Contracts Management in Projects

Unit 8

Unit 8

Types of Contracts for Works and Goods

Structure: 8.1 Introduction Objectives 8.2 Factors Influencing Types of Contracts 8.3 Lump Sum/All inclusive/Fixed Price Contracts (Works) 8.4 Item Rate/Unit Rate Contracts (Works and Goods) 8.5 Percentage Rate Contract (Works) 8.6 Cost Plus Fee Contracts (Works) 8.7 Supply and Erect/Install, Commission, and Test Contracts (combination of supply of Goods and Works contracts) 8.8 Design and Build Contracts (Works) 8.9 Turnkey Contracts (combination of supply of Goods and Works Contracts) 8.10 Management Contracts 8.11 Public Private Participation Contracts 8.12 Summary 8.13 Glossary 8.14 Terminal Question 8.15 Answers 8.16 Caselet

8.1 Introduction
In the previous unit you learned about production and supplies. We learnt that there are different processes in production as well as purchase. We also discussed the concept of Inward goods, IG accounting and binning. In this unit you will study various types of contracts along with each of their salient features. You will learn the situation where each of the contracts can be applicable along with their advantages and disadvantages. Objectives: After studying this unit, you should be able to: discuss the factors influencing the types of contracts. explain different types of contract. identify the advantages and disadvantages of various contracts.
Sikkim Manipal University Page No. 143

Contracts Management in Projects

Unit 8

8.2 Factors Influencing Types of Contracts

There are various types of contracts that are suitable for different situations. Contracts are required for both project developments as well as for purchase of goods. The type of contract that you choose can be suitable only for works or goods or both, depending on the requirement and on the complexity of the works and goods. The type of contract chosen will affect the subsequent steps of procurement. Some of the factors that enable you to select the type of contracts suitable for your works or goods are as follows: Nature and complexity of the works/equipment (example, building, highway, flyover, industrial plant and so on). The size and duration of the contract (example, primary health centre, primary school, major hospital, feeder roads, expressway, pumping unit supply and installation, urban water supply, and others). The degree of the definition of the works and the element of risk/uncertainty. The status of design of works or framing of specifications for goods and so on. (Preliminary or final). The technical capability for design, framing of specification, preparation of drawings, and supervision of works/installation of equipment. The financial resources available and/or budgetary constraints, if any. The previous experience in awarding of the type of contract and its management.

8.3 Lump Sum/All inclusive/Fixed Price Contracts (Works)

After knowing the factors influencing your choice to pick a suitable contract, let us learn more about different types of contracts. In this section, we will learn about Lump sum/all inclusive/fixed price contracts. This type of contact is typical used for small projects that can be executed in a small duration. You should use this type of contact for only works. Typical examples of lump sum contracts is culverts, small bridges, primary schools, health clinics, bus shelters, transmission towers, and so on.

Sikkim Manipal University

Page No. 144

Contracts Management in Projects

Unit 8

Features Let us look at the salient features for lump sum contracts: You find bidders who offer a fixed sum for execution and completion of the work, in accordance with the designs, drawings and specifications, within the stipulated time. Your work must be defined accurately, specifications should be complete, and the site conditions must be fully explained to avoid disputes. Quantities are not usually given for small works. However, for large works, the quantities of major items are indicated to enable rational bid. Payments schedule should be linked to the completion on stages of work and should be a percentage of the contract price for each of the stages. Modifications to the lump sum price should be appropriately incorporated in the contract to account for quantity variations and price adjustments. Conditions for adopting The lump sum/all inclusive/fixed price contracts are best suited for the following situations: You should use it for small works with short (less than a year) duration for completion. For example, buildings, schools, and so on. You should use it for works which are unlikely to change in quantity and specifications. You should use it where there are no unforeseen problems. For example, you buy a half constructed house and plan to complete it as you got it in a better price. After buying, you call for contract to complete the house. While work is in progress you come to know that there is a problem in the foundation and you cannot complete the project as per plan and have to spend more. Advantages and disadvantages Every contract has its advantages and disadvantages. Let us take a look at advantages of the lump sum/all inclusive/fixed prices contracts: As you are aware of the fixed price (variation and price adjustment being minimal), it is helpful for budget forecasting to be precise.

