Project procuremenet contract in ethiopia

Project Procurement and contract
Ethiopian Context By Guta Mengesha
MBA,MA in project Finance
Email.gutamdg@yahoo.com
Jimma, Ethiopia
1

PROJECT CONTRACT ADMINSTRATION
Content
• Procurement contract administration
• Meaning of contract
• Contract Management
• Element of valid contract
• Classification of contract
• Procurement contract
• Project procurement contract
• Procurement contract Ethiopian context
• Challenge in procurement contract
compiled by DGM 2

Procurement contract administration
Definition
Is management of all actions after the award of a contract to
successful bidder(s).
Example:
Timely delivery
Acceptance
Payment
Closing a contract
Resolving disputes
ETC
In public enterprise it involves those activities performed by
government and/or corporate business managers after contract
has been awarded to determine how well the government and
contractor performed to meet the requirement of contract.compiled by DGM 3

Factors influencing degree of complexity of contract administration
Nature of work(good and/or service, constriction work)
Type of contract(Project and operational)
Nature of relationship between buyer and supplier(arms-length, co-
operative)
General Contract Administration
A. Post award contract administration
• Setting up system for managing the contract
• Providing information to the contract management team
• Getting all key documents in place(Bond , guarantees, supplier insurance
certificate, safety policy, permit to work)
B. Ongoing contract management
• Document management –document issued received register
• Monitoring resource level and costs: cost plus or time basis
• Expediting: incentives for delivery ahead of schedule
compiled by DGM 4

C. Variation and change control:
• Dealing with request for change- reasons for changes to contract when;
 Specification proves to be inaccurate or incomplete
 New ideas surface
 The buyer or its customer changes its mind
 Statutory or certificate bodies require changes
D. Payment
• Before payment
Invoices is accurate
Supplier has satisfactorily completed the work or delivered the goods
.Making payment:
pay the supplier in accordance with the payment terms defined in the
contract
After payment
When payment has been made, it is necessary to up date payment schedule.
compiled by DGM 5

E. Administration at, and beyond contract completion
Two stages
Stage I:Delivery of the product or the end of the provision of the service the refer
to “completion”
Stage II: The end of the warranty period
F. Contract review/Close-out review
It consider;
i. Cost, quality, schedule and performance
ii. The risk involved-cause of schedule delay, budget overrun, quality problem
iii. The suppliers overall performance-learning from mistakes
iv. Organizational and operational effectiveness in implementation of contract
In summary: the review answers the following
a. What went wrong?
b. Why did it go wrong?
c. What was the impact on the contract?
d. What Remedial action is taken?
e. How might the problem be prevented in the future?
compiled by DGM 6

What is contract
• “A contract is an agreement whereby two or more persons as between themselves
create, vary or extinguish obligations of a proprietary nature”. Art. 1675 Civil Co.
• In the project or program context, contracts typically involve the exchange of money
in return for goods or services. Source: Ali Heydari 2018
• Before entering in to a contract a contracting party must study provisions of contract
and convince their ability to fulfill the conditions.
• A contract is an agreement between two or more people that is legally binding. A
contract can be verbaal or witten. Source: D. Vasudevan
Contract Management
Contract management includes negotiating the terms and conditions in contracts and
ensuring compliance with the terms and conditions, as well as documenting and
agreeing on any changes or amendments that may arise during its implementation or
execution.
Contract management is the process which ensures all parties to a contract fully meet
their obligations, in order to satisfy the operational objectives of the contract and the
strategic business goals of the customer. Source: BI-CAD,WTC,UN 2018
compiled by DGM 7

PROJECT CONTRACT
Elements of Valid contract(Art 1678- 1680
A. Competence :The parties to contract must be major( 18 years of age)
and legally competent to enter binding agreement.(sound mind, not
legally interdicted)
B. Offer: is a promise to carry out the term of proposed transaction, in an
exchange for the consideration. It can be oral, written, or even implied
from contract.
C. Acceptance: When you accept an offer ,it must be unconditional and
unequivocal acceptance to exact terms of the offer. If not it becomes a
counter offer.
D. Consideration: something of value that is bargained for and given in
exchange for the promise contained in the offer.
E. Certainty: its terms not vague that no one can determine what to
inforce
F. Legality: the agreement must be legal for the parties to agree about
G. Free consent: there must be free and genuine consent of parties to the
contract. It should not be obtained by misrepresentation, fraud,
coercion , due influence or mistake Art.3144 CC
H. Writing/Registration: oral contract is valid, but it must me in writing
and authenticated if required by law. In Ethiopia gift, mortgage, sale
lease, memorandum of association are few to mention. Art 1724
compiled by DGM 8

