Reforming Negotiations: The way forward for contracting and project management

The way forward for contracting and project management

Sound contract conditions are a prerequisite for the development of good quality infrastructure. At a recent webinar on “Delivery of Quality Infrastructure and Conditions of Contract”, organised by the Consulting Engineers Association of India, industry experts shared interesting and insightful views on the current contracting and project management conditions in the country, and recommended some necessary reforms in this area.

Key takeaways

Standardisation of contracts is the need of the hour

The lack of standard bidding documents in the country poses a major challenge when it comes to drafting a good contract. Further, the diversity of contract structures within central ministries, and the even greater variance across the state governments and local bodies, adds to the disadvantage. There is a need to mandate a standard framework for contracts.

Approvals and land acquisition should be completed before project award

The government should structure projects and ensure that all approvals are in place and land has been acquired before handing over a project to a private developer.

Optimal risk allocation is imperative for successful project implementation

Some of the key issues faced in contracting include a lack of balanced risk allocation between the parties involved. Ensuring optimal allocation of risks between the government and the concessionaire, which is essential to avoid time and cost overruns, remains a key challenge.

FIDIC guidelines should offer higher flexibility

Most bilateral and multilateral funding agencies have been insisting that International Federation of Consulting Engineers (FIDIC) guidelines be followed for project implementation. However, it is imperative that FIDIC guidelines take into account regional variations and adapt to local, country-specific laws.

L-1 bidder criteria of project award should be done away with

The lowest bidder (L-1) selection process is one of the most damaging things to have been introduced for project implementation. FIDIC has published a document that suggests that the engagement of contractors for projects should be done on the lowest workable rate and not on the lowest bid rate, to ensure that the quality is maintained. The assignments should be awarded on the quality cost-based selection basis to ensure good quality infrastructure.

Dispute resolution continues to be a key challenge

The high cost of arbitration is a major challenge for timely project execution. Arbitration should be made more reasonable in order to ensure quicker dispute resolution. Besides, contracts should have clearly defined scopes, completion timelines and cashflows to ensure that no legal issues arise in the future. It is also recommended for contracts to have a clause stipulating that unless there is a conflict with the governing law of contract, all disputes must be referred to the adjunction board.

Time and cost overruns are plaguing project implementation

The Sagarmala Pariyojana, Bharatmala Pariyojana, the dedicated freight corridors and the Smart Cities Mission are among the mega infrastructure projects being implemented by the government. The cumulative cost overrun for public sector projects is equivalent to about 2.3 per cent of India’s GDP.

Covid-19 is expected to bring industrial transformation

Digital transformation, a greater emphasis on climate change, health and wellness, and re-localisation of supply chains will be some of the social outcomes of the pandemic. Infrastructure sectors, big and small, will have to adapt to the technological changes. Beyond 2021, sectors such as building, architecture and transport will witness moderate growth, whereas the energy, water, environment and health sectors are expected to witness significant growth.

Focus on asset monetisation is set to enhance infrastructure quality

In the Union Budget 2021-22, the Government of India unlocked a new opportunity in the form of asset monetisation. The transfer of public assets to private operators for operation and maintenance will result in high quality infrastructure management and bring in private sector efficiencies for the improvement of infrastructure quality. The government has already conceptualised infrastructure investment trusts and the toll-operate-transfer model with the aim of undertaking brownfield projects, reducing life cycle costs and improving efficiencies.

Focus on boosting competency of domestic players

In light of the increased emphasis on the Aatmanirbhar Bharat initiative, there has to be greater focus on the creation of competency and skills within the country. To this end, contracts should be structured in such a way that they allow incorporation of collaborations and consortiums, so that Indian contracting and consulting firms are encouraged to reach global levels and deal with projects internationally.

Next steps and the way forward

The NITI Aayog task force has programmed and laid down a detailed plan of action, with short-term and long-term strategies for implementing best international practices in the Indian context. The transformational phase has begun with the launch of the National Programme Project Management Policy Framework in October 2020. The National Institute of Chartered Program and Project Professionals is being institutionalised under the Quality Council of India. It has already started rolling out capability development drives for key ministries on a pilot basis. It will bring in professionalism in project management in order to create quality infrastructure in the country in a time-bound and cost-effective manner.

Quality infrastructure is essential for the effective operation of the domestic market. International recognition of the same is also imperative to unlock access to foreign markets. In order to achieve this, contracts should provide adequate protection to both the contracting authority and contractors, have reliable and quick dispute settlement mechanisms, incorporate a fair and balanced allocation of risk, and provide for deliverables in accordance with the required standards of the project. It is essential for the sanctity of the contracts to be upheld by both the public and private sectors, for key clearances and approvals to be in place before projects are awarded, and for project timelines and quality to be clearly defined in contracts. With a view to ensuring better outcomes, payments that incentivise timelines and performance quality should be included in the contracts. Going forward, there is a need to develop a high quality national infrastructure framework and establish a task force on infrastructure contract reforms for effective and timely implementation of projects.