Let us first understand these concepts.
Unit Rate Contracts
In the unit rate contract mode of works execution, the major items are procured by a central team in a large quantity which is the aggregated indent of various offices. Once procured, the material and equipment are issued tovarious indenting units as per the demand received from them. Small petty items are procured locally. Equipment erection is done by the departments or local vendors. In a nutshell, a large number of employees look after various activities in the sector and the utility has to employ sufficient resources to carry out planning, project management, engineering design and procurement of items (on the basis of yearly contracts/unit rate contracts, etc.), supervision of implementation including stores,and in some cases construction.
For engineering projects involving supplies, installation and commissioning, project execution has two basic components: Supplies and Associated Services.
Project implementation can be carried out by
1. putting these two components separately from each other, or
2. clubbing the two together as per the employer’s option.
In the first option, for the component involving supplies, the employer (client) prepares (or gets prepared through its consulting engineers) the specifications of goods to be supplied and works out their quantities and gets the goods procured as per their procedure of procurement through one or different sources. As regards the other component involving services (e.g., erection testing, commissioning, etc.), one (or more) agency is separately appointed for the services associated with the goods procured. Other agencies are also appointed for carrying out associated works (e.g., civil works, structural works, enabling works) at site. Supervision of work at site is often the responsibility of the agency (contractor) appointed for services but in their own interest, the employer also engages its own personnel (or its consulting engineers) for carrying out the supervision.
For specialised equipment/systems, the supplier is also required to depute experts for supervision services in respect of equipment/systems. In some cases the installation and associated works are got executed departmentally (after the supplies have been made) if the employer has got the required resources and the infrastructure for the same.The second option is executed as item rate contract (or unit rate contract) wherein the goods to be supplied with their specification and quantities are clearly defined along with the erection services in respect of the said goods. In a nutshell, in this type of execution, the engineering is done by the employers themselves/their consultants and the contract execution is done on the basis of well defined Bill of Quantities (BOQ). In this too sometimes certain items are given by the Employer to the Contractor as free issue (for Quality Control/Bulk discount considerations) for the purpose of erection and commissioning only. In this option, the Contractor gets payment according to the quantities executed and certified as per the Unit rates provided in the Contract.The manner of operation in the unit rate contract system calls for the following from the employer for successful execution of the project:
• Owning the onus for inadequacy/errors in designs and specifications and paying (incurring extra expenditure) for the inadequacy/errors.
• As a number of agencies might be involved for obtaining the same objective, it is imperative that proper coordination (including follow-up) with all the agencies involved is done so that not only the time schedule is maintained but there is no unnecessary blocking of investments. Delay by one agency may consequently upset the overall time schedule. It requires meticulous planning for each activity and regular monitoring. Apart from delays, problems at the interfaces have also to be sorted out by the employer.
• Accuracy/adequacy of the quantities worked out (as per basic design) must be ascertained beforehand; otherwise it may lead to delays at a later stage if there is a shortage. This means that there is all likelihood of uncertainty of final price affecting the budget provisions.
• Ascertaining adequacy of the specifications beforehand to avoid failures in performance (i.e., the desired objective).
• Ascertaining the quality aspects of the deliverables at various stages viz.,procurement of raw materials, manufacturing, delivery at site,erection and final testing, etc.
• Providing adequate supervision of the work being carried out at site and ensuring that substantial workforce of the employer is engaged.
• Maintaining the accounts with the contractor doing work at site to whom the goods procured by the employer are issued for the purposes of installation and reconciliation at the end.
Unit Rate Contracts
In the unit rate contract mode of works execution, the major items are procured by a central team in a large quantity which is the aggregated indent of various offices. Once procured, the material and equipment are issued tovarious indenting units as per the demand received from them. Small petty items are procured locally. Equipment erection is done by the departments or local vendors. In a nutshell, a large number of employees look after various activities in the sector and the utility has to employ sufficient resources to carry out planning, project management, engineering design and procurement of items (on the basis of yearly contracts/unit rate contracts, etc.), supervision of implementation including stores,and in some cases construction.
For engineering projects involving supplies, installation and commissioning, project execution has two basic components: Supplies and Associated Services.
Project implementation can be carried out by
1. putting these two components separately from each other, or
2. clubbing the two together as per the employer’s option.
In the first option, for the component involving supplies, the employer (client) prepares (or gets prepared through its consulting engineers) the specifications of goods to be supplied and works out their quantities and gets the goods procured as per their procedure of procurement through one or different sources. As regards the other component involving services (e.g., erection testing, commissioning, etc.), one (or more) agency is separately appointed for the services associated with the goods procured. Other agencies are also appointed for carrying out associated works (e.g., civil works, structural works, enabling works) at site. Supervision of work at site is often the responsibility of the agency (contractor) appointed for services but in their own interest, the employer also engages its own personnel (or its consulting engineers) for carrying out the supervision.
