VALUATION

Definition
Valuation is the art of assessing the present fair value of a property at a stated time. The valuation
of anything is an estimate of the value of that thing in terms of money. It only attempts to suggest
fair prices. Yet, valuation is not an arbitrary process. It is based on certain facts and indications and
only after judicious processing of such facts and indications, we can suggest the value or fair price
of the property.
Rises and falls of the fair price can occur in a very short space of time. It follows therefore that all
valuations must clearly state the date to which the valuation relates, since time is the essence of all
valuations.
Difference between Value and Cost
Cost means the actual cost of construction where as value means the present market value or fair
sale value which may not be the same to the cost of construction. Value depends on supply and
demand where as cost is a constant amount requires for the construction
Qualifications and functions of a Valuer
A valuer is an expert who can work- out the market value of a property based on scientific analysis
and instances of sales. A good valuer is an engineer or architect who must possess sound
knowledge of the following subjects:
1. Estimating and costing.
2. Surveying and leveling.
3. Planning and designing.
4. Experience in construction works.
5. Building bye-laws of the local bodies.
6. Law of ease- ments.
7. Law of contracts.
8. Land Acquisition and Town planning Act.
9. Arbitration.
10. Fire insurance.
11. Central and local Government's taxation.
12. Money market and rate of interest.
13. Zonal importance of land and buildings.
14. Writing reports.
The function of a valuer is to determine the market value of a property in order to help his client
and also the courts when enquired for the same.
The purposes of valuation are
1. Purchase for investment or for occupation.
2. Tax fixation.
3. Purchase and Sale.
4. Rent fixation.
5. Insurance Premium.
6. Mortgage value.
7. Compulsory Acquisition.
8. Speculation.
9. Betterment charges.
10. Auction bids.
11. Wealth tax.
12. Gift tax.
13. Probate,
14. Estate duty.
15. To determine the amount of court fee stamp.

