The Overview of Tanzania Legal Framework on Contract Management
OUTLINE 1. Introduction; 2. Public Procurement System; 3. Legal and Regulatory Framework; 4. Contract Formation; 5. Construction Contract Roles and Responsibilities; 6. Contract Violations; 7. Communications; 8. Scope of Works and Variations; 9. Dispute and Resolutions; 10.Payments and Certificates.
1. INTRODUCTION The law of contract is that branch of law which determines the circumstances in which promises made by the parties to a contract shall be legally binding on them In simple words, the purpose of law of contract is to ensure the parties who enter in to contract understand the terms of the contract
OBJECT OF LAW OF CONTRACT The law of contract is intended to ensure that, what a man has been led to expect shall come to pass, and that what has been promised to him shall be performed Sir William Anson
2. PUBLIC PROCUREMENT SYSTEM Government of the United Republic of Tanzania: -Ministry of Finance Fully decentralized to Procuring Entities: -MDAs, LGAs, PC, etc. Many Stakeholders: - General public, private sector - taxpayers, industry, development partners, CSO s, etc. Many interests: -Services, development, business, protection against foreign firms, social aspects, environmental aspects
Expenditure in Public Procurement How Efficient?
3. LEGAL AND REGULATORY FRAMEWORK The Public Procurement (Goods, Works, Non-Consultant Services and Disposal of Public Assets by Tender) Regulations GN. No 97 of 2005 Local Gov t Authorities Tender Boards (Establishment and Proceedings) Regulations, GN. No. 177 of 2007 Standard Bidding Documents Tender Evaluation Guidelines Public Procurement Act, CAP 410 of 2004 Guidelines for Preparation of Responsive bids Other Circulars periodically issued by PPRA The Public Procurement (Selection and Employment of Consultants) Regulations GN. No 98 of 2005
4. FORMATION OF A CONTRACT Key Elements
CONTRACTING Contract: Agreement entered into by two parties under the terms of which one party agrees to perform a specific job for which the other party agrees to pay: OFFER + ACCEPTANCE = CONTRACT) Construction contract: Formal agreement for construction, alteration, or repair of buildings or structures (facilities, dams, bridges, roads, tanks, etc.) Is distinct from a contract to assemble, fabricate or manufacture
Key elements in forming a Contract: Offer (1) An offer must be made willingly; its terms must be clear and certain; it must be a final expression of the offeror A contractor makes an offer when he fills the Form of Tender as he offers to execute, complete and maintain the contract for his tender sum and within a specific period Terms and conditions of the contract to be formed are in the bidding documents
Key elements in forming a Contract: Offer (2) Termination of an Offer revocation of the offer by the offeror; Acceptance; Counter offer by offeree; rejection of offer by offeree; lapse of time; death or disability of either party; or failure of precondition or performance of the contract becomes illegal after the offer is made.
Key elements in forming a Contract: Acceptance (1) Is a signification of assent to the offer Requirements of an Acceptance [S7/LCAT, Cap 345] Must be absolute and unqualified-accept the proposal offer as made without any change If any change is made to the offer it becomes a counter offer - not acceptance
Key elements in forming a Contract: Acceptance (2) Requirements of an Acceptance [S7/LCT, Cap 345]: must be in response to the offer; must have knowledge of the offer before accepting (No knowledge of offer - no acceptance); in exchange for the offer/ proposal Acceptance must be communicated; must be complete; and can be made to an agent instead of the offeror; Desired mode of communication must conform to the wishes of the offeror; When by post, acceptance will be complete once the offeror knows of the acceptance.
Key elements in forming a Contract: Letter of Acceptance An acceptance is a final expression of assent to the terms of an offer The acceptance of an offer must be absolute and unconditional and must be communicated to the offeror if it is to result in a concluded contract. A conditional acceptance which fails to comply with the requirements of the offer is not a valid acceptance.