For specialised equipment/systems, the supplier is also required to depute experts for supervision services in respect of equipment/systems. In some cases the installation and associated works are got executed departmentally (after the supplies have been made) if the employer has got the required resources and the infrastructure for the same.The second option is executed as item rate contract (or unit rate contract) wherein the goods to be supplied with their specification and quantities are clearly defined along with the erection services in respect of the said goods. In a nutshell, in this type of execution, the engineering is done by the employers themselves/their consultants and the contract execution is done on the basis of well defined Bill of Quantities (BOQ). In this too sometimes certain items are given by the Employer to the Contractor as free issue (for Quality Control/Bulk discount considerations) for the purpose of erection and commissioning only. In this option, the Contractor gets payment according to the quantities executed and certified as per the Unit rates provided in the Contract.The manner of operation in the unit rate contract system calls for the following from the employer for successful execution of the project:
• Owning the onus for inadequacy/errors in designs and specifications and paying (incurring extra expenditure) for the inadequacy/errors.
• As a number of agencies might be involved for obtaining the same objective, it is imperative that proper coordination (including follow-up) with all the agencies involved is done so that not only the time schedule is maintained but there is no unnecessary blocking of investments. Delay by one agency may consequently upset the overall time schedule. It requires meticulous planning for each activity and regular monitoring. Apart from delays, problems at the interfaces have also to be sorted out by the employer.
• Accuracy/adequacy of the quantities worked out (as per basic design) must be ascertained beforehand; otherwise it may lead to delays at a later stage if there is a shortage. This means that there is all likelihood of uncertainty of final price affecting the budget provisions.
• Ascertaining adequacy of the specifications beforehand to avoid failures in performance (i.e., the desired objective).
• Ascertaining the quality aspects of the deliverables at various stages viz.,procurement of raw materials, manufacturing, delivery at site,erection and final testing, etc.
• Providing adequate supervision of the work being carried out at site and ensuring that substantial workforce of the employer is engaged.
• Maintaining the accounts with the contractor doing work at site to whom the goods procured by the employer are issued for the purposes of installation and reconciliation at the end.
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| Utilities Juggle Many Responsibilities in the Unit Rate System |
There are several deficiencies in this system (Box ).
Box : Deficiencies in the Unit Rate Contract System
• Delay in getting the material: The central procurement department waits for the indent of materials from various offices or till such time as the quantity to be procured is large enough, to initiate the procurement process. Once material is procured, substantial time may be taken in issue and shifting of the material to the site. There may also be other reasons for delay such as diversion of materials to other works or sites due to exigencies, etc. Hence, the project may be delayed.
• Expiry of guarantee/warranty period: Sometimes the guarantee period expires while the material is still in store. This may be due to delay in finalization of the contract for the work or due to slow progress of the work. In the event of expiry, the utility suffers financially if the equipment does not perform satisfactorily or there is malfunctioning, etc.
• Difficulty in project coordination: For projects of larger magnitudes and complexities, there could be dozens of equipment and material sources as well as diverse professional attitudes and competencies. This makes coordination a difficult task.
• Lack of response from well-equipped agencies: If the value of the work to be executed is small, only the local contractors compete and over a period of time a cartel system gets into place. The monopoly of local contractors in the long run leads to poor quality of work and undesirable practices.
For all these reasons, the concept of turnkey contracts is finding favour in the execution of projects. Let us learn about this concept.
Turnkey Contracts
The concept of getting a project executed on turnkey basis is relatively new.
Let us first explain what it is.
What is a turnkey contract?
The turnkey contract is an agreement in which a contractor designs, constructs, and manages a project until it is ready to be handed over to the client and operation can begin.In the turnkey contract, the deliverables from the inception to the execution are clearly spelt out and the responsibility of providing the defined deliverables in time lies with the contractor. It is the contractor’s responsibility to supply and erect all the equipment/ material as per the specifications of the contract. S/he is also responsible for the engineering, testing, commissioning and handing over of the working system to the utility.