Some common terms in Valuation

Gross Income
Gross income is the total income or receipts from all sources without deducting the outgoings
necessary for taxes, maintenance, collection, replacement or loss of income, ground rent etc,
whatever may be.
Outgoings
Outgoings are the expenses to be made by virtue of being in possession of the property and also
the expenses of maintaining the property. Outgoings may be classified under the different heads of
taxes, repairs, management and collection charges, insurance premiums loss of rent. It should also
include sinking fund. A short description of each head of outgoings are given below!
(a) Taxes-This include Municipal taxes. The rates that are payable for Occupiers' share and for
Owners' share of taxes are calculated on the basis of 'Annual Rental Value' of a property after
deducting an amount for repairs etc. (usually 10% of the rent for repairs). The amount of taxes to
be deducted will vary from place to place in accordance with the laws in force at that particular
Municipality. For big properties Wealth tax and Property tax are also required as imposed by the
Government.
(b) Repairs-An amount is provided for annual repairs of buildings to keep the same in a sound
condition although actual repairs are taken in hand periodically say 3 to 5 years intervals. In
average cases 10 percent of the gross rent is provided for valuation purpose. Although cost of a
building should not have a direct bearing on the amount for repairs, yet there is also a method to
provide 1% to 14% of the cost of construction for annual repairs.
(c) Management and Collection Charges-An agent collects rents for big buildings and if the state
is large he will also manage the state. Usually the charges vary from 4 to 5 percent. This includes
investigation of petty complains and supervising petty repairs. This figure of 4 to 5 percent does
not include salaries of Liftman, Sweeper to clean staircase, common passage etc. pump attendant
and Electric Charges for common lights, pump and Lift etc. with due allowance for the service
charges. In order to include all such expenses at least 9 to 10 percent of the gross rent should be
allowed as the management and collection charges.
For small buildings having no lift, no common pump or light etc. and the owner collects the rent
himself the outgoing on account of this head is not practically considered
(d) Insurance :-The amount of actual insurance premium is considered as an outgoing expense. A
property may not be insured at all, but this does not mean no deduction should be made for
insurance premium. Because market value is required to be ascertained from the view-point of a
prudent perchaser who will always insure his building against fire and if the owner has failed to
take this precaution, a valuer should do so, otherwise an incorrect figure will be found. Insurance
premium depends on the construction of the building, the nature of Occupancy of the building, the
adequacy of the water supply, the pressure of the water main and facilities for fire fighting etc.
(e) Loss of Rent -Part of a property may remain vacant for some period and will not fetch any rent
for that period. Therefore the loss of rent is considered as outgoing expenses and deducted from
the calculated gross rent. The average loss of the past 3 years may be considered as a guide to
calculate the yearly loss of rent.
(ƒ) Sinking Fund- discussed later
(g) Ground Rent- When a structure is constructed on a lease hold property (lease may be 99 years
or 999 years ) then a specified amount in a specified period as may be agreed upon is considered
as outgoing from the gross income of that property.
Net Income-
Net income is the gross income less all outgoings which includes taxes, premiums, repairs,
insurance, management and collection charges, loss of rent, ground rent, sinking fund etc.
necessary to maintain the property in a state to command that income.
Scrap Value-
Scrap value is the value of dismantled materials of a built up property at the end of its utility period
and absolutely useless except for sale as scrap. When it applies to an old building which has
outlived its useful span of life a certain amount can get by selling the old useful materials like,
bricks, steel, wooden articles, etc. less cost of demolition of the building. The scrap value of a
building is usually considered as 10 percent to the cost of construction. Thus in the case a machine
which do not give useful service or becomes obsolete and can not be used again by repairing or
replacement of parts, the value obtained at that time by selling the machine in one unit or cut in
parts is known as scrap value. The scrap value is also known as junk value or Demolition value.
On rare occasions scrap value may be zero or even negative if the cost of dismantling or removal
becomes equal or more than the scrap value.
Salvage Value
It is the estimated value of a built up property at the end of its useful life without being dismantled.
Salvage value will be high when a building, a machine becomes useful after replacement and
remodeling.
Market Value
The market value of a property is the value at which it can be sold in the open market at a particular
time. In the open market means the property is offered for sale by advertise in daily News Papers
and all necessary steps are adopted so that every person who desires to purchase the same can
make an offer. The owner willing and not obliged to sell might reasonably expect the price from a
willing purchase with whom he was bargaining for the sale. So market value must be free from
forced value or sentimental value.
Market values vary time to time. Factors that affect the market value of a property are :---
