Fifty shades of contracting mega projects in Pakistan
Among other problems, unscrupulous contractors often submit low bids to win contract
Bahria Grand Hotel Lahore. PHOTO COURTESY: HABIB CONSTRUCTION SERVICES
ISLAMABAD:
Infrastructure spending is the latest policy fad in Pakistan; however these mega projects are also accompanied by severe and sustained contractual problems – leading to an increase in project costs manifold.
When it comes to hydropower projects, the scam-tainted Wapda has been inadvertently forced to learn its lessons about contracts the hard way. The Neelum-Jhelum saga has been in shambles from start to finish whereas the contractor of Tarbela-4 extension project is threatening to suspend the contract.
Mega projects: CPEC to create jobs in G-B
Learning lessons from such contractual woes, Wapda recently decided to cancel Rs4.5 billion Dasu hydropower contracts with China Railway First Group (CRFG) at the earliest sign of trouble.
Variation order fraud
One of the reasons behind contractual mismanagement is the fact that most of our treasured public infrastructure mega projects, paid for by our taxpayers, are awarded to contractors that bid considerably below reasonable cost estimate (called the Engineer’s estimate).
But one may ask how such a contractor recovers project costs – not to mention making hefty profits out of its contract?
Unscrupulous contractors often play ‘low-ball’ by submitting low bids to win contracts awards – with an intention to recover project losses through a classic variation order fraud. Relying on the incompleteness of a project ToRs, contractors’ engineers propose cosmetic alterations in the scope of the project and then bill that extra work (called variation order) at an astronomical rate.
Many contractors ensure that a project is sufficiently delayed so that both the government agency and the contractor are locked-in, especially if the project site is classified as a harsh and remote location.
The modus operandi here is the same: make sure that the cost and schedule implications of re-tendering the project are much higher than contractor’s demands to re-rate the contract or to get approval of hefty change orders. These contractors seek change orders for work that is actually within the existing scope of their contracts.
Time, material fraud in civil works
Contractors often use fictitious labour, material and equipment under the time and material (T&M) costs. Many lump sum change orders that start as time and materials work are settled as lump sums using work tickets but contractors illegally do work ticket padding later on. Very often these T&M charges are not only overcharged and include base contract work but they are “recycled” on frequent basis. Under a ‘recycling’ mechanism, contractors resubmit invoices that have already been settled but under a different title.
Gwadar-Turbat-Hoshab M8 project
Consider the case of a construction supervision consultancy assignment for Gwadar-Turbat-Hoshab section of M-8 that was signed in 2004. The project was finally completed in February 2016. However the revised cost of supervision contract had escalated to almost 500% of the original contract value – thanks to five variation orders and three requests to re-rate the contract.
At one point, the National Highway Authority (NHA) was seriously considering to terminate the contract and re-tender it as consultants rejected the 5% annual escalation in rate allowed and threatened to stop work. However, NHA abstained to cancel the contract as it would have further delayed the project due to the time required in fresh procurement and the learning curve of the next consultant.
Neelum-Jhelum hydropower project: Consumers to bear Rs9b hit as cost goes up again
At the end of the day, many original civil contracts look like a rubber dingy next to a mammoth boat of variation orders. The worst part of all this is that such a practice is very much legal and not easily caught in annual audits of books.
There is no doubt that change orders are inevitable and a ‘necessary evil’ but those contractors who reduce their bid and then aggressively seek change orders to restore the profit lost during the bidding process should be brought to task.
The writer is a Cambridge graduate and is working as a management consultant.
Published in The Express Tribune, January 30th, 2017.
Infrastructure spending is the latest policy fad in Pakistan; however these mega projects are also accompanied by severe and sustained contractual problems – leading to an increase in project costs manifold.
When it comes to hydropower projects, the scam-tainted Wapda has been inadvertently forced to learn its lessons about contracts the hard way. The Neelum-Jhelum saga has been in shambles from start to finish whereas the contractor of Tarbela-4 extension project is threatening to suspend the contract.
Mega projects: CPEC to create jobs in G-B
Learning lessons from such contractual woes, Wapda recently decided to cancel Rs4.5 billion Dasu hydropower contracts with China Railway First Group (CRFG) at the earliest sign of trouble.
Variation order fraud
One of the reasons behind contractual mismanagement is the fact that most of our treasured public infrastructure mega projects, paid for by our taxpayers, are awarded to contractors that bid considerably below reasonable cost estimate (called the Engineer’s estimate).
But one may ask how such a contractor recovers project costs – not to mention making hefty profits out of its contract?
Unscrupulous contractors often play ‘low-ball’ by submitting low bids to win contracts awards – with an intention to recover project losses through a classic variation order fraud. Relying on the incompleteness of a project ToRs, contractors’ engineers propose cosmetic alterations in the scope of the project and then bill that extra work (called variation order) at an astronomical rate.
Many contractors ensure that a project is sufficiently delayed so that both the government agency and the contractor are locked-in, especially if the project site is classified as a harsh and remote location.
The modus operandi here is the same: make sure that the cost and schedule implications of re-tendering the project are much higher than contractor’s demands to re-rate the contract or to get approval of hefty change orders. These contractors seek change orders for work that is actually within the existing scope of their contracts.
Time, material fraud in civil works
Contractors often use fictitious labour, material and equipment under the time and material (T&M) costs. Many lump sum change orders that start as time and materials work are settled as lump sums using work tickets but contractors illegally do work ticket padding later on. Very often these T&M charges are not only overcharged and include base contract work but they are “recycled” on frequent basis. Under a ‘recycling’ mechanism, contractors resubmit invoices that have already been settled but under a different title.
Gwadar-Turbat-Hoshab M8 project
Consider the case of a construction supervision consultancy assignment for Gwadar-Turbat-Hoshab section of M-8 that was signed in 2004. The project was finally completed in February 2016. However the revised cost of supervision contract had escalated to almost 500% of the original contract value – thanks to five variation orders and three requests to re-rate the contract.
At one point, the National Highway Authority (NHA) was seriously considering to terminate the contract and re-tender it as consultants rejected the 5% annual escalation in rate allowed and threatened to stop work. However, NHA abstained to cancel the contract as it would have further delayed the project due to the time required in fresh procurement and the learning curve of the next consultant.
Neelum-Jhelum hydropower project: Consumers to bear Rs9b hit as cost goes up again
At the end of the day, many original civil contracts look like a rubber dingy next to a mammoth boat of variation orders. The worst part of all this is that such a practice is very much legal and not easily caught in annual audits of books.
There is no doubt that change orders are inevitable and a ‘necessary evil’ but those contractors who reduce their bid and then aggressively seek change orders to restore the profit lost during the bidding process should be brought to task.
The writer is a Cambridge graduate and is working as a management consultant.
Published in The Express Tribune, January 30th, 2017.