In the turnkey mode, all equipment/sub-systems are supplied and erected by a single agency. It is easier to coordinate the overall project at every stage of its execution by the utility and more time can be devoted by the utility on quality aspect. The payment is specified at the time of the signing of the contract in accordance with the standards set for the contract.Under this arrangement, the contractor assumes responsibility for not only constructing productive installations but also ensuring that they operate effectively before turning them over to the client. By assuming responsibility for the contributions of all participants in the project, the contractor is often able to arrange more favourable financing terms. The responsibility of the contractor ends when the completed installation is turned over to the client.More often than not, the turnkey contract is considered to be a modus operandi of executing a project wherein the same agency (it may be a single contractor,a consortium or joint venture as well) is responsible both for delivering the goods for the project and carrying out erection (installation) and commissioning (if required) of the goods as well as doing associated site works. In such forms of contract, a broad list of facilities/ items are given and priced for (but covering the entire scope as per contract terms). For interim (progress) payment purposes, the price is broken up further in mutual agreement at the stage of execution.
In the widest possible sense, turnkey can almost have its literal meaning, Fig : In the Turnkey where the employer has nothing to do except turning the key so that the System,Utilities just project gets commissioned and put to its desired use. One typical example of Turn the Key!turnkey in this sense can be where an employer wants a Rolling Mill for Rolling Strips of a given thickness and width range for a given metal/alloy with a stipulated per annum output for a given number of working hours per annum or a Thermal Power plant of given MW rating with given fuel and water quality,Project Development and Implementation layout, etc. There can even be execution of Thermal Power plant in more than one turnkey package with necessary engineering input on the part of the employer/their consultant. Input from the employers is still basic as far as the bidding specifications are concerned. Two very important aspects of turnkey in this sense are that timely execution and demonstrating the performance guarantees are the sole responsibilities of the Contractor.
These two are the basic advantages for which most employers adopt turnkey mode of execution of projects. Especially where performance is of prime importance and there are reputed contractors in the field whose past performance is well established, employers do not risk with any other modality of project execution. In this there are certain categories:a) Technology Oriented: Where technology developed/acquired(through license, etc.) by the Contractor is adopted. Projects like an Aluminium Smelter Plant, a Blast Furnace, and a Rolling Mill, etc. fall under this category. The Contractor has to be provided with freedom of design and all subsequent activities so long as it meets the requirements of the contract specification. Process know-how and basic engineering is provided by the turnkey contractor.
Box : Deficiencies in the Unit Rate Contract System
• Delay in getting the material: The central procurement department waits for the indent of materials from various offices or till such time as the quantity to be procured is large enough, to initiate the procurement process. Once material is procured, substantial time may be taken in issue and shifting of the material to the site. There may also be other reasons for delay such as diversion of materials to other works or sites due to exigencies, etc. Hence, the project may be delayed.
• Expiry of guarantee/warranty period: Sometimes the guarantee period expires while the material is still in store. This may be due to delay in finalization of the contract for the work or due to slow progress of the work. In the event of expiry, the utility suffers financially if the equipment does not perform satisfactorily or there is malfunctioning, etc.
• Difficulty in project coordination: For projects of larger magnitudes and complexities, there could be dozens of equipment and material sources as well as diverse professional attitudes and competencies. This makes coordination a difficult task.
• Lack of response from well-equipped agencies: If the value of the work to be executed is small, only the local contractors compete and over a period of time a cartel system gets into place. The monopoly of local contractors in the long run leads to poor quality of work and undesirable practices.
For all these reasons, the concept of turnkey contracts is finding favour in the execution of projects. Let us learn about this concept.
Turnkey Contracts
The concept of getting a project executed on turnkey basis is relatively new.
Let us first explain what it is.
What is a turnkey contract?
The turnkey contract is an agreement in which a contractor designs, constructs, and manages a project until it is ready to be handed over to the client and operation can begin.In the turnkey contract, the deliverables from the inception to the execution are clearly spelt out and the responsibility of providing the defined deliverables in time lies with the contractor. It is the contractor’s responsibility to supply and erect all the equipment/ material as per the specifications of the contract. S/he is also responsible for the engineering, testing, commissioning and handing over of the working system to the utility.
In the turnkey mode, all equipment/sub-systems are supplied and erected by a single agency. It is easier to coordinate the overall project at every stage of its execution by the utility and more time can be devoted by the utility on quality aspect. The payment is specified at the time of the signing of the contract in accordance with the standards set for the contract.Under this arrangement, the contractor assumes responsibility for not only constructing productive installations but also ensuring that they operate effectively before turning them over to the client. By assuming responsibility for the contributions of all participants in the project, the contractor is often able to arrange more favourable financing terms. The responsibility of the contractor ends when the completed installation is turned over to the client.More often than not, the turnkey contract is considered to be a modus operandi of executing a project wherein the same agency (it may be a single contractor,a consortium or joint venture as well) is responsible both for delivering the goods for the project and carrying out erection (installation) and commissioning (if required) of the goods as well as doing associated site works. In such forms of contract, a broad list of facilities/ items are given and priced for (but covering the entire scope as per contract terms). For interim (progress) payment purposes, the price is broken up further in mutual agreement at the stage of execution.