(i) Forces on demand and supply-Few buyers as compaired to a number of properties available for
sale in a locality will result in low prices for the property and vice-versa.
(ii) Rise in population-Rise in population may be due to growth of new industries or influx or by
multiplication will result heavy demand for land-building properties.
(iii) Cost of production-The present cost of production affects the value due to rapid change of
price index in comparison with the rate of depreciation.
(iv) Purpose of purchase-Value of a property will be more when the purchaser can reside himself
even in partly vacant house or speculate to run a business by purchasing the property.
(v) The imposition of control of prices of building materials_This will cause violent fluctuation in
the prices of building materials and the values of buildings will vary an appreciable amount from
time to time.
(vi) Rent Restriction Act-Value of a property is calculated from its probable annual income through
rent and so due to certain passing of a rent restriction act. by a Government may be the means of
causing a slump in property values.
(vii) Improvement by Public Schemes-The taking of any public service scheme, like sewerline,
waterline, means of transport etc. to an area lacking modern amenities will tend to make that area
more attractive and will be closely followed by an increased in land values. Even a proposal to
bring a sewerline to an unsewered area or before roads are made and services installed will cause
to rise the value of property at that area.
(viii) Interest on Schedule Banks or Government securities-The lowering of the Schedule bank
interest or Government security higher may be the interest of making more money available for
investment in property and vice-versa.
(ix) Abnormal conditions to insecure conditions like riots, war trend etc. cause of values may drop
and remain for a considerable period.
Book Value
Book value is defined as the value of the property shown in the account book in that particular
year, i.e. the original cost less the total depreciation till that year. Thus the book value of a property
gradually reduces at a constant amouut year after year upto the limit of scrap value i.e. upto its
utility period. Book value is applicable on building and movable properties but not on land. This
is usually required in the accounts book of a company to show the assets and also required to
determine the reserved price for court sale.
Difference between market and Book Value :-
Market value Book value
(a) The value is fixed by the purchaser. (a) The value is fixed by the rate of
(b) The value may be higher during the depreciation.
subsequent years due to an increase in the price (b) The value can not be higher during the
index. subsequent years even due to an increase of the
(c) The value may be constant for a period. price index.
(d) This is applicable to any type of property. (c) The value cannot be constant but there is a
(e) Market value is considered for valuation. gradual fall.
(f) This depends on forces of demand and its (d) This is not applicable in the case of land or
supply, development of the area, etc. metal articles like Steel, Copper, Gold, etc.
(e) Book value is considered for the Accounts
book of a company.
(f) Book value is not variable due to its supply,
development of the area, etc. demand and
supply or development of the area
Assessed value
The assessed value is the value of a property recorded in the register of a municipality to determine
the amount of municipal taxes to be collected from the owner of the property. Generally, the
assessed value is determined from the gross annual rent at which the land or building might at the
time of assessment be reasonably expected to let from year to year, less in the case of a building,
an allowance of ten percent for the cost of repairs and for all other expenses necessary to maintain
the building. In case the gross annual rent of a property can not be easily estimated then an amount
of 5 percent of the estimated cost of the property shall be considered.
Sinking fund-
The sinking fund is an amount that has to be set aside at fixed intervals of time ( say annually) out
of the gross income so that at the end of the useful life of the building or property the fund should
accumulate to the initial cost of the property. A building a machine, a vehicle, etc., becomes useless
after certain years i.e. at the end of its life. Hence it is necessary to make some provision whereby
the owner can accumulate to a sum required for rebuilding the premises or can replace the article.
For the above purpose sinking fund is periodically collected and deposited to a bank to get the
highest compound interest or a sinking fund insurance policy is made to the insurance company
throughout the life of a building or article. In case when a building is built up or a vehicle is
purchased by taking a loan, a small portion of rent or income is set aside every year or at regular
intervals and may be paid directly to the lender by way of installments.
Determination of sinking fund
The calculation of sinking fund depends upon the life of a building and also upon the rate of
interest. When the life of a building is over the owner can get back a certain amount on the sale of
old building materials which is known as scrap value. This amount is considered as 10% of the
building cost. Therefore, the calculation of sinking fund is made on 90% cost of the building.
Let,
S=Total amount of the sinking fund;
I=Annual installment required;
R=Rate of interest expressed in decimal; n=number of years and
Is=Co-efficient of annual sinking fund, so that I=Is x S.