Categories of contract
Bases of classification
1) Degree of responsibility assumed by contractor for the cost performance
(Fixed price and cost –reimbursement contract)
2) Validity of contract (Valid, Void, Voidable, Enforceable void agreement and
illegal agreement)
3) Formation(Express, Implied, Quasi contract)
4) Performance (Executed, executory, Unilateral and bilateral contact)
compiled by DGM 9

Based on responsibility on contracting party
1. Fixed-Price Contract-
• a price is not subject to any adjustment on the basis of contractor
• This type of contract place maximum risk upon contractor and full
responsibility of costs and resulting profit or losses.
• It provide maximum incentive for contractor to control cost and
impose minimum administrative burden on contracting parties.
• Buyer knows the expense flow and risky project for seller
• It is suitable for commercial items, or service on the bases of definite
functional and detailed specification and when fair and reasonable
price is established when:-
compiled by DGM 10

Fixed-price Contracts
• Firm fixed price
• Fixed Price With Incentive
• Fixed Price With Economic Price Adjustment
• Fixed Price, Level of Effort
• Fixed Price With Price Redetermination
(a) Firm Fixed Price
The price is not subject to adjustment.
The buyer and seller agree to performance at the stated price,
and the risk of profit and loss passes solely to the supplier.
Can be obtained using
• Price quotation
• Supplier response to RFP
• Negotiation
Simplest and easiest contract
compiled by DGM 11

(b) Fixed Price With Incentive
For the fixed-price-with-incentive contract, a profit formula is established
based on target cost and target profit within an agreed-upon maximum
price.
The final price is established by adjusting the actual profit the supplier
receives based on the difference between the final cost agreed to by the
parties and the original target cost.
Typically, the amount saved by reducing the cost is shared by both parties.
This contract type provides an incentive to the supplier to hold down the
costs and thereby increase its profit.
(c) Fixed Price With Economic Price Adjustment
This type of contract allows pricing to be adjusted upward or downward
based on established contingencies such as escalating labor and material
rates.
Changes in actual costs beyond the supplier’s control or reasonable ability to
foresee, above or below the contract’s baseline, can lead to an adjustment
reflected in the supplier’s pricing.
Contract category………………….
12

(e) Fixed Price, Level of Effort
The fixed-price, level-of-effort method of pricing, although
uncommon, is usually used in situations when the precise
amount of labor or materials is unknown but the parties can
agree on a standard level of effort (such as the type and
quantity of tools to be used or the rated proficiency of the
employees) and a given price.
(d) Fixed Price With Price Redetermination
Used when parties cannot accurately predict labor or material
costs and quantities required
Base price is determined using “best guess” estimates
At a predetermined future time, buyer and supplier review
actual experience and adjust price.
Generally, the specific time for redetermination will be
included.
Contract category………….
13

2. Cost- Reimbursement contract:
Is type of contract provide for payment of allowable incurred cost, to
the extent prescribed in the contract. It is suitable for use when:-
uncertainty involved that do not permit cost to be estimated with
accuracy to use the above contract,-Contractor has adequate
accounting system to determine cost applicable to contract. Unit price
is known and total is not known. Example Brick plus cost
Cost-based Contracts
Cost Plus Fixed Fee
Cost plus incentive fee
• Cost Plus Award Fee
• Cost-sharing contract
• Cost plus fixed-fee contract
• Cost only
• Time and materials contract compiled by DGM 14

(a) Cost Plus Fixed Fee
The cost-plus-fixed-fee contract is a cost-reimbursement contract that
allows the supplier to recover actual costs plus a fee negotiated prior to
the contract’s inception.
The fee is considered fixed because it does not vary from the amount
of the cost, although further negotiation of the fee based on changed
conditions can be considered.
(b) Cost Plus Incentive Fee
The cost-plus-incentive-fee contract is another reimbursable contract
that, like the fixed-price-plus-incentive contract outlined previously,
provides an initially negotiated fee with a formula-based adjustment
that reflects the relationship of total allowable cost to total target cost.
15

(c) Cost Plus Award Fee
The cost-plus-award-fee contract provides additional incentive for the
supplier to produce excellent results by enabling the buyer to make a
financial award in addition to the cost and negotiated fee.
It is designed to provide the supplier with a financial incentive for excellent
performance.
(d) Cost Sharing
A cost-sharing contract is generally used in a partnering relationship where all
parties share the cost and the accruing benefits according to a negotiated
formula.
The costs are typically limited to a specific amount or an in-kind exchange
that is defined at the contract’s formation. In many ways, this type of contract
is similar to a joint venture, where all parties own a portion of the operation.
(e) Cost Only
Used primarily between universities and other nonprofit and research
institutions.
The cost-only contract, as its name implies, covers reimbursement only for
actual costs, without including a fee.
16