In the widest possible sense, turnkey can almost have its literal meaning, Fig : In the Turnkey where the employer has nothing to do except turning the key so that the System,Utilities just project gets commissioned and put to its desired use. One typical example of Turn the Key!turnkey in this sense can be where an employer wants a Rolling Mill for Rolling Strips of a given thickness and width range for a given metal/alloy with a stipulated per annum output for a given number of working hours per annum or a Thermal Power plant of given MW rating with given fuel and water quality,Project Development and Implementation layout, etc. There can even be execution of Thermal Power plant in more than one turnkey package with necessary engineering input on the part of the employer/their consultant. Input from the employers is still basic as far as the bidding specifications are concerned. Two very important aspects of turnkey in this sense are that timely execution and demonstrating the performance guarantees are the sole responsibilities of the Contractor.
These two are the basic advantages for which most employers adopt turnkey mode of execution of projects. Especially where performance is of prime importance and there are reputed contractors in the field whose past performance is well established, employers do not risk with any other modality of project execution. In this there are certain categories:a) Technology Oriented: Where technology developed/acquired(through license, etc.) by the Contractor is adopted. Projects like an Aluminium Smelter Plant, a Blast Furnace, and a Rolling Mill, etc. fall under this category. The Contractor has to be provided with freedom of design and all subsequent activities so long as it meets the requirements of the contract specification. Process know-how and basic engineering is provided by the turnkey contractor.
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| Sole Responsibilities of the Turkey Contractor |
b) Module Type: In this the technology is broadly in the domain of public.However, Contractors have their standard designs which they apply in execution of such projects. This standardisation is quite common worldwide and saves the time of designing afresh. Accordingly standard equipment is manufactured, standard spares are available and at least standard specifications/drawings of various auxiliary systems are available. For example, (modules of) a Thermal Power Plant is available in ratings of 30 MW, 68 MW, 120 MW, 200 MW, 210 MW, 250 MW and so on.If an employer wants to have a Thermal Power Plant of 80 MW, the first requirement will be to moderate the design with all sub-systems/equipment, etc. which would be a bit time consuming and expensive. Problems of compatibility in respect of equipment/systems may also be faced.
Under the module type projects, sometimes there may be Contractor specific module. For example, for Cooling Towers one manufacturer may have a design of 3100 cu m per hour per cell and that of some other could be 3200 cu m per hour per cell. For an employer seeking bids against requirement of 3000 cu m per hour per cell both would be acceptable and also both may be competitive. Similarly, there may be slight difference in cooling or other parameters but can be considered at par so long as they meet the basic requirement of the employer.In this type of project execution (both Technology oriented and Module type),the submission of as-built drawings is of immense help. It helps in operation, maintenance and future modifications.
In those cases where a project is awarded to a Contractor, where s/he doesnot have to provide any engineering input, i.e., where the items to be supplied and to be erected (tested and commissioned) are spelt out in detail (i.e., quantities, specifications and drawings wherever applicable) by the employer,the turnkey mode may or may not be advantageous.
An example is the turnkey construction of a building or laying of pipelines,where the employer provides the construction drawings (working drawings).Such jobs are awarded on turnkey basis when there is emphasis on project management for time bound execution. These cases are not turnkey cases in a strict sense. In such cases, performance of the contract much depends on the intent of the Contractor. If s/he has the intent of completing the work despite constraints from the Employer’s side s/he would complete it. If otherwise, the Contractor would be looking for loopholes from time to time in matters (they may not be many but important) which fall under the employer’s obligations. This would not be a healthy situation. However, since such jobs are not highly technology-oriented, replacement contractors can always be found (provided remedial clauses are suitably drafted to protect the employer).
One important feature of turnkey contracts is that there are essentially two contributions from the contractor:
(i) design and engineering to a certain extent, and
(ii) project management by the contractor.
Under the module type projects, sometimes there may be Contractor specific module. For example, for Cooling Towers one manufacturer may have a design of 3100 cu m per hour per cell and that of some other could be 3200 cu m per hour per cell. For an employer seeking bids against requirement of 3000 cu m per hour per cell both would be acceptable and also both may be competitive. Similarly, there may be slight difference in cooling or other parameters but can be considered at par so long as they meet the basic requirement of the employer.In this type of project execution (both Technology oriented and Module type),the submission of as-built drawings is of immense help. It helps in operation, maintenance and future modifications.
In those cases where a project is awarded to a Contractor, where s/he doesnot have to provide any engineering input, i.e., where the items to be supplied and to be erected (tested and commissioned) are spelt out in detail (i.e., quantities, specifications and drawings wherever applicable) by the employer,the turnkey mode may or may not be advantageous.