** numerical form BN Dutta and M Chakraborty**

Capitalized value
The capitalized value of a property is the sum or amount, the interest on which at the highest
prevailing rate would be equal to the net income out of the property.
If a property produces a net income of Rs. 4,000 per annum and a purchaser desires 8% return on
his capital according to the highest prevailing rate he should pay Rs. 4,000 ×100/8 =Rs. 50,000
maximum for the property. This amount Rs. 50,000 is the capitalized value of the property. If the
purchaser, pays more, he will not have 8% return on capital. If he pays less, he will obtain a greater
return than 8%. Thus, the higher the rate of interest, the lower will be the capitalized value of a
property and vice-versa. But practically the capitalized value of a property does not lower down
inspite of higher Bank interest due to the fact that rent goes up and so more will be the net annual
return.
The multiplier of the net annual return or rent (in this case 182 ) to obtain the capital value is
known as the year's purchase.
Capitalized value=Net annual return x year's purchase.

Year's Purchase (Y. P.)

Year's purchase is defined as the capital sum required to be invested in order to receive a net annual
income as an annuity of Re 1/- at certain rate of interest.
Depreciation
Depreciation is the loss in the value of the property due to its use, life, wear, tear, decay and
obsolescence This is an assessment of the physical wear and tear of the building or property and
is naturally depend on its original condition, quality of maintenance and made of use. Thus the
value of a buiding or property decreases gradually upto the utility period due to depreciation. There
are different methods to calculate depreciation. Whatever method is adopted book_value of a
property at a particular time is the original cost less all depreciations till the time. The general
annual decrease in the value of a property is known as Annual depreciation. Present value of an
old building should be worked out on the basis of an annual rate of plysical deterioration multiplied
by the building age and concluding by making a final adjustment for obsolescence.
Obsolescence
This may be defined as the loss in the value of the property due to change in fashions, in designs,
in structure, in adequacy to present or growing needs, necessity for replacement due to new
inventions etc. An apartment which becomes increasingly difficult to rent out is said to suffer from
obsolescence.
Obsolescence may be (a) Internal obsolescence :-
due to (i) Poor on eccentric original design,
(ii)Change in type of construction,
(iii)Change of kind of construction,
(iv) Change in utility demand.
(b) External obsolescence are 1-
(i) Poor original location,
(ii) Change in the character of the district,
(iii) Specific detrimental influences, such as due to construction of factories, stackyards, proximity
of public buildings, traffic locations, and noises, etc.,
(iv) Zoning laws.
Differentiation between Depreciation and Obsolescence

Depreciation Obsolescence
1. This is the physical loss in the value of the 1. The loss in the value of the property is due
property due to wear, tear, decay, etc. to changes of design, fashion, in the structure
2. Depreciation depends on its original of others, changes of utility demand, and also
condition, quality of maintenance, and mode specific detrimental
of use. influences.
3. This is variable according to the age of the 2. Obsolescence depends on normal progress
property. More the age more will be the in the arts, inadequacy to present or growing
amount for depreciation. needs, etc.
4. There are different methods by which the
amount of depreciation can be calculated.
 3. This is not dependable on age of the
building. A new building may suffer its usual
rent due to obsolescence.
4. At present there is no method.

Annuity
An annuity is the net installment of annual or periodical payment for repayment of the capital
amount invested in a property for a specified period. An annuity is either paid at the beginning or
at the end of each period of installment.
In case when the annuity is payable at the beginning of each period of the year and payments are
continued for a certain fixed number of periods it is known as Annuity certain.
In case when the annuity is receivable for an indefinite period, it is known as Perpetual Annuity.
In case when the annuity commences after a few years from the actual date of the capital amount
it is known as Deferred Annuity.
Determination of Depreciation
Depreciation is an assessment of the physical wear and tear of the property and is naturally
dependent on its original condition, quality of
maintenance and mode of use.
Methods of calculating depreciation :-(a) Straight line method, (b) Constant per- centage method
or Declining Balance method-(c) Sinking fund method, (d) Quantity survey method.
**Numericals from M Chakraborty page -564**
Different methods of valuation
The different methods of valuation commonly adopted are
(a) Rental method of valuation,
(b) Initial cost based valuation,
(c) Direct comparison method of valuation,
(d) Profit based valuation,
(e) Development method of valuation,
(f) Depreciation method of valuation.
 TENDERS AND CONTRACTS
Contracts
An agreement between two parties enforceable by law is a Contract. The contract invariably
follows a proposal from one party and its acceptance by the other.

The term contract, so far as Public Works Department is concerned, means a written
undertaking for the execution of works or supply of materials or for the performance of any
service connected there with duly accepted and registered by the competent authority on
behalf of the Union or State Govt.

Contractors
In the above context, the term Contractors mean Private individuals Partnership firms, Public
or Private Limited concerns who have made such an undertaking for the execution of works,
supply of materials, or for services concerned therewith with the respective Govt.