Key elements in forming a Contract: Consideration Refers to what is actually given or accepted in return for a promise as part of an agreement in the form of a right, interest, profit or benefit accruing to one party. For a promise to be enforceable the promisee must show that he paid a price for it [the promise] Failure to perform promise leads to damages Failure to fulfill condition terminates contract
Key elements in forming a Contract: Capacity (1) Parties to the contract must be competent. S11/LCAT, Cap 345, every person is competent to contract if the person: is of the age of majority; is of sound mind; and is not disqualified from contracting by any law to which he is subject
Key elements in forming a Contract: Capacity (2) Qualification of Bidders: R14(1)(b)/GN 97/2005: To qualify to participate in procurement or disposal proceedings - bidders must have legal capacity to enter into the procurement or disposal contract;
Key elements in forming a Contract: Free consent Consent agreeing on same thing in same sense Free consent freely agreeing on same thing in same sense Consent is said to be free if is not obtained by Coercion or duress Misrepresentation Fraud Undue influence Mistake
Key elements in forming a Contract: Legality Illegality can often invalidate a contract; Certainly some agreements which are wholly illegal, such as agreements to commit a murder, will not be recognized as valid contracts The contract must be formed within the boundaries of the law Otherwise, it may be declared NULL AND VOID
Discharge of Contract General term used to denote the bringing to an end of a contract and the release of all contractual obligations Ways which discharge can be effected Performance Frustration Acceptance of breach [Termination] Or agreement
5. CONSTRUCTION CONTRACT ROLES AND RESPONSIBILITIES
Parties to the Contract RIGHTS OBLIGATIONS OBLIGATIONS RIGHTS Employer Contractor Project Manager
Client Responsibilities 1. Indemnify the contractor as appropriate; Responsible for special risks and any work done by his workmen and omissions of the Project Manager; 2. To make available data relating to the project; 3. To approve variations; To pay the contractor for goods supplied; services rendered or executed works;
Contractor Responsibilities 1. 2. 3. To carry out and complete the contract satisfactorily; To provide, labour, materials, plant, equipment and all other things for the satisfactory completion of works or contract; To give prompt notice to the Project Manager of any error, omission, or other defect which can be discovered during execution of the project; Responsible for the design of Temporary works; Take full responsibility for the execution of the contract.
Responsibilities of PM/CM -1 1. Responsible for the correspondence on contractual issues exchanged between Employer and the Contractor; 2. Responsible for keeping an updated file with all of the documents exchanged with the Contractor and related with the execution of the contract; 3. Oversees the execution of the contract; 4. Manages the resolution of problems and up to a point of any disputes/ disagreements with the Contractor that appear during the execution of the contract;
Responsibilities of PM/CM -2 5. Monitors the Contractor s performance; 6. Responsible to establish a good spirit of cooperation with the Contractor which will lead to the achievement of the desired results; 7. Responsible for the closure of the contract.
6. CONTRACT VIOLATIONS One problem with contract management is specifically how the contract is enforced. When bidder doesn't provide the goods or services promised in the contract, the procuring entity must determine his next actions. PE can levy fines (liquidated damage) on the other contract holder or take legal action against him.
Disagreements Two partners may use a third party to settle difficult contract disagreements. This third party may be the court system, but the court system can sometimes be too expensive. Many parties under contract rely on third-party arbitration, where a neutral third party reviews the contract and makes a decision based on its terms.
Time When a contract dispute begins, evidence is required to make arguments regarding the contract. If the parties wait to arbitrate a contract, it's more likely evidence will be lost. Contract disputes should be resolved as soon as possible
Confusion Poor understanding of the contract can be one of the biggest problems for parties. If you outline a needed service unclearly in a contract, the service provider may make a mistake as a result. A third-party arbitrator will likely rule in the service provider's favour. Contracts should clearly identify deadlines and links between performance and payment
Legal Troubles Numerous legal issues can appear in a contract. Violations in laws or regulations can lead to void contracts, and can lead to legal trouble for one or both parties. All contracts should be reviewed by a lawyer -somebody who can interpret well the terms and conditions
7. COMMUNICATION
What is Communication? The system whereby information or knowledge possessed is transferred to and received in its entirety by another party. The transfer of information should be done properly to avoid wrong interpretation misunderstanding and communication break down. A good communication is a structural element in the relationship between the Client and the Contractor. In contract execution has proven that problems of lack of trust or concern related with the performance of the Contractor are frequently due to the ineffective communication of those managing the contract from both sides as well as the failure to communicate.
Rules Avoid Communication Problems 1. Whenever there is a deadline for the receipt of a written communication, the sender shall take all of the necessary measures to ensure the prompt receipt of the communication; 2. Any notice, consent, approval, certificate or decision by any person required by the contract shall be made in writing, unless otherwise defined in the contract; and 3. Any verbal instructions or orders shall be put into effect at the time of their communication and then confirmed in writing.
Types of Communication A: Informal Communication B: Formal Communication Is the verbal communication. People involved in contract execution practice verbal communication through discussion, giving and receiving instructions. Is the written communication. Can be in way of a letter, notice, memorandum, or written instructions which may require an equal formal written reply. Should be brief, clear, simple and containing all the essential details.