An example is the turnkey construction of a building or laying of pipelines,where the employer provides the construction drawings (working drawings).Such jobs are awarded on turnkey basis when there is emphasis on project management for time bound execution. These cases are not turnkey cases in a strict sense. In such cases, performance of the contract much depends on the intent of the Contractor. If s/he has the intent of completing the work despite constraints from the Employer’s side s/he would complete it. If otherwise, the Contractor would be looking for loopholes from time to time in matters (they may not be many but important) which fall under the employer’s obligations. This would not be a healthy situation. However, since such jobs are not highly technology-oriented, replacement contractors can always be found (provided remedial clauses are suitably drafted to protect the employer).
One important feature of turnkey contracts is that there are essentially two contributions from the contractor:
(i) design and engineering to a certain extent, and
(ii) project management by the contractor.
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| Contributions of the Turnkey Contractor |
There are many advantages of project execution through turnkey contracts and you may like to know about them. We list them in Box.
Box : Advantages of Turnkey Execution
• Single Source Responsibility: The main advantage of the turnkey approach of project execution lies in the single point responsibility. The owner has to deal with only one agency for a particular project, unlike in the conventional system where multiple agencies are involved. All integration needs are attended by a single agency and as such the chances of mismatch between various sub-systems are substantially reduced. For example, in a particular project there could be several types and sizes of clamps and connectors apart from different bus-bar arrangements. Undertaking R&M work in such a project by the utility could be an onerous task.
• Expeditious Completion: Since one professional agency is solelyresponsible for all activities, timely completion of the projects is easier to achieve.
• Limited Owner’s Risk: The owner is not responsible for safe transportation, storage of the equipment, till the project is handed over by the contractor in working condition.
• Lesser Administrative Cost: All the coordination, mobilization, etc. is done by the contractor resulting in cost saving to the owner.
• Better quality of work and equipment.
• Assured Equipment Performance Guarantees.
Let us now compare the turnkey contracts with unit rate contracts on various points to understand the relative merits of these systems. This will also help you understand why utilities should opt for turnkey contracts at least for some cases.
Comparison of Unit Rate and Turnkey Contracts
The conceptual difference between the unit rate contracts and turnkey contracts lies basically in sharing of associated risks. In turnkey mode of execution, the contractor has to assume more risks on her/his side. As such s/he has to be given adequate opportunity to study and examine the bidding documents as well as local conditions and also adequate time to interact with her/his back-up agencies in the market. Let us now make a point-wise comparison of the two.
• Different Bidders Price the Risks Differently: The bidders are expected to complete a project in time. Therefore, their assessment of site-specific risks and related costs vary. Specifying site visit conditions in the tender document and better understanding of site conditions and statutory regulations is likely to bring optimum cost proposals. Information on sources of material and services from local agencies and facilities to be provided by the Utility could minimize coverage of risks to be assumed by the contractors. All risks cannot be taken care of by insurance (in which a premium amount and deductible franchise is the only liability of the contractor). Greater clarity on these aspects would fetch better competitive price. Remember that the suppliers are used to supply items and get penalized for Liquidated Damages due to delay.
• Direct and Indirect Cost (Management Fee): Turnkey modality of execution is often brought under criticism for being costlier. The prices quoted against various items suggest so when compared by the employers with in-house database of unit rate execution of projects or purchase items. But in making such comparison one important aspect gets normally ignored: the cost taken from the employer’s database is merely their direct cost of materials/services and does not include the valuable person-hour cost of employer’s personnel involved in engineering, procurement activities (which often includes a number of press advertisements) and supervision. The price quoted by a bidder in turnkey contracts combines his/her direct as well as indirect costs (suchas cost of workforce for design and execution of work at site, establishment cost at site, local transport, communication facilities, etc.).A fair comparison between unit rate and turnkey contract can be possible, only if the employer’s indirect costs are also taken into account. This point is to be given due consideration but in any case the two institutions should not be compared.
• Fixed Liability of Expenditure: The turnkey contracts are normally better in terms of knowing the financial liability of the utility.
• Performance Guarantee: Getting the Performance Guarantee for the project is the key driver for switching from unit rate to turnkey contract.However, we first need to freeze the specifications that highlight performance guarantee parameters for distribution system requirements. For example, consider the installation of 11kV/ 440 V distribution transformers (which number over 2 million in the country). Do utilities buy them after comparing and loading iron and copper losses for their useful life? The point being made here is that a critical look is necessary for site-specific/project-specific performance by the experts from each utility for turnkey specifications.