Essentials of Contracts
Essentials of Contracts are the following particulars by which all agreements must be made in
order to constitute a valid contract;

1. The contract shall be made by parties competent to contract

A person is competent to contract provided (a) He is of the age of majority according to the
law to which he is subject. A person who is not a major according to law can break an
agreement. No contracts shall be made by a subordinate authority who has not been directed
or authorized to do so. (b) He is of sound mind person is said to be of sound mind for the
purpose of making a contract provided he is capable of understanding it and of forming a
rational judgment as to its effect upon his interest at the time when he performs the contract.
(c) He is not disqualified from contracting by any law to which he is subject.

2. The contract shall be made by free consent of the parties;

Two or more persons are said to consent when they agreed upon the same thing in the same
sense. Consent is said free when

(a) It is not caused by under influence. The relations between the two parties performing a
contract are not such that one of the parties is in a position to dominate the will of the other
and uses that position to obtain an unfair advantage over the other.

(b) It is not caused by committing or threatening to commit any act forbidden by the Indian
penal code, or the unlawful detaining or threatening to detain any person to enter into an
agreement.

(c) It is not caused by fraud.

(d) It is not caused by misrepresentation.

3. There shall be a definite proposal and its acceptance:

Terms of contract must be precise and difinite and there must be no room for ambiguity or
misconstruction therein. When one person signifies to another his willingness to do anything
(here contract), he is said to make a proposal, The communication of a proposal is complete,
when it comes to the knowledge of the person to whom it is made. The acceptance must be
absolute, unqualified be expressed in some usual and reasonable manner. Acceptance is made
by performing conditions or receiving conditions.

4. The contract shall be made so that the considerations and objects are lawful.

The consideration or object of an agreement is said to be unlawful if forbidden by law or

fraudulent or of such nature that, if permitted it would defeat the provisions of any law or
involves or implies injury to the person or property of another or opposed by public policy or
regards as immoral by the court.

5. That the meaning shall be certain.

Agreement, the meaning of which shall be certain or capable of being made certain.

Types of Engineering Contract their advantages and disadvantages:

Following are the different types of contracts for the execution of civil Engineering

1. Item rate contract,

2. Percentage rate contract,

3. Lump-Sum contract,

4. Labour contract,

5. Materials supply contract,

6. Piece Work Agreement,

Reprise Innovations

7. Cost plus percentage rate contract,

8. Cost plus fixed fee contract,

9. Cost plus sliding or fluctuating fee-Scale contract.

10. Target contract.

1. Item rate contract

It is also known as Unit-price contract or schedule contract. For item rate contracts,
contractors are required to quote rates for individual items of work on the basis of the
schedule of quantities furnished by the department. This schedule indicates the full
nomenclature of the items as per the sanctioned estimate, estimated quantities, and unit
therein. While filling up the rates the contractors are required to express the amount is figures
and words and also to work out the cost against each item. The final total of the amount
tendered for the work is also drawn up by them. This type of contract is followed by Central
Public Works and Railway departments.

Advantages of item-rate contract:-

(i) This form of contract ensures a more detailed analysis of cost by the contractor and as
such is more scientific. The departmental officers are to work out the schedule of quantities
against each item of work and the contractors are to work out the rates against each item. The
element of uncertainty and guess which is inherent in the use of percentage rate contract is
altogether absent in item-rate contract and the authority competent to accept the tender can
easily check the rates with reference to his own calculations and decide which of the tender is
favourable.

(ii) Since the contractors are to write of their individual rates of individual items in figures as
well as in words, it is not easy to form a ring during the submission of tender and to allot a
work to one of the contractors without competition.

(iii) The contractors work out the rates of all items of the schedule in order to put it in the
tender. Thus, the unworkable rated tender may be avoided which leads smooth progress and
timely completion of a work.

Disadvantages of item rate contract :-

(i) The basis of this type of contract is the item wise rate offered by a contractor. But the
itemwise amount which is calculated by the contractor by multiplying the quantity of each
item with the rate may be incorrect. Sometimes such incorrectness may be provided by a
contractor for his own interest. Thus the lowest position of a tender can not be known after
opening the tender in the presence of all other contractors. Contractors may also quote some
item rates in words excluding paisa intentionally to tamper in rates. Thus, there is a loophole
for a contractor to correct a rate to be the lowest tenderer.