Sikkim Manipal University

Page No. 145

Contracts Management in Projects

Unit 8

You find it easy to administer the payment process, since payment is made on completion of each stage that involves minimal measurements. You require very less documentation, as there is practically no bill of quantities.

Let us now look at the disadvantages of lump sum/all inclusive/fixed prices contract: It is inflexible to design changes. You cannot do any major variations as it becomes difficult to manage. It is difficult to foresee potential future risks and changes. In such case the bidders may increase their prices to cover future risks which may result in paying more price than the original. Self Assessment Questions 1. In lump sum contracts the bidder offers a _______ sum for the execution of the works 2. Lump sum contracts are appropriate only for _______ Contracts. 3. In lump sum contracts, payment schedule is linked to completion of _____ of work. Payment is usually a _______ of the contract price. 4. Lump sum contracts are ______ for design changes.

8.4 Item Rate/Unit Rate Contracts (Works and Goods)

In the previous section you understood that lump sum/all inclusive/fixed price contracts are beneficial for small projects that do not have changes during the execution phase. Let us now learn about the item rate/unit rate contracts. This is the common form of contract for execution of simple, small/large value infrastructure works or for supply of goods (including equipment) for public sector across the world.

Sikkim Manipal University

Page No. 146

Contracts Management in Projects

Unit 8

Features Let us look at the salient features of item rate contracts: Bidders are allowed to quote unit rates1 for carrying out various items of work or required goods. Detailed measurements of all items of work executed by the contractor are recorded and payments are made to the contractor as per the quoted rates. In the case of goods, the bid price is the product of required quantities of items of supply with the respective unit rates. The unit rates are fixed for short duration contracts (usually less than one year) or adjusted for variations in the indexed price of inputs for longer duration contracts. Conditions for adopting Following are the situation where you can use item rate/unit rate: For supply of goods and works, in public-sector across the world. For works that are under moderate perceivable risk in sectors such as transportation, power, irrigation, water supply and sewerage, and so on. Advantages and disadvantages As mentioned earlier every contract has both advantages and disadvantages, you must be aware of them for optimum benefits. The advantages item rate/unit rate contracts are: It provides flexibility for the contracting parties in handling variations and extra items of work. For example, you give orders to buy ten units of computer for your new office. Later, you come to know that two units are required for your old office to replace existing system. It will be easy to buy them as item rate contract provides you the flexibility to do so. It provides regular process payments for the works completed or the supplies made, which gives a good income to the contractors/suppliers.

The unit rates are inclusive of all related inputs such as labour, materials, equipment usage and a proportion of overheads and profit.

Sikkim Manipal University

Page No. 147

Contracts Management in Projects

Unit 8

It provides reasonably accurate cost estimates of works. Thus, employer can expect only minor discrepancies between the estimate of cost and the lowest bid as well as between contract price and the final basic cost (without price adjustment).

Disadvantages Let us now look at the disadvantages of item rate contract: Involves bids containing unbalanced unit rates for some items of works. It also includes filing rates in initial stages where the details deign is not available, which create problems in comparison and evaluation of bids. Involves higher cost of documentation, compared to lump sum contract, in preparing the detailed bill of quantities. Involves higher supervision cost, compared to lump sum contract, when recording detailed measurements of work that are involved in various items of work.

Self Assessment Questions 5. Item rate contracts are appropriate for both ______ and _______ contracts. 6. Item rate contracts are _________ for design changes. 7. In item rate contracts ______ measurement of each item is recorded and payment made at the quoted rates.