• Single Milestone for Single Agency: Turnkey modality of contract execution deals with one agency compared with multi location dealing with large agencies for unit rate contracts. This considerably reduces monitoring. However, turnkey contractors of corporate stature need to be selected.
• Diversion of Free Issue and Other Materials: The diversion of materials has been a regular phenomenon due to site conditions in various utilities while executing schemes on unit rate/items-supplies basis. This could be restricted through the turnkey contract concept.
• Failures on the Part of the Employer Lead to Delay or Non- completion: In unit rate execution of projects, the contractor requires considerable inputs from the employer to execute the work. As such, progress and completion of work would depend on timely availability of such inputs by the employer to the contractor. In turnkey jobs, most of these requirements are passed on to the contractor.
• Poor Response from Bidders: As the bidders also find it easy to supply the material and get their payment and have been used to it for over decades now, the initial response from bidders to turnkey contracts may be poor. It has to be sportingly received!
• Single Point Responsibility: A turnkey contractor assumes all the responsibility for timely execution and successful performance. The utility should also put in place just the optimum checks and interventions required. It should of course be clear about its obligations for payment and facilities at the project site.
• Tendency by Manufacturer turned Contractors to Merely Sell: The turnkey contracts are being executed by
(a) manufacturers turned turnkey contractors, and (b) engineering-cum-project management organisations.
There are relative merits and demerits of having either (a) or (b) as the contractor for turnkey projects. However, no discrimination should be made in their selection as turnkey contractors unless there are compelling pre-qualification requirements. In fact, in such cases options should be kept open to form consortiums/Joint Ventures/Special Purpose Vehicles for identified projects.
• Use of Latest Construction Tools/Practices: Turnkey contractors deploy the latest construction tools, equipment and adopt best
construction practices, including project management software. No doubt,such things can be done by a utility as well but would require added initiative on its part.
• Risk and Liabilities need to be Clearly Defined to Avoid Disputes:In turnkey mode of execution of contracts, the contractor is required to assume responsibility for a wider range of risks other than those under unit rate contracts. Therefore, the liabilities are to be clearly defined. On unit rate contracts, such liabilities are either not noticed or are taken care of by the utilities themselves; the local contractors provide primarily the effort input rather than the knowledge input.
• Resourceful Contractors: The turnkey contractors are selected normally after scrutiny of their technical and financial credentials. On most occasions, they are resourceful enough to carry on execution of projects for reasonable time even in case payments from the employer are delayed. They have a tendency to live up to their reputation and have the spirit to complete the work awarded. Unlike unit rate contracts, financial constraints do not affect execution of turnkey contracts, except under extraordinary circumstances.
• Possibility of Dialogue: In order that the prospective bidders understand the utilities’ requirement precisely, a pre-bid conference is recommended with the prospective bidders who are given the turnkey clarifications. For a balanced risk sharing, such a dialogue is highly desirable so that the prices quoted by the bidders are realistic, minimizing the possibility of future disputes due to non-clarity of specifications and terms and conditions.Often in the process of such a dialogue, suggestions for improvement in the specifications or execution methodology come up for the benefit of utilities. However, these are to be thrown open to all bidders as equal opportunity before final price submission. In the process, the specifications may also get updated with respect to the latest technologies developed by manufacturers and adopted by other utilities.
• Smaller Project Team of Client: The workforce involvement required on\ the part of the utility in a turnkey contract is much less compared to that in the case of unit rate contracts.
• Contractor’s Independence within the Framework of Specifications: In the case of a turnkey contract, the employer fixes only the basic parameters of the project. The contractor has the flexibility of design to provide optimal solution which meets requirements of the specifications,has ease of execution and is cost effective too. Advantageous features (such as increased level of automation, more trouble free operation or at least future provisions for such features, etc.) may be offered by the turnkey contractor within the budgeted cost, which may not have been specified by the employer. This flexibility is not available in the unit rate contract.
• Belongingness: The right spirited turnkey contractors have a sense of belongingness to the project they undertake as it adds to their company’s reference list.
• Better Control by the Utility: The utility can exercise better control on Turnkey Contractor.
• Taxes: We have been used to sales tax, excise duty, octroi, import duties, etc., in case of unit rate contracts. For turnkey contracts, we need to look at the works taxes, divisible and indivisible contracts, labour laws, statutory regulations/safety aspects at site and many more that go with turnkey.
• Payment: In unit rate contracts, the largest share of payment is normally released on making the supplies. However, in turnkey contracts, certain
• Performance: In unit rate contracts, normally, the equipment manufacturing defect warrantees are covered. In turnkey contracts, the concepts of Preliminary Acceptance Test (PAT), Commissioning Certificate (CC) and Final Acceptance Test (FAT) and similar terms come into the hands of utilities to control and demand performance from Contractors.
