Friday, 15 July 2016

Contracts in Govt Civil Works - Facts

Today almost all Govt civil works are done by contractors including designs. When Nagarjuna Sagar Dam was constructed during 1950's and Srisailam Dam in 1960's, AP Irrigation Department with the help of Central Water Commission made its own designs procured entire raw material steel, cement, granite stone etc and its staff supervised the works on site day & night and ensured quality work. Contractors role was limited to mobilizing the workers/laborers for which they were granted small commission. This has resulted in value of construction being more than 90% and overheads less than 10%.

Nowadays with EPC system & third party quality certification, contractor is responsible for working capital, designs, raw material procurement, labour mobilization, quality certification by third parties, on-site supervision etc. Departments role is limited to awarding contracts, approving designs, handing over site, approving initial markings, taking measurements of progress of works and releasing payments. With provisions for other extraneous factors like corruption, inefficiency, substandard raw materials etc true value of work done is at best 30-40% and over heads, including corruption and mismanagement, are in excess of 60%.

Today's state of affairs I shall highlight with an example:
  • A company HQ at Hyderabad was awarded canal concrete lining work at an unit of Rs.72 and value of contract in excess of Rs.100 crores about 12 years ago.
  • The main contractor sub contracted to 4 other sub contractors for execution of the work at unit rate at Rs. 27 totaling Rs. 38 crores.
  • The sub contractor further sub contracted to several entrepreneurs splitting the work each about Rs. 1 crore at unit rate of Rs.22, again verbally, all these ground level contracts of about Rs. 30 crores i.e. Rs. 30 crores.
  • The level 3 local contractor, without any technical expertise or experience executes the work with substandard material and raises running bills in the name of main contractor. He has to manage the supervising staff of the department at site.
  • Whenever running bill payment is made at unit rate of Rs.72 and is received by main contractor and he in turn pays  level 2 contractor at Rs.27 unit rate in cash, and level 3 contractor gets cash payment at unit rate of Rs.22.
  • Upon completion of the work, the level 3 contractor discovered that in his work of Rs. 1 crore, he made a profit of Rs. 5 lakhs but lost Rs.10 lakhs due to labor issues and thefts at site.
  • I had never seen main contractor or sub contractor or his staff, at site during the progress of works of over an year.
  • Third party quality certification obtained on paper without site inspection.
  • True value of work is just 30% and remaining is overheads and corruption and final completed work is substandard with life of around 50% of its designed life.
  • Even though maintenance is contractors responsibility for about 5 years, the main contractors does hotchpatch maintenance within a small budget and with abnormal delays.
  • Inflated estimates have become order of the day with no controls.
My view:
All sub contractors should also be qualified or certified with verifiable expertise and infrastructure. No contractor should be awarded works more than twice previous year's turnover. Main contractor should never be allowed to subcontract the core work. Main contractor must have site office, and material procurement and supply to sub contractors should be its responsibility. All subcontracts up to 2 levels must be in writing and vetted by the department. Quality certification should be a continuous process by multiple agencies and well documented. Quality non-adherence should attract heavy penalties. The estimates must be approved by autonomous Costing & Prices Commission based on normative parameters. Tenders in excess of +/- 5% of estimates should be summarily rejected. It is better bear work delays than promoting & abetting corruption. Finally Anti-corruption agencies must get teeth and laws stringent and penalties heavy so that corruption should become a low profit & high risk activity. At least 90% of contractor expenditure must not be in cash.

No comments:

Post a Comment