reasonableness means what is actual, factual and true rather than assumptions, perceptions and feelings. It also signifies: logical, rational and sensible. This means that both parties need be genuine and should act based on facts and reasons. No one should be taking undue advantage of the situation or mis-using its dominating position

It signifies that no party should raise any demand or claim on other unless it has really incurred cost because of the reason of other party. Also, other party is liable to compensate the loss actual suffered and proved through documentary evidences. Both parties should act towards other with good conscience and mutual trust

Significance of Applying Contract Principles

Let us apply above principles during contract formation, interpretation and administration. This is necessary to avoid any dispute at later stage. The cost one may incur in contractual dispute could be multi-fold in comparison to the cost of applying such principles.

In the event a contract goes to litigation, court gives the justice based on above principles only. So, writing certain clauses and getting these accepted by other party may not hold well in the court, if such clauses violates above principles

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