(3) Time and Materials Contracts
T&M contracts are used when there are no acceptable ways
to determine what a fair and reasonable price may be for a
particular project, such as a well-digging contract where the
exact depth of the water and the composition of the soil
may be unknown.
With this type of contract, the rates for labor and the
markup for materials are initially negotiated with a cap, or
not-to-exceed (NTE) amount, specified as a limit.
In most respects, T&M contracts are similar to cost-
reimbursable contracts.
17

4.Spot contracts – those purchases that are made on a
nonrecurring or limited basis
5.Short-term contracts – contract purchases that are routinely
made over a relatively limited time horizon
6.Long-term contracts – made on a continuing basis for a
specified or indefinite period (often ≥ 1 year)
7.Purchase Orders (POs)
The PO is the most common procurement document available
and is, in effect, a contract.
It is the easiest way to order purchased materials and services
and provides the most commonly required audit trail.
It can be used for recurring or repetitive purchases as well as
one-time purchases.
It also specify your requirements for the purchase, as well as
conveys your firm’s standard terms & conditions.
Contract Length
18

7. Requirements or Indefinite Delivery Contracts
Is used when the buyer wishes to lock in pricing or lead time in exchange for
a commitment to purchase all of the firm’s requirements (or at least some
described minimum and/or maximum amount) but specific quantities and
delivery dates are not yet known.
8. Definite Quantity Contracts
A definite quantity contract specifies the amount being purchased during a
given time frame but not the specific delivery dates.
This type of contract is also known as a take-or-pay contract because the
buying firm cannot cancel it & must pay for it at the end of the contractual
period even if it is not used.
Contract Essentials… Cont’d
19

Based on Validity
a. Valid contract: an agreement having all essential element of contract and enforced
by law
b. Avoidable contract: agreement which is enforced y law at the option of more
parties thereto, but not at the option of other or others. If element free consent is
missing in contract, the law confers right on the aggrieved party to reject or to
accept it
c. Void contract: is a contract which ceases to be enforced by law.
d. Unenforceable contract: a contract is good substance but because of same defects
can not be enforced by law
e. Illegal agreement: is forbidden by law, or such nature that , if permitted, would
defeat the provision of any law or is fraudulent.
Based on formation
A. Express contract: is type of contract created by signing a detailed written
agreement, containing all or most of the terms the parties have agreed
upon.(Purchase of home, New car, Marriage, Debt, sale and purchase of good birr
500 for credit contract)
B. Implied contract: is created with little or no formality. Yet as long as basic element
of contract exist it is valid. During dispute is more difficult to prove its terms than
terms of written contract.
C. Quasi Contract: is based on the principle that person shall not be allowed to enrich
him/her self at expense of another.
compiled by DGM 20

Based on performance
i. Executed contract: is one in which both parties have performed their
respective obligation
ii. Executory contract: is a contract which partially performed or wholly
unperformed
iii. Unilateral contract: only one party (one-sided) to the contract makes a
promise which may often be made to many people(to world) by means of
media. Example: Adde Walmale promise and announces using FM radio to pay
a reward to find her 5 year old son, thus she is obliged to pay the reward to any
one who find her son.
iv. Bilateral contract: is an agreement in which each party to a contract makes a
promise to other party .Is also called a contract of executory consideration.
Example if sale of home buyer promise to pay birr 750,000.00 in exchange a
seller to deliver title to the property.
Other terms: Standard terms and conditions which provide legal protection to
contracting party and usually found at reverse side of a purchase order(PO) are
called Boilerplate
Witness of at least three person from either contracting party
compiled by DGM 21

Project procurement contract
A type of contract such as for contraction or for manufacture and installation of
major pieces of custom-designed equipment are characterized by:
Unique “One-off’ circumstance
Having a defined start date and end date
Having a defined end result to be achieved
Involving a number of planned and interrelated activities
A defined time-phased and work-related budget
Focus on the earliest time to complete each activity in context of critical path, to
meet project scheduled completion date.
We call such type of contract “Project "contract
Example: Construction of building or bridge, manufacture, installation and delivery
of custom-designed equipment
Operational contract: Alternatively, in the case of many service contract and the
scheduled supply of production line components and materials, the contract
involves a repetition of the same activity.(Example-Office to be cleaned every night
or delivery of standard component against delivery schedule).compiled by DGM 22