(ii) As the quantities may be increased 'or decreased, a contract of this nature requires careful
consideration by the Engineer before it is entered into, as by wise anticipation or perhaps
outside information a contractor may quote high prices for items that are likely to be required
in increased quantities and low prices for items likely to be decreased or required in small
quantities. In that case the department would stand lose heavily due to an unbalanced tender.

(iii) During filling up the tender by the contractors by quoting their rates in figures as well as
in words against each item of the schedule there are possibilities of overwritings. Erased rates
and rates not shown in words are liable to be rejected. In case of discrepancy in rates as
shown in figures, and words the accepting authority may at his descretion accept the lower of
the two.

(iv) Comparative statement of item rate tenders is more elaborate and comprehen- sive and
intelligent scrutiny is required. A mistake in it may lead to the work being awarded to a
contractor who is not lowest.

2. Percentage rate contract:-

In this form of the contract, the department draws up the schedule of items according to the
description of items sanctioned in the estimate with quantities, rates units and amount shown
therein. Thus, the department fixes the item rates of the tender (so called as "item rate
tender"). The contractors are required to offer to carry out the work at per the rates shown in
the specific price schedule or at percentage above or below the rates indicated in the schedule
of items of work attached to the tender. The percentage above or below or as per tendered by
the contractor applies to the overall amount of quantities.

Advantages of percentage rate contract:

(i) This type of contract is convenient as the lowest rate and comparative position amongst
the contractors are readily known just on the opening of the tender.

(ii) As there is no provision to quote contractors' own rate for an individual item, benefit due
to increased quantity with a beneficial rate cannot be availed by a contractor. Thus there is no
possibility of unbalanced tender.

(iii) A comparative statement can be prepared quickly and their is no possibility of tampering
the rates of a contractor in order to be the lowest tenderer.

(iv) As contractors are not required to quote their rates for individual items the overwriting,
erasing rate, etc. can be avoided. Thus, a tender (may be lowest) is not liable to rejection due
to the above causes.

Disadvantages of percentage rate contracts :-

(i) In this type of contract, contractors compete for the tender by quoting their percentage
rates. To write down the quantum of percentage in order to be the lowest tenderer contractors
mostly depend on guessing the quantum of percentage to their competitors without analyzing
the workable rates of the individual items. Thus, an uncertain or unworkable rated tender may
be the lowest. Much time, consideration and approval of higher authority are required to
cancel the lowest tender. On the other hand if such a tender is accepted considering the keen
competition there are uncertainty for quality. smooth progress and completion of the work.

(ii) Since the contractors are to write down only the percentage above or at per or below it is
very easy to write such a rate in few minuites before the time of submission of the tender.
Also the correction of the percentage rate is only at one place. Thus, the tenderers can easily
form a ring even up to the time of submission tender in order to allot the work to a particular
contractor at a high rate without actual competition. This leads drainage of Government
money.

(iii) By negotiation among the contractors two or more of them may quote the same rate in
order to get a part of the work at a high rate. If the tender is acceptable there is administrative
difficulty to allot the whole work to any one of the contractors. There may be also technical
difficulty in dividing the work at equal amounts among the contractors If the work is
distributed more labour is required to make entries of the measurements, issue materials, and
to prepare and check the bills of the contractors individually.

3. Lump-Sum Contract

In this form of contract, the contractors are required to quote a fixed sum for the execution of
work complete in all respects i.e. according to the drawing, designs, and specifications
supplied to them with the tender within the specified time.

The departmental schedule of rates for various items of work are also provided which
regulates the payment to the contractor in respect of the items of works involved for any
additions and alterations not covered by the original work.

Advantages of Lump-Sum Contract:-

(i) It has the advantage that the owner knows before