8.5 Percentage Rate Contract (Works)

In the previous section, you learnt that item rate contract is used for supply of goods and works, in public-sector across the world. They are used for simple projects without many complications. The percentage rate contract is generally used for works contracts. You provide the bidders, all the items or materials required for the work. This type of contracts is best used for public sector organisations. Features You have to consider few important features before you choose this contract: Provides a detailed estimate of the quantity of work to be carried out along with the estimate rates to the bidders to quote their price.

Sikkim Manipal University

Page No. 148

Contracts Management in Projects

Unit 8

Enables bidders to quote the amount in percentage above or below or at Par for your estimation.

Conditions for adopting Let us see the suitability of percentage rate contracts; It is widely used in public sector. It is appropriate for small value contracts, where the items of work are few and belong to the same category. For example maintenance works leveling and storm water drainage, water supply and sewer lines, and so on. Advantages and disadvantages As you know that every contract has both advantage and disadvantage, lets us look at the advantages of percentage rate contracts: Simple to comprehend for the contractor and submit his bid. Decision on the lowest bid can be taken immediately as no detailed procedures are involved. Possibility of unbalanced bid submission is eliminated as the percentage of amount obtained above or below the estimate is applicable to all the items of works.

Let us now look at the disadvantages of percentage rate contracts: Two or more bidders may quote the same percentage making it difficult for you to take a decision. Quoting the same percentage rate above or below the estimate is irrational since the prices of inputs will not change over a period of time. Suppliers manipulate the items to obtain advantage of higher rates.

Self Assessment Questions 8. Percentage rate contracts are appropriate for small value ____ Contracts. 9. In percentage contracts, the bidder offers to execute the works at some percentage above or below the _________ rates.

8.6 Cost Plus Fee Contracts (Works)

In the previous section, you learnt that percentage rate contract is suitable for small value projects. Let us now discuss about the cost plus fee contract.
Sikkim Manipal University Page No. 149

Contracts Management in Projects

Unit 8

A cost-plus fee contract, also termed a Cost Reimbursement Contract, is a contract where you pay the contractor for all set expenses plus an additional payment as profit to him. This type of contract is also suitable for works. For example you buy 3 tons of bricks from a contactor who is outside your city. You pay him the manufacturing cost of bricks, transportation cost, labour cost for loading and unloading, labour cost for manufacturing plus an additional amount which is given as profit to him. Features As already told features are to be considered to pick the right type of contract for your project. You need to reimburse the bidders periodically for inputs such as labour, materials, equipment, spare parts, fuel, and so on, with a fee to cover his overheads, management and profit. The fee may be either: A fixed fee that is independent of the total measured costs, or A percentage of the measured costs, or A variable (incentive) fee, which increases if savings are materialised in an agreed estimate of the total contract payments or which reduces with cost overruns.

Conditions for adopting Now that we know the features of this contract, let us analyse where we can use this type of contracts: They are appropriate for open ended emergency situations such as structural collapse. For example, damage to buildings and bridges due to flood, earthquake, and other natural calamities. They are best suited for works with unquantifiable risks such as unknown ground conditions which cannot be foreseen before the project is started. They help to select a known contractor who is very reliable to complete highly remunerative projects such as hotels, casinos, and so on, where the design and aesthetics are complex and innovative. They are used in an innovative technical processing and manufacturing plants, which are not completely designed.

Sikkim Manipal University

Page No. 150

Contracts Management in Projects

Unit 8

Advantages and disadvantages Let us first look at the advantages of the cost plus contracts: Emergency works are mobilised and started almost immediately without finding bidders, calling for tenders, allotting tenders, which will consume lot of time. Payments are made for the actual expenditure incurred and hence can be used for the works that are poorly defined and involve high risks. Final cost may be less than a fixed price contract because contractors do not have to increase the price to cover their risk and give the actual price covered.