Contracts
We hope that the typical comparison given above has given you some insight into the situation and you now have an idea of the projects in power distribution that should be taken up on turnkey basis, the requirements to draw up the specifications and to derive the best out of turnkey contractors in terms of total responsibility, system performance, quality and timely execution of the projects. This would also have given you an idea of the change required for formulation of turnkey contracts. A number of standard reference materials are available for the terms and conditions that go into turnkey jobs.
Box : Advantages of Turnkey Execution
• Single Source Responsibility: The main advantage of the turnkey approach of project execution lies in the single point responsibility. The owner has to deal with only one agency for a particular project, unlike in the conventional system where multiple agencies are involved. All integration needs are attended by a single agency and as such the chances of mismatch between various sub-systems are substantially reduced. For example, in a particular project there could be several types and sizes of clamps and connectors apart from different bus-bar arrangements. Undertaking R&M work in such a project by the utility could be an onerous task.
• Expeditious Completion: Since one professional agency is solelyresponsible for all activities, timely completion of the projects is easier to achieve.
• Limited Owner’s Risk: The owner is not responsible for safe transportation, storage of the equipment, till the project is handed over by the contractor in working condition.
• Lesser Administrative Cost: All the coordination, mobilization, etc. is done by the contractor resulting in cost saving to the owner.
• Better quality of work and equipment.
• Assured Equipment Performance Guarantees.
Let us now compare the turnkey contracts with unit rate contracts on various points to understand the relative merits of these systems. This will also help you understand why utilities should opt for turnkey contracts at least for some cases.
Comparison of Unit Rate and Turnkey Contracts
The conceptual difference between the unit rate contracts and turnkey contracts lies basically in sharing of associated risks. In turnkey mode of execution, the contractor has to assume more risks on her/his side. As such s/he has to be given adequate opportunity to study and examine the bidding documents as well as local conditions and also adequate time to interact with her/his back-up agencies in the market. Let us now make a point-wise comparison of the two.
• Different Bidders Price the Risks Differently: The bidders are expected to complete a project in time. Therefore, their assessment of site-specific risks and related costs vary. Specifying site visit conditions in the tender document and better understanding of site conditions and statutory regulations is likely to bring optimum cost proposals. Information on sources of material and services from local agencies and facilities to be provided by the Utility could minimize coverage of risks to be assumed by the contractors. All risks cannot be taken care of by insurance (in which a premium amount and deductible franchise is the only liability of the contractor). Greater clarity on these aspects would fetch better competitive price. Remember that the suppliers are used to supply items and get penalized for Liquidated Damages due to delay.
• Direct and Indirect Cost (Management Fee): Turnkey modality of execution is often brought under criticism for being costlier. The prices quoted against various items suggest so when compared by the employers with in-house database of unit rate execution of projects or purchase items. But in making such comparison one important aspect gets normally ignored: the cost taken from the employer’s database is merely their direct cost of materials/services and does not include the valuable person-hour cost of employer’s personnel involved in engineering, procurement activities (which often includes a number of press advertisements) and supervision. The price quoted by a bidder in turnkey contracts combines his/her direct as well as indirect costs (suchas cost of workforce for design and execution of work at site, establishment cost at site, local transport, communication facilities, etc.).A fair comparison between unit rate and turnkey contract can be possible, only if the employer’s indirect costs are also taken into account. This point is to be given due consideration but in any case the two institutions should not be compared.
• Fixed Liability of Expenditure: The turnkey contracts are normally better in terms of knowing the financial liability of the utility.
• Performance Guarantee: Getting the Performance Guarantee for the project is the key driver for switching from unit rate to turnkey contract.However, we first need to freeze the specifications that highlight performance guarantee parameters for distribution system requirements. For example, consider the installation of 11kV/ 440 V distribution transformers (which number over 2 million in the country). Do utilities buy them after comparing and loading iron and copper losses for their useful life? The point being made here is that a critical look is necessary for site-specific/project-specific performance by the experts from each utility for turnkey specifications.
• Single Milestone for Single Agency: Turnkey modality of contract execution deals with one agency compared with multi location dealing with large agencies for unit rate contracts. This considerably reduces monitoring. However, turnkey contractors of corporate stature need to be selected.
• Diversion of Free Issue and Other Materials: The diversion of materials has been a regular phenomenon due to site conditions in various utilities while executing schemes on unit rate/items-supplies basis. This could be restricted through the turnkey contract concept.