Written Communication Instructions Are orders, information or directions issued by the PM/CM to the Provider under the powers conferred upon him by the terms and conditions of contract. Meetings Records Reports Notices and The main objectives of the meetings are to make decisions, exchange information, generate new ideas and discuss problems pertaining to the execution of the contracts. Very important especially in the event of claims relating to delays and payments. Contract documents detail type of notices to be given by whom and to whom and procedures to be followed. The normal specified method is by registered post or recorded delivery to addresses contained in the contract
Instructions Procedure for issuing Instructions are :- All instructions may be issued to the Contractor or his agent on site All instructions must be in writing Oral instructions are not effective unless the Contractor or Project Manager confirms them in writing within a stated period An instruction is effective from the date of its issue or on the expiration of the period for its confirmation
Meetings Site meetings give the parties to the contract an opportunity to: Identify problems and challenges facing the projects; Clarify issues relating to drawings, specifications, schedule and instructions issued; Request additional information; and Report progress.
Records and Reports (1) Some of the records and reports to be kept are: Records of any memoranda relating to conversations, inspections, directions and observations. Records of correspondence between parties to the contract Minutes of site meetings and other meetings Monthly Claims Statements and all data submitted to support such requests Cost and productivity reports where possible
Records and Reports (2) Other records and reports to be kept are: Delivery reports of materials, plant and equipment Diaries, job schedules, transmittals Drawings and specifications Variation orders and associated documentation Inspection reports Accidents and site safety reports Weather and temperature reports.
8. SCOPE OF WORKS AND VARIATIONS A Major Challenge?
Scope of Work Defined as the extent of the contractor s responsibility to perform certain contract work Poorly written scope of work is a main source of dispute and contract claims, as well as fraud and corruption Scope is determined from: o Plans (drawings), o BoQ, o Specifications
Types of Variations Directed Variations Constructive Variations Defective Specifications
Directed Variations Ordered by the Employer (Project Manager) Apply clauses in the GCC/SCC: comments on compensation, time extensions, work proposals, scope of work, and other variation-related issues Parties are often in agreement as to the scope of the variation, compensation, and time extension but claims do arise where the parties disagree with the specific terms Most contracts contain a provision obligating the contractor to proceed with the disputed variation work pending a determination of the claim, so that the project does not suffer
Constructive Variations Occurs where the employer acts in a manner which has the same effect as if the employer executed a directed variation order; The employer, through some act or omission, caused the contractor to perform variations without issuing a formal directed variation order; Such variations claims depend upon an interpretation of the contract, the parties' actions with respect to the variations performed and whether the law provides support for the underlying basis of the constructive variation claim.
Defective Specifications Such claim arises where there are errors and omissions within the project drawings or specifications which result in changes in the work; Work to correct a defective design, which the employer does not recognise as a variation, can be pursued as a constructive variation; Defective specifications claims depend upon an interpretation of the contract and whether the law provides support for the claim. Another determining factor is whether a party should have known that the project drawings and specifications were defective and if they had a duty to review them. Early Warning Clause!!!
Variations An addition to, omission from, or change of scope, specifications, terms and conditions under the contract. Executed by means of a Variation Order/Change Order issued to the Contractor by the Employer or his authorized agent (PM). Under PPA 2004, all variation orders must get approval of the respective Tender Board prior to their being executed.
Variations (cont.) Reasons for Variation: Unforeseeable conditions Change of legislations Inadequate designs; Inadequate specifications; Insufficient detailing; Improvement in design and/or specifications; Inadequate materials testing during design phase; Inadequate site investigations; Insufficient budget; Defective work and/or materials.
Variations (cont.) Standard forms of contracts used in building and civil engineering works provide for variations which are necessary or desirable; They cover: Procedure for issuing variations Valuation for variations
Variations (cont,) Important rules to follow: Variations should not vary the basic terms, conditions and objects of the contract. Variations should be given in writing (normally as variation orders); Variations should be issued by a person authorized by the contract to do so; Orally issued variations must be confirmed in writing HOW CAN VARIATIONS BE MINIMIZED?
9. DISPUTES AND THEIR RESOLUTIONS
Disputes A dispute occurs when a claim by one party is rejected by the other; partly or in total; If the disputes sustain for a long time, then there is a significant increase in the cost for both contracting parties, the achievement of best value for money is affected; Great effort must be put to create a good working relationship which will ensure a frequent and effective communication as well as preventing the development of any sort of dispute between the Employer and the Contractor
Disputes (cont.) Escalation Range of Dispute Resolution Methods in terms of: Degree of Involvement: o The dispute may be resolved exclusively between the two parties without any third party involved or through a third party intervention of or by court decision Degree of Formality: o The dispute resolution procedure may be informal or totally formal
10. CONTRACT PAYMENTS
Payment In normal business transactions, one pays for services once they have been rendered or pays for a finished product e.g. cars, furniture etc. The payment of the Contractors for the construction of public works and services constitutes an obligation of the Employer, which arises from the terms and conditions of the contract.