Let us now look at the disadvantages of the cost plus contracts: Works are awarded on sole source basis with negotiations and hence there is no competition. Quality of work may be affected as bidder will have less incentive to produce quality work or timely completion. Bidder who gets the contract may use higher value material to increase his incentives and not make it cost effective. Additional supervisory staff is required to monitor and verify the actual costs.

Self Assessment Questions 10. Cost plus fee contracts are appropriate for emergency works. (True/False) 11. In cost plus fee contracts works are awarded on sole source basis and hence there is no competition. (True/False) 12. In cost plus fee contracts, if the fee is fixed the contractor is likely to produce quality works and ensure their early completion. (True/False)

8.7 Supply and Erect/Install, Commission, and Test Contracts (combination of supply of Goods and Works contracts)
In the previous section, you learnt that the cost plus contract are suitable for emergency projects as they can be allotted to contractor in a short time. The supply and erect/install, commission, and test contracts are used when there are projects involving the erection and testing of the equipment. The

Sikkim Manipal University

Page No. 151

Contracts Management in Projects

Unit 8

contractors supply the required goods or equipments as well as set up the equipments and check out for installations. Features Let us look at the salient features of this contract: The supplied goods meet the specifications or are fabricated to the design required on a lump sum basis. Minor works are quoted lump sum based on the design of the supplier, but the major works are normally undertaken to the design of the employer on item rate basis. Commissioning and/or testing of the completed work/plant become a necessity before acceptance. Conditions for adopting This type of contract is used when supply of manufactured or prefabricated goods such as turbines, switch yards, transmission towers, and telecommunication equipments will include installation and commissioning. In such cases, the manufacturer will do the required installation and commissioning which is a minor part in the project rather than hiring a new contractor. Advantages and disadvantages Let us first take a quick look at the advantages of this contract: The contractor alone becomes responsible for the supply of the goods and execution. This avoids conflicts and delays in the event of noncompatibility. Managing the project is simpler, as you do not get involved in any stages or lengthy procedures. The disadvantage of this contract is that there is no competitive bidding from the contractor to procure equipments. He buys equipment from several sources on sole basis, which increases the direct cost.. Self Assessment Questions 13. The supplied goods should meet the specifications or fabricated to the design required on a percentage rate basis. (True/False)? 14. In supply and erect/install, commission and test contracts, the responsibility for successful completion is shared by many contractors and suppliers. (True/False)?
Sikkim Manipal University Page No. 152

Contracts Management in Projects

Unit 8

Activity 1: You are an officer at the Public works department. The new township outside Mumbai requires maintenance for water and sewage. Which kind of contract will you opt for and why? Hint: Refer section 8.5

8.8 Design and Build Contracts (Works)

In the previous section you learnt that Supply and Erect/Install, Commission, and Test Contracts are suited for both combination of works and goods. Design and build contracts are also used for works. Sometime you may not have the required skill set within your organisation for which you look for a contractor on a competitive basis. You must find the most innovative designs and the special skills of individual contractors. For example, you need to install a transformer for a huge building. You do not have engineers who can erect and install the transformer. Hence you try and get them from contractor who can give you innovative design. Features Let us look at the salient features for design and build contracts: Bidders have pre-qualification, which help them to easily select the qualified combinations of Engineer/Architect and Contractor. Comprehensive site and sub-soil survey are offered that include the parameters of structural design and loading. Bidders are allowed to provide competitive design and lump sum bids. Bid evaluation includes design checks, the quantification of design errors, time for completion, payment schedules, and so on. It also includes an assessment of the aesthetics of different proposals. Bidders are sometimes compensated on a sliding scale according to merit for the preparation of responsive proposals.

Conditions for adopting It is appropriate for important buildings, major bridges, aqueducts, viaducts, complex flyovers, navigation works, seaports, airports, and other major infrastructure works.

