sc008 smu mba summer 2014 IVth sem assignment

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DRIVE summer 2014

PROGRAM/SEMESTER MBADS (SEM 4/SEM 6)

MBAFLEX/ MBAN2 (SEM 4)

PGDSCMN (SEM 2)

SUBJECT CODE & NAME SC0008 –PURCHASING AND CONTRACTING FOR

PROJECTS

BK ID- B1663

CREDITS AND MARKS- 4 CREDITS AND 60 MARKS

Q.1. Write short notes on: 10 (2.5 marks each)

·         3 R's in contract management

·         Contracting strategies

·         Target cost contract

·         Fixed price contract

ANS: 3 R's in contract management: Therefore, we can say that there are three R’s in contract management, which are Risk, Rules and Relationships.

Risks - Risk is present in every business or transactions in one form or another. Whatever strategy the contractor selects, it will bring in some kind of risks for the buyer as well as the contractor. Hence, it is important to select a strategy wherein the risk involved is less. The risk involved in a contract should be modified to the extent that the contractor can manage the risk.

Q.2. Contract for Transferring the Newspaper Agency

Background

Pranav, a business man, owned a newspaper agency. He wanted to sell the newspaper agency to another party. Hence, in January 2010, he entered into negotiations with Mishra who had just started a newspaper agency business. Pranav informed Mishra that the newspaper agency has been making a profit of about Rs 10 lakh per annum over the last five years. Pranav also offered to let Mishra inspect the annual accounts of the newspaper agency, but Mishra refused to do it. The negotiation proceeded for three months, during which time the business diminished to such an extent that the profit reduced to approximately Rs two lakh per annum.

Issues

On 1st June 2010, Mishra entered into a contract with Pranav by which the newspaper agency business was transferred to Mishra for Rs 50 lakh. On 12th June 2010, Mishra realised the actual state of the business. He also realised that the business had only made a profit of Rs five lakh over the last five years and not Rs 10 lakh. In this case, Mishra had no remedy against Pranav for breach of contract. This is because a valid contract was created when Mishra agreed to Pranav's offer after months of negotiation. Without any contrary to the contract, Mishra had entered into the contract and offered his consent. After creating the contract, both the parties had not breached any terms of the contract. Even though Pranav had stated that the agency was earning Rs 10 lakh per annum, the contract did not indicate that the agency to be transferred was earning Rs 10 lakh per annum for the last five years. The contract that existed in this scenario only covered the transfer of ownership of the agency and the purchase price that was delivered by Pranav as fulfilment of his obligations. As there was no apparent breach of contract terms, Mishra could not claim breach of contract even when he identified that the agency was really earning less than what Pranav had stated previously.

Explain why Mishra could not claim breach of contract against Pranav. ( Background of the case,  Explanation terms and conditions of the contract that was entered into, Inference of whether what was stated by Pranav falls under the terms and conditions) 2,4,4

ANS: Background of the case: Pranav, a business man, owned a newspaper agency. He wanted to sell the newspaper agency to another party. Hence, in January 2010, he entered into negotiations with Mishra who had just started a newspaper agency business. Pranav informed Mishra that the newspaper agency has been making a profit of about Rs 10 lakh per annum over the last five years. Pranav also offered to let Mishra inspect the annual accounts of the newspaper agency, but Mishra

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Q.3. Assume that you are looking out for a contracting company for the construction of a hospital. You decide to draft a PQQ to all the proposed tenderers. Which questions you would include in the PQQ? ( Writing the question, Justifying the need to include the question in the PQQ) 5,5

ANS: Writing the question:

Question - Please confirm that your company will submit a tender in accordance with the proposed contracting strategy and in accordance with the attached terms.

Question - Describe your capabilities, experience and resources with ABC technology.

Q.4. Explain payment security.( Description of payment security, Discussion on various payment security risks,  Indication of least and most risk from contractor’s point of view) 2,7,1

ANS: Payment Security: The client or the buyer requires security for any advance or progress payments, in case the contractor does not perform as per the contract. Therefore, to secure the client against such risks there needs to be some security stating that the payment would be made. Such type

Q.5. Attractive Incentive Scheme

OP is a major oil company that had a massive blow-out in one of its oil wells. Oil was flowing out and polluting a major river in an environmentally sensitive area. Only a few companies in the area had equipment suitable to plug the well. OP’s director had a brief discussion with one of the companies that specialised in plugging the leak. This leak had posed a major environmental risk. Hence, the issues that needed to be considered here were urgency, duration of the work and availability of suitable contractors. If the leak was not plugged at the earliest it would seriously affect the public’s perception of the company. As the situation had to be rectified at the earliest the company had to choose contractors in the nearby location. Most contractors viewed the situation as an opportunity to make money. The oil company’s director had noticed this in his discussion with the first company. However, in this situation the oil company had to seek a solution that satisfied the contractor’s objective to make money and the company’s aim of getting the work done quickly. The offer for the contract was such that the contractor would be paid at the standard rates for normal work, together with an incentive scheme. Conversely, the two tasks, plugging the well and cleaning up, had to be treated independently. The offer also stated that if the oil leak was stopped within an hour a very high bonus would be paid, and the longer it takes the bonus would be reduced on an hourly basis. If the time taken was unacceptable, the bonus would be reduced to zero and only the standard rate as agreed for the work would be paid. The bonus offered was sufficiently high in order to make the task seem worthwhile. The clean-up work was also based on a similar incentive formula but with a daily, rather than an hourly, time schedule. By providing a high incentive the company was able to get the well plugged in one day and the clean-up in 23 days. Source: Ward, G. (2008). The Project Manager's Guide to Purchasing: Contracting for Goods and Services. Great Britain: Gower Publishing Limited.)

What contract and payment terms should be negotiated? What should be the base criteria for formulating the incentive scheme? ( Analysis with respect to incentive mechanisms, Interpretation with respect to negatives of cost incentives) 5,5

ANS:  Incentive Mechanisms: Incentives are external measures that are designed and established in order to influence motivation and behaviour of individuals, groups or organisations. There are many incentive systems or mechanisms and they are a combination of several coherent incentives. An incentive strategy should be developed by the client as part of the payment strategy. However, the client should not reveal the incentive strategy until the supplier or the contractor is selected. Let us now discuss the various incentive mechanisms.

Q.6. Can delivery affect the project? Explain ( Statement of the student’s viewpoint, Justification for it with supporting evidence, Conclusion) 2,6,2

ANS: Delivery: The transport department of an organisation is responsible for delivering the goods. Usually, the delivery of goods is done by the people who have expertise in the area of transportation. Sometimes even the project manager gets involved in the delivery of goods or services to assist the transportation department during import or export of materials. Usually, the items that are large in size and/or delicate involve greater risk and require greater attention while delivery. Risk management is a

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