Payment (cont.) TIMELY PAYMENTS quality, quantity, and timely delivery PE Contractual Obligation Contractor s Contractual Obligation PAYMENT CERTIFICATE IS BLOOD OF CONSTRUCTION INDUSTRY
Payment Procedures Depending on the type and particularities of the contract different payment methods and procedures are applied; They depend on the Form of Contract and wording of the respective contract. Conditions and procedures for payments are described in the General and Special Conditions of the Contract. Excluding the advance payment, all of the other payments are associated with respective deliveries/ acceptance (total or partial) of the supplies, services or works.
Types of Certificates A: Category I Interim Payment Certificate [Progress Certificates]. B: Category II Certificate of Practical Completion [Taking Over Certificates] Certificate of Partial Completion; Certificate of Sectional Completion; Defects Liability Certificate [Certificate of Making Good Defects]; C: Category III Final Certificate.
Types of Payments I: Advance Payment II: Interim/Progress Payment III: Retention Money IV: Final Payment
Guidelines for Issuing Certificates -1 PM must determine the form of the Monthly Statements (Interim & Final) that the Contractor is required to submit in order to facilitate the auditing and drafting of the respective payment certificates; PM must check that the unit prices written in the Monthly Statements do not differ from those defined based on the contract; PM must check whether the quantities written are consistent with the ones finally measured; The contracts with fixed price, without quantities, PM must check that the amount that the Contractor states in the Monthly Statements as the value of Permanent Works that were executed corresponds to the percentage of completion of every component of the project defined in the Analysis of Contract Value;
Guidelines for Issuing Certificates -2 PM within the specified in the contract from the receipt of the Monthly Statement, deliver to the PE IPC by stating the amount the he/she considers as due and payable to the Contractor taking into account: the amount of deduction provisioned in the contract [Retention Monies until the amount deducted reaches the Limit of Retention which is mentioned in the contract]; the amount for the repayment of the advance payment as per repayment schedule stipulated in the contract; and the amount of the Liquidated damages [if any]. PM may, through any IPC, correct or modify any previous certificate issued by him;
Guidelines for Issuing Certificates -3 In a case where PM, during the review of the IPC disagrees or cannot verify any part thereof, he/she must instruct the Contractor to provide additional information or to make changes in the IPC in order to achieve accord; PM must within the time specified in the contract issue the Final Payment Certificate; and The amount due the Contractor based on any IPC issued by PM must be paid by the PE within the time prescribed in the contract.
Works Measurements It is the duty of the Contractor to measure and of the Engineer to check all the work executed under contracts. However, it advisable that measurement to be done jointly to minimize time for checking and certifying; BoQs are the estimated quantities for the works, and they are not actual and correct quantities of the works to be executed by the contractor; The fact that word interim is used should not give both parties the chance just to present any claims. PM has an obligation to ensure that what is being claimed in the statement merits payments.
Aids for the Preparation of Certificates Contract Document, Bills of quantities, Drawings, Specifications and Conditions of Contract. Site Instruction (s) Engineers instructions (must be recorded and a proper up to date file be maintained); Variation orders, Site sketches, minutes of meetings, survey levels data, materials delivery records and invoices. Records of progressive measurements;
SBD Smaller Works Certificate Preparation, Certification and Payment Clause 45.1 Clause 46.1 Contractor Clause 45.2 PE makes submit PM issue IPC the payment Each statement of to to Employer to the the < 56d Contractor monthly < 28d [or otherwi se interim PM check the < 28d payment statement PM Delay = Interest
Contents of IPC The total amount of work properly executed; The total value of materials and goods delivered to or adjacent to the works [depend on the Form of Contract]; Retention; Fluctuations [fluctuating contracts]; Preliminaries; Liquidated damage; Day works [if any]; Advance Payment [amount to be recovered]; Others: claims assessed, compensation events, arbitral awards, variation orders
11. CONTRACT MANAGEMENT AS PER PPRA AUDITS Key compliance issues
Appropriate management of general contracts administration issues Appropriate management of performance securities, insurances, advance payment guarantees (which ever is appropriate); Timely issuance of instructions ; Management meetings are held (records prepared and signed);
Appropriate management of time control issues Appropriate extension of contract duration/delivery period; Appropriate application of remedies for delays; Timeliness of site possession; Quality of the project/service programme; Adherence to project/service programme; Progress reports are prepared.
Appropriate management of quality control issues Availability and quality of specifications/tor; Appointment of Project Managers/ supervisor; Appropriate qualification of Project Managers; Availability and quality of implementation reports (service delivery reports); Adherence to quality assurance plan; Appropriate qualification of inspection committees; Availability and quality of inspection reports; Availability of quality assurance plan; Appointment of inspection and acceptance committees.
Appropriate management of scope and cost control issues Are there justifications for variations Payment certificates are attached with inspection reports/measurement sheets Payments made on time Appropriate procedures followed in issuing variation orders/contract amendments
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