Sikkim Manipal University

Page No. 153

Contracts Management in Projects

Unit 8

Advantages and disadvantages The advantage of this contract is that, competitive proposals result in economy and better design and aesthetics. The disadvantages of this contract are none to mention. Self Assessment Questions 15. The advantage of this contract is that, competitive proposals result in economy and better design and aesthetics. (True/ False) 16. You must invite bidders for design and build who can provide competitive design on percentage basis. (True/ False)

8.9 Turnkey Contracts (combination of supply of Goods and Works Contracts)

In previous section, we discussed that a design and build contract is for works and must be used when you do not have the required skill set within your organisation. The turnkey contracts are the combination of works and goods contracts. Here, you will not be involved in any stages of projects. The contractor or bidders will accomplish the project and give it to you after completion. Features Let us look at the salient features for turnkey contracts: Bids are invited for alternative systems and processes to provide satisfactory end product requirements. Thus, it is undesirable or impracticable to prepare definitive designs and complete technical specifications in advance. Two stage bidding procedure is followed. The contactor first includes the detailed designs, production process plant, equipment, related construction, procurement licenses, guarantees, recruitment, training of operating staff and commissioning. Then they hand over the key/project to you. The contract price is normally quoted full amount with periodic payments against specific stages of partial completion. Price adjustment is provided to the contracts of longer duration (say more than one or two years).
Page No. 154

Sikkim Manipal University

Contracts Management in Projects

Unit 8

Conditions for adopting It is appropriate for procurement of complex industrial process plants such as steel mills, fertilizer plants, food processing plants, oil refineries, and so on. Advantages and disadvantages The advantage of the turnkey contracts is that the employer is able to choose the best available processes and thus achieve a good position in economy. The disadvantages are none to mentioning. Self Assessment Questions 17. The advantage of the turnkey contracts is that the employer is able to choose the best available processes and thus___________. 18. The contract price is normally quoted _______with periodic payments against specific stages of partial completion.

8.10 Management Contracts

In previous section you learned that the turnkey contracts must be used when you do not want to involve in any phase of the project. Turnkey projects are used for a combination of works and goods. Management Contracts is a combination for supply of Goods and Works Contracts. This is a third party contracts that are useful for huge public sector projects. Features Let us look at the salient features for management contracts: Allow you to hire consultation firm that act as contractor/supplier, but do not usually perform construction work/supply goods directly. They manage the work of other sub-contractors and suppliers. The firm bears full responsibility and risk for price, quantity and timely performance of the contract. Conditions for adopting It is appropriate for major infrastructure projects such as airports, seaports, expressways, townships, power projects, telecommunication projects, and so on.

Sikkim Manipal University

Page No. 155

Contracts Management in Projects

Unit 8

Advantages and disadvantages Now let us look at the advantages and disadvantages for the management contracts. The advantages of management contracts are: It helps you to lower the project costs, related to goods and services or running ancillary business operations. It reduced any risk involved, as the consulting firm will be responsible to handle risks. The disadvantages of management contracts: You need to give up a considerable amount of control over the services that will be provided. You cannot ensure the quality of material or goods which may lead to loss in quality. You may not be able to modify or change design in the process. Self Assessment Questions 19. A management contract helps you to lower the project costs. (True/False) 20. You can ensure the quality of material or goods which may lead to loss in quality. (True/False) Activity 2: You have shifted from London to Delhi. You have bought a house that needs renovation. You are not aware of the hidden issues in that house are. What kind of contract will you opt and why? Hint: Refer section 8.6

8.11 Public Private Participation Contracts

In previous section we learnt that management contracts are best suited for major infrastructure projects. Now let us learn about Public Private Participation (PPP). PPP contracts are usually based on Build, Operate and Transfer (BOT) concept with many variations. PPP contracts are concessionary turnkey type of contracts, which include financing, design, construction, operation and maintenance of public and private revenue earning projects and so on.