• Failures on the Part of the Employer Lead to Delay or Non- completion: In unit rate execution of projects, the contractor requires considerable inputs from the employer to execute the work. As such, progress and completion of work would depend on timely availability of such inputs by the employer to the contractor. In turnkey jobs, most of these requirements are passed on to the contractor.
• Poor Response from Bidders: As the bidders also find it easy to supply the material and get their payment and have been used to it for over decades now, the initial response from bidders to turnkey contracts may be poor. It has to be sportingly received!
• Single Point Responsibility: A turnkey contractor assumes all the responsibility for timely execution and successful performance. The utility should also put in place just the optimum checks and interventions required. It should of course be clear about its obligations for payment and facilities at the project site.
• Tendency by Manufacturer turned Contractors to Merely Sell: The turnkey contracts are being executed by
(a) manufacturers turned turnkey contractors, and (b) engineering-cum-project management organisations.
There are relative merits and demerits of having either (a) or (b) as the contractor for turnkey projects. However, no discrimination should be made in their selection as turnkey contractors unless there are compelling pre-qualification requirements. In fact, in such cases options should be kept open to form consortiums/Joint Ventures/Special Purpose Vehicles for identified projects.
• Use of Latest Construction Tools/Practices: Turnkey contractors deploy the latest construction tools, equipment and adopt best
construction practices, including project management software. No doubt,such things can be done by a utility as well but would require added initiative on its part.
• Risk and Liabilities need to be Clearly Defined to Avoid Disputes:In turnkey mode of execution of contracts, the contractor is required to assume responsibility for a wider range of risks other than those under unit rate contracts. Therefore, the liabilities are to be clearly defined. On unit rate contracts, such liabilities are either not noticed or are taken care of by the utilities themselves; the local contractors provide primarily the effort input rather than the knowledge input.
• Resourceful Contractors: The turnkey contractors are selected normally after scrutiny of their technical and financial credentials. On most occasions, they are resourceful enough to carry on execution of projects for reasonable time even in case payments from the employer are delayed. They have a tendency to live up to their reputation and have the spirit to complete the work awarded. Unlike unit rate contracts, financial constraints do not affect execution of turnkey contracts, except under extraordinary circumstances.
• Possibility of Dialogue: In order that the prospective bidders understand the utilities’ requirement precisely, a pre-bid conference is recommended with the prospective bidders who are given the turnkey clarifications. For a balanced risk sharing, such a dialogue is highly desirable so that the prices quoted by the bidders are realistic, minimizing the possibility of future disputes due to non-clarity of specifications and terms and conditions.Often in the process of such a dialogue, suggestions for improvement in the specifications or execution methodology come up for the benefit of utilities. However, these are to be thrown open to all bidders as equal opportunity before final price submission. In the process, the specifications may also get updated with respect to the latest technologies developed by manufacturers and adopted by other utilities.
• Smaller Project Team of Client: The workforce involvement required on\ the part of the utility in a turnkey contract is much less compared to that in the case of unit rate contracts.
• Contractor’s Independence within the Framework of Specifications: In the case of a turnkey contract, the employer fixes only the basic parameters of the project. The contractor has the flexibility of design to provide optimal solution which meets requirements of the specifications,has ease of execution and is cost effective too. Advantageous features (such as increased level of automation, more trouble free operation or at least future provisions for such features, etc.) may be offered by the turnkey contractor within the budgeted cost, which may not have been specified by the employer. This flexibility is not available in the unit rate contract.
• Belongingness: The right spirited turnkey contractors have a sense of belongingness to the project they undertake as it adds to their company’s reference list.
• Better Control by the Utility: The utility can exercise better control on Turnkey Contractor.
• Taxes: We have been used to sales tax, excise duty, octroi, import duties, etc., in case of unit rate contracts. For turnkey contracts, we need to look at the works taxes, divisible and indivisible contracts, labour laws, statutory regulations/safety aspects at site and many more that go with turnkey.
• Payment: In unit rate contracts, the largest share of payment is normally released on making the supplies. However, in turnkey contracts, certain
• Performance: In unit rate contracts, normally, the equipment manufacturing defect warrantees are covered. In turnkey contracts, the concepts of Preliminary Acceptance Test (PAT), Commissioning Certificate (CC) and Final Acceptance Test (FAT) and similar terms come into the hands of utilities to control and demand performance from Contractors.
Contracts
We hope that the typical comparison given above has given you some insight into the situation and you now have an idea of the projects in power distribution that should be taken up on turnkey basis, the requirements to draw up the specifications and to derive the best out of turnkey contractors in terms of total responsibility, system performance, quality and timely execution of the projects. This would also have given you an idea of the change required for formulation of turnkey contracts. A number of standard reference materials are available for the terms and conditions that go into turnkey jobs.
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