7. Contracts Management .......................................................................................... 93-105
7.4 Tendering Procedure
The risks associated with the projects can become manifold if contractor selected for specific work is not competent technically, financially or managerially. So ensuring qualification of contractor is must.
Tendering procedure involves following:
• Pre-qualification of contractors
• Preparation of tender documents
• Mode of floatation of enquiry
• Receipt of tender
• Guidelines for evaluation of tenders
• Selection of contractor
7.4.1 Pre-qualification of Contractor
Notifications are issued ‘in press’, ‘at embassies’ etc with details of purchaser, project, tender submission date and instruction for applying for pre-qualification and its submission date. The pre-qualification document seeks information about financial statement, experience in specific work, and availability of resources like labour, plant, and technical aspects.
The data supplied by contractor is evaluated for short listing based on:
• Previous experience and contracts
• Past turnover and fund availability
• Necessary infrastructure, technical manpower and equipment
• Credibility and job performance
7.4.2 Preparation of Tender Documents
The purchaser prepares tender document in a detailed and clean manner as far as possible to define technical aspects and purchaser or contractor’s share of responsibility. Tender document should include
1. Letter of invitation to tender 2. Instruction to tenderer
3. General Conditions of Contract (GCC) 4. Technical specification
5. Special conditions of contract 6. Scope drawing
7. Bill of quantities
8. General information about site 9. Form of tender
General Conditions of Contract (GCC): There are standard contract documents to ensure that parties entering into contract are appropriately protected against risks. It is advisable for parties entering into contract to take one of these documents rather than making on their own. This is because it is more likely to be more neutral without any inclination. Inclination is possible towards the party which frames and drafts contract. Some of the clauses include the following things: definition of terms, contractor to inform himself fully, security for due performance, Mistakes in information, patents rights, liability for accidents and damage, limitation on contractors liability, variation in scope, delivery, manner of execution, etc
7.4.3 Receipt and Evaluation of Tenders
There may be a pre-bid conference to clarify various issues to the tenderer’s. Queries can be clarified through correspondence till due date for bidding. On due date bids may be opened in front of tenderer’s present. The late submitters are disqualified. The tenders are evaluated from technical, commercial, contractual and managerial angles. Clarifications may be sought from contractor. Normally the lowest bidder who is also technically and managerially acceptable is awarded the contract. Agreement is signed on stamped paper. The contractor, for an insurance against uncertainties in dealing, may require form of guarantee.
7.4.4 Selection of Contractor
It should be noted that price should not be the only criteria for selection of contract/bid. A contract presumes that parties entering into a contact are competent and normal. The general condition for contracts (GCC) also lists provisions to protect against uncertainties arising during a normal course of work. The contactor selected for a specific work should be competent technically, financially or managerially else the risks may multiply manifold. Therefore a well laid out procedure must be adopted for pre-qualification of contactor. Certain factors such as financial capacity, technical infrastructure available and past experience have to be kept in mind before selection of the contractor.
Objectives for Rating the Supplier
The essence of purchasing is the rational selection of the supplier. Besides identifying potential and reliable vendors, maintaining updated records on their performance is vital for purchasing operations. The consequences of choosing the wrong type of suppliers are serious both financially and operationally. A supplier’s default may sometimes be more serious than a
buyer’s mistakes. It is necessary to educate the supplier with a view to improve his performance.
It is desirable to compare one vendor’s performance with other to improve the overall reliability.
Just as buyer tries to rate the supplier, seller also rates the buyer with regard to his authority, technical knowledge, professionalism, and commitment to promise. Purchase department has a sole responsibility for the choice of supplier and placing the order. Hence it is necessary to access the vendor’s performance on an objective basis, based on price, delivery, quality and service aspects, in order to fulfill the objective of getting a quality product at minimum costs.
Unless the vendor sends material of proper quality, all the previous efforts and time spent by the buyer become useless and delays while the replacement and settlement causes loss. The technical, managerial, financial, personnel, and service aspects are must for making vendor’s rating.
The following things should be kept in mind for vendor rating:
• Vendor’s reputation as a reliable and financial strong company.
• Suppliers proven integrity by past performance.
• Supplier’s commitment for warranty, guarantee and quality.
• Supplier’s cost reduction programmes by using scientific method.
• Labour – management relationship in the seller’s plant.
• Adequate design and development wing for technological challenges.
• Supplier’s capability for analytical engineering, installation and commission engineering.
• Capacity to train buyer’s engineer.
• Ability to meet challenging and new task by technical leadership.
• Research efforts leading to general advances.
• Quality to the after- sales- service and spare parts availability.
• Dependability and reasonable price to other sales-service.
• Ability to provide maintenance contract needs of the buyer.
• Assurance and conformance of minimum delivery time schedules.
• Reserve production facilities for emergency requirements.
• Supplier diverting to other customer in terms intended for one.
• Vendor not becoming insolvent after taking money.
• Selling a range of full time of related items.
• Credit availability and financial arrangement of seller.
• Local contracts and their technical competence to help.
• Supplier’s reputation enhancing product sales of buying firm.
• Vendor’s capacity to provide selling aids, drawings etc.
• Managerial effectiveness of suppliers organization ownership pattern, and professionalisation of personnel.
• Status and operational reliability of seller’s plants.
• Financial status of supplier, certified by bankers.
• Record of labour disputes at seller’s plant and their impact on buyer’s requirement.
Vendor Difficulties
The large range, variety, sizes and number due to technological upgradation, forces the vendors to be highly selective in stocking the spares leading to customer dissatisfaction.
Communication and transportation bottleneck with customers located in far-flung areas is a major issue. Officers often blame the suppliers for all troubles without following the maintenance schedule of equipment and operating them according to service manuals.
7.4.5 Seller’s Frustrations
The buyer does not have sufficient authority to exercise sound judgment in taking decision creating embarrassing situations. The delay in account settlement is one of the major deterrent for a seller. Unwarranted and wavering policies are sometimes adopted by the buyer in rejecting goods, when not needed. Inordinate delays in buying decisions with continuous change in delivery orders leading to even abrupt cancellation of order without notice. The buyer does not adhere to recommended operating and maintenance manuals and communication on problems observed not reported immediately.
Vender Rating Index (VRI)
VRI given below can help in selecting of contractors. If there are several contractors their performance is rated according to:
• Quality
• Delivery
• Price
• Service
VRI = VRI (Quality) * A + VRI (Delivery) * B + VRI (Price) * C
Where A, B, C are the weights given to 3 venders rating index based on quality, delivery and price by material manager.
• VRI (Quality) = Number Rejected/Number Received
• VRI (Delivery) = Number delivered on schedule/Number of delivery
• VRI (Price) = Lowest price bid/Price bid by vender