Sikkim Manipal University

Page No. 156

Contracts Management in Projects

Unit 8

Features Let us now take a look at the salient features of a PPP contract: Total costs and risks are borne by the private BOT investors over the yielding period, which may be between 10 to 20 years. The employer from a public sector is the public authority, responsible for a PPP contract. The contract is transferred to the employer at the end of the concessionary period. PPP contracts are of different types. There is little variation among these types. The only source of revenue to the BOT investors is the tariff imposed on users of this facility, during bid evaluation. Other variants include o Build, Own, Operate and Transfer (BOOT). o Build, Own and Operate (BOO) without any obligation for Transfer. o Build, Rent and Transfer (BRT). o Build, Lease and Transfer (BLT). o Build, Own, Operate, Subsidise and Transfer (BOOST). o Build and Transfer (BT) immediately, possibly subject to instalments payments of the purchase price. Conditions for adopting It is best used for profit earning projects such as power generation and distribution, port facilities, toll roads and bridges, water supply, and so on. Thus it provides income when you have limited budget and/or borrowing capacity. Advantages and disadvantages Let us look at the advantages of the PPP contracts: PPP contracts are a way for overcoming the borrowing capacity, budgetary constraints to acquire the much needed infrastructure for growth. PPP contracts provide significant additional functions in financial resources, while achieving overall cost savings from efficiency in design, construction and operation. Let us now look at the disadvantages of the PPP contracts: They are highly complex from both a legal and financial point of view. They require potential sponsors to spend millions of rupees in development.
Sikkim Manipal University Page No. 157

Contracts Management in Projects

Unit 8

They require to present issues for host Government/implementing agencies about the proper allocation of risks and rewards among parties.

Self Assessment Questions 21. PPP contracts are a way for overcoming the borrowing capacity, budgetary constraints to acquire the much needed infrastructure for growth. (True/False) 22. In a PPP type of contract the total costs and risks are borne by the Public sector over the yielding period. (True/False) Activity 3: You are constructing a movie theatre with aesthetics of high order. You have highly defined concepts with clear specification. This project will take eight months of duration with no unforeseen issues. What kind of contract will you adopt and why? Hint: Refer section 8.3

8.12 Summary
Let us sum up the points that we learnt in this unit. In this unit, we have discussed various types of contracts used for works and goods. You have to select any contract only after considering various factors as it affects the type of projects or purchase of goods both in monetarily as well in execution part. The right choice of contract will help deliver quality project on the right time. We learnt the several factors such as nature and complexity, size and duration, degree of definition, status of design and financial resources influence the selection of the type of contract for execution of works or supply of goods. We discussed few common types of contracts. The common types of contracts are Lump Sum; Item Rate; Percentage Rate; Cost plus Fee; Supply, Erect and Install; Design and Build; Turnkey; Management; Public Private Participation. We also learnt that each of these contracts has different features, has definite advantages and disadvantages as well as their use in different situations and circumstances.
Sikkim Manipal University Page No. 158

Contracts Management in Projects

Unit 8

Public Private Participation contracts are nowadays being adopted in large numbers because of constraints of budget and the need to provide large number of infrastructure works.

8.13 Glossary
Term Aesthetics Viability Inflexible Turnkey Concessionary period Subsidise Description An artistically beautiful or pleasing appearance. Capability of any work being done in a practical and useful way Incapable of being changed or unalterable. A project or service which can be implemented or utilised with no additional work required by the buyer. A term used for yielding period. Monetary assistance granted by a government to a person or group in support of an enterprise regarded as being in the public interest.

8.14 Terminal Question

1. Explain the factors which generally affect/influence the selection of the type of contract for a package of works/goods. 2. List the features of Item Rate contracts and demonstrate how they are different from Lump Sum contracts. 3. Where is a Percentage Rate contracts suitable and List its features. 4. Explain the features of Turnkey contracts. 5. What are PPP contracts and List the advantages and disadvantages of the same.

8.15 Answers
Self Assessment Questions 1. Fixed 2. Works 3. Stages, percentage 4. Inflexible 5. Works, goods 6. Flexible 7. Detailed 8. Works
Sikkim Manipal University Page No. 159

Contracts Management in Projects

Unit 8

9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22.