Procurement contract in Ethiopia
Contract administration deals with the management of all actions once the contract is
awarded to successful bidders, it includes planning, I implementation, and control .It involves
activates of preparation pf tender document, tender announcement, provision of tender
document, provision of clarification, opening of tender, evaluation of tender, award of
contract, provision of information and close-out of contract.
Tender document is made up of four basic components:
A.Instruction to bidders(ITB) –it helps bidder how to complete forms allow comparing and
evaluation easy, but has no practical value after award of contract. Eligibility amd method of
participation of interested bidders
B. Special condition of contract(SCC)- define the arrangement in place for terms of
cooperation between contracting authority a nd contractor to be selected to implement a
contract.(Include contract, obligation of public body, payment, Obligation of suppliers snd
performance of contract)
Once the contractor has been selected, this become principal contractual text that regulate
the term of cooperation and is supported by four annexes:
It contains-----
o Stricture of contract, Contract scope ,Contract value, Project organization and
administration, Date of commencement and period of implementation, Condition and
procedure of payment & delivery, Penalties of delay, Settlement of dispute, Communication
between parties
compiled by DGM 23

C. General conditions of a contract(GCC)- define basic terms of cooperation with
contractor for implementation of contract in which changes should not be made to
its text.
Contain the following key clauses
Ownership-intellectual and property Administration and financial penalties
Obligation of contracting authority Branch of contract
Performance guarantee Insurance-indemnification
Subcontracting Termination by contracting authority
Confidentiality Termination by contractor
Code of ethics Force majeure
Conflict of interest Settlement of dispute
Protection of employees Payment
Amendment of contract Assignments
compiled by DGM 24

D. Term of reference(TOR)/Technical specification: This help procuring entity in guiding to
record its need and requirement and by other side help bidders understand the
environment and scope of project to propose the appropriate solutions. It contains:
E. Contractors Technical offer
F. Contractors financial offer
G. Technical specification: description of results or activities needed
for the contract or special requirement regarding quality,
performance ….
Background information Project location
Objective and expected result Duration of implementation
Project scope(TS) Special requirements(Staffing,
equipment)
Delivery times
compiled by DGM 25

Problems in the public procurement sector in Ethiopia include:
i. Challenges in procurement planning and implementing the plans;
ii. Lack of transparency in procurement process;
iii. Delay in procurement evaluation and contract award process;
iv. Lack of accountability;
v. Poor contract management;
vi. Inconsistency in using procurement standards;
vii. Poor data management and lack of access to procurement
information; and
viii. Poor coordination between and among procuring entities
compiled by DGM 26

Challenge in procurement contract
We could summarize the challenge as follows
1.Lack of clarity about scope and goals(No committing to each other)
Result: cause of claims and disputes
2.Legal/Contract team not involved early enough plan negotiation
Result: wrong forms of contract and extended lead time
3.Failure to engage stakeholders(People with interest in contract)
Result: Misaligned interest and future opposition.
4.Adversary negotiation and fighting for terms-(issue price and risk
which undermine trust)
Result: Competitive exposure and delayed revenue
5.Negotiation focus on wrong term and wrong risks-No focus on
likelihood of cause of failure rather on consequence)
Result: Loss of economic benefit, contract a weapon
compiled by DGM 27

Challenge in procurement contract
6.Lack of flexibility with today change. Insufficient focus on governance Result: Performance
management dominated by blame/fault
7.Poor handover form deal team to implement manage it(Contract filled a way and do things
without real reference to it
Result: commitment and obligation missed and misunderstood what party agreed
8.Difficult to use or understand (written by lowers in expectation of litigation)
Result: user see contract as irrelevant to business need
9.Limited use of technology(No good instrument for communication, manual process,
fragmented, no good report)
Result: Inefficient and loss of quality in performance and analysis
10.Poor post award process and governance
Result: repetitive issue error causing value loss
Source: International Association of contract and commercial Management
11.Win-loss case: when supplier(contract seller) fail in bid dealing
Result: quality issue, and use of inferior input to increase profit margin or to reduce cost.
12:Force majeure: Things beyond control if not well explained
Result: loss commitment to abide by term of contract
Source: Observation in Ethiopia contextcompiled by DGM 28

procurement contract
Reference
Ethiopian civil code
Federal public procurement directives 2009, and Dec 2015
E-procutment use and implementation by ministry of finance 2018
Scholarly article on project Contract management by D. Vasudevan
2018
Contract Management in procurerment Presented By: Nishant Rai,
Materials Management Division Central electronics Limited 2017
Training material on contract administration by Bi-CAD consulting PLC, world trade
organization and UN 2018
Standard Bidding Document (SBD) of Ethiopian Federal Government procurement
manual
Linkdin slide share presentations
Learning material on Tender and contract administration Saint Mary University 2010.
compiled by DGM 29

procurement contract
Thank you!!
compiled by DGM 30

Project procuremenet contract in ethiopia

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