SYSTEM OF PROCUREMENT IN CONSTRUCTION WORKS: SOME FLAWS AND THEIR REMEDIES

Rajeev Jain Sr. Project Officer, CIDC

INTRODUCTION

Most of the problems in project execution have their roots in flawed selection of agencies than all other adverse factors combined. Loose or not-so-relevant pre-bid screening procedure often permits entry of a few weak or incompetent agencies. With an eye on the award, some of them quote unworkable prices. In the absence of more comprehensive, rigorous, objective, reliable, transparent and justifiable system of evaluation, owners, specially in government organizations where visible objectivity in the award of a contract enjoys much higher weight age than the ultimate chances of successful completion, have shown a propensity to award the contract to the numerically lowest bidder with no weight age for competence since he had been considered eligible to bid for the work. This may mark the commencement of an agonizing journey through the maze of activities and responsibilities involved in the execution stage. Herein an attempt has been made to analyze the existing system of procurement and to suggest some remedial measures to improve upon the weaknesses and flaws of the system
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PREVAILING SYSTEM OF PROCUREMENT

Going further on the systems of procurement, let us examine, as to how we actually procure the works. Having obtained all the clearances, a notice for procurement, colloquially, known as Notice Inviting the tender is prepared, along with requisite bid documents. Irrespective of the fact that the procuring agency has only two major assignments viz. (a) satisfying all the supervisory agencies and (b) procuring; the exercise, instead of being a standardized one, is repeated again, as if this is being done the first time in the history. Same agencies are pre qualified for the similar services time and again by the same group of persons. But then one has to be transparent. In the name of transparency, advertisements are released in the national and local daily newspapers, sometimes costing more than the cost of the works themselves. The need of the hour is to eliminate in fructuous expenditure which amounts to making the process of procurements as expensive, as the procurement itself.

Noble Permises

In addition to the above facts, the existing system is supposed to be based on some noble premises concerning the project owner as well as the contractor. Here is the summary of these premises that is followed by the discussion of what may actually happen instead.

1. Premises Concerning the Project Owner

Here premises concerning the project owner are listed and are followed by the discussion what may really happen in practice instead.

Premise 1.1: The most competent agency should be awarded the work.

What may really happen

Each premise has been discussed here keeping in view the various operational aspects and the existing practices.

Premise 1.1: (Selection of contractors is done in following fashion)

1.1.1 Pre-bid selection : (registration of contractor with owner departments)

The registration system is commonly used with the owners, who have routine, repetitive works and need a contractor to enter with an owner after furnishing details of his past assignments, manpower potentials that the organization has, the plants and equipment he possesses, and various tax clearances. The system came into being with public works departments, defence establishments and other manufacturing organizations, who need regular work forces, albeit of smaller values. The system works well with small routine and repetitive works. However, some times this is used for even larger works. Some of the evident flaws are:

• Lack of consideration of the works in hand.

• Lack of consideration of specific experience of executing the nature of work in question.

• Lack of consideration of capabilities of the contractor to meet other exigent requirements.
  

1.1.2 Pre-qualification of contractors (Selection at the time of bidding):

For larger monetary value contracts, or those requiring specific skills, the system of prequalification of a bidder has become quite common. Apart from the usual requirements defined above, information on specific work related experience is asked for and evaluated. Work load in hand vis-à-vis the performance capability is also considered. In this respect, the system is a sure improvement over the pre-bid selection process. The system however works on an envelope situation, where specific performance location or stratification is not known and this also does not have a relative compare – award situation.

Premise 1.2: At the time of the award the lowest price among all the eligible bids is considered the most economical price. The lowest quoted price is frequently an unworkable price quoted deliberately or in error / ignorance. This results in suffering for both owner and contractor.

Premise 1.3: Unrealistic bidding and over stretched resources combined with weak coordination makes time and cost overruns and quality detection a rule rather than an exception.

Premise 1.4: Award to the numerically lowest bid may appear transparent but the weakness in the pre-bid selection, unrealistic quotes occasionally questionable credentials of the owner’s representative make the entire procedure fairly opaque.

Premise 1.5: Frequently, owners engineers lack formal training to oversee execution of work and large inadequate work execution experience except writing notes, passing adverse comments, collecting and collating data and similar bureaucratic functions.

2. Premises concerning the Contractor

Here premises concerning the contractor are listed and followed by the discussion what may really happen in practice instead.

Premise 2.1: Contractor possesses requisite experience in the type of work taken up.

Premise 2.2: The Contractor has adequate resources for executing the work.

Premise 2.3: Contractor quotes a workable price.

Premise 2.4: The Contractor has the corporate strength and resilience to weather adverse situations if and when they may arise.

What may really happen :

Premise 2.1: Contractors have a limited number of professionals on their permanent staff. Good professionals are also mobile. Most of the work is supervised and executed through temporary professionals hired on contract. With the modern day technology explosion and the pressures on time schedules, specialized experienced professionals are expensive and also, not easy to find. These professionals also have short-term loyalties and a lower level of motivation to achieve high standards of construction work. In many cases, corrective measures are taken when it is too late and much damage has already been done.

Premise 2.2: In-house resources are minimal in most cases. Dependence on temporary hiring is common but the same is seldom tied up in advance and often not available on schedule. Contractor control on hired resources is not the same as on owned resources. Absence of specialization also makes it difficult for a Contractor to build up permanently owned pool of resources on his own. Owners too do not ask many questions.

Premise 2.3: Entry into the field of contracting is unregulated. Most bids are optimistic. Many times an entry price is quoted without the financial strength to back it up over a larger span of time. Corporate development of resources (human, financial, technology and equipment) is seldom planned properly. When faced with a situation of unworkable price, the financially weak and / or short sighted contractor resorts to cutting corners.

Reasons for quoting an unrealistic price may be one or more of the following :

• Anticipation of tough competition

• Perception of owners’ urgency or lack of it

• Greed to jump in stature

• A bidders agenda of making up through claims on “extras”

• A genuine hope of long term business with the owner (dangerous unless backed up by department of financial and corporate strength etc)
  

Premise 2.4: Entry into the field of contracting is unregulated. Most bids are optimistic. Many times an entry price is quoted without the financial strength to back it up over a larger span of time. Corporate development of resources (human, financial, technology and equipment) is seldom planned properly. When faced with a situation of unworkable price, the financially weak and / or short-sighted contractor resorts to cutting corners.

REMEDIAL MEASURES

Some remedial measure as suggested here can avoid lot many problems which arise because of the flaws associated with the existing procurement system.

Statutory Entry Regulations:

By introducing statutory entry regulations, bidders quoting unrealistic price and performing sub-standard quality work can be kept away from the bidding process. This aspect needs debates and discussion before framing the regulations and being put into practice.

Evolving New System of Grading:

The present simplistic system of classifying panels of contractors into A, B, C special etc. should be replaced with a new system that should have the following:

• Grading of all entities involved in the project.

• Professional method of rating.

• Comprehensive – taking into consideration all factors which have bearing on successful execution.

• Objective system operated by an independent professional agency. Based on pre-determined and open methodology.

• Transparency of the grading process to the maximum possible level.

• Benefit of subjective wisdom of every senior highly experienced professional in the field who also have a reputation for their integrity and independence. However, subjective assessment however valuable should have less weight age than the objective methods.

• Grouping of various grades.

• Applying on a sliding scale, pre-determined and pre-announced moderating factors to the bid prices to arrive at moderated bid prices.
  

CIDC – ICRA Grading System

The Construction Industry Development Council (CIDC) with professional participation of the renowned rating agency Investment Information and Credit Rating Agency Ltd (ICRA) has already developed a new grading system on the above lines. A brief write up on the system is given in Annexure-A. It will be seen that we propose to grade not only the Contractor but also the Owner, the Consultant and the project itself as an entity as it has been conceived and defined. The subjective but necessary element of assessments by the Committee of Elders and the Grading Committee has been limited to 35% (20+15) as against 65% of the objective professional qualification. The new system will benefit all parties – owners, consultants, contractors and the project itself. Most of all it will be of immense value to banks and financing institutions in evaluating their lending risk for giving financial support to the Project.

Moderation of Bids with the grades secured

In one of the previous sections we have laid great emphasis on the hazards of accepting a lowest priced bid. This moderating system is proposed for counter balancing the hazards and will be of great value to all the parties concerned, in particular, the agency which has been charged with the responsibility for making procurement decision. Benefits to various parties are :

The Owner :

• Shall be able to pick out good players and also be able to award them the work, getting out of the syndrome of awarding the work to a poor agency simply due to the fact that the price quoted was lowest on the face value.

• Encourage mid stature players, to strive to achieve a better stature.

The Contractor :

• Shall be able to quote the reasonable and reliable price, and then able to deliver the goods as contracted.

• Raise the level of workmanship and concentrate more on the quality standards of his work than worrying about his eroding and dwindling returns.
  

The Consultant :

Part of the Consultant’s burden of recommending the best party is eased.

The Bank :

Greater confidence in lending risk evaluation.

Audit / Vigilance :