Estimated True True False False False True False Achieve economy Lump sum True False True False

Terminal Questions 1. Refer section 8.2 Factors Influencing Types of Contracts. 2. Refer section 8.3 and 8.4 Lump sum/All inclusive/Fixed Price Contracts (Works) and Item Rate/Unit Rate Contracts (Works and Goods). 3. Refer section 8.5 Percentage Rate Contract (Works). 4. Refer section 8.9 Turnkey Contracts (combination of supply of Goods and Works Contracts). 5. Refer section 8.11 Public Private Participation Contracts.

8.16 Caselet
The Cape Town Street Lights- A Case Study This case study is considered as one of its kind till date for a Public Private Participation (PPP) type of contract. The City of Cape Town is split into three controlled supply areas, that is, City of Cape Town Provincial Administration ESKOM ESKOM was maintaining street lights in the areas that were allocated to them in a day to day basis. They called for contract only when something failed. They felt this was not effective and they started looking for an alternative pro-active solution. They decided that the maintenance of the
Sikkim Manipal University Page No. 160

Contracts Management in Projects

Unit 8

ESKOM supply areas should be the responsibility of the City of Cape Town. As they did not have the resources to maintain these areas, the City invited tenders. Total Facility Management Company (TFMC) had the commercial potential of maintaining the street lighting for a city like Cape Town. But TFMC did not have the specific expertise in this niche market to provide street-lighting maintenance work in-house. They then entered into an Operational Partnership with Light-Be, a company with the necessary expertise. TFMC's then placed a tender with Cape Town. The tender was successful, largely on the basis of its track-record, its professionalism, its recognised experience and expertise in contract management. TFMC's has a call centre which is 24/7, played an important positive element. Services provided Service Level Agreements (SLA) were agreed upon with the City of Cape Town and a back-to-back agreement between TFMC and Light-Be was entered thereafter. As mentioned in the contract, they conducted an audit of the areas to be maintained. And it was agreed with the City of Cape Town that initially, a total of 31,000 units would be maintained. The next step was to divide the ESKOM supply area into smaller operational areas and eventually standardise the light fittings per area, making them easier to maintain. This project was completed on 31st August, 2006. A total number of 34100 units were accounted for within the agreed areas. As additional areas being built, these new areas are handed over to TFMC for maintenance. The company also provides a day-to-day service through its Contact Centre, enabling the general public to report faulty streetlights. These faults are channelled to Light-Be for repair. TFMC ensures that the SLAs are met at all times. Contractually, the "Mean Time to Repair" (MTTR) faults is 7 days, 95% of the time with the balance to be repaired within 14 days from date of logging the fault. TFMC has to date continuously to achieve a MTTR of less than three days. Some faults classified as "excusable delays" are
Sikkim Manipal University Page No. 161

Contracts Management in Projects

Unit 8

brought to the City of Cape Town's attention as and when they occur. The duration of the repair work for these types of faults is mutuallyagreed upon with the City and is not measured according to the MTTR. The initial period of the agreement is three years (July, 2005 to June, 2008), with the option to extend the agreement for a minimum of a further five years. The extension of agreement is subject to TFMC's meeting the performance criteria of 90%, during its audit. Value-Added Achievements Although the City of Cape Town operates on a run-to-fail basis, TFMC operates on a scheduled routine maintenance strategy, i.e. all streetlights are replaced every three years, reducing the failure rate. To date, TFMC has consistently met the performance criteria of any audit/monitoring exercise conducted by the City of Cape Town. Question: 1. What is the MTTR according to TFMCs? Explain in details how it was achieved? Hint: Refer the services provided by the TFMC. References Ministry of Statistics and Project Implementation, Government of India, Standard Bid document. Ministry of Finance, Government of India, Standard Bid Document.

Sikkim Manipal University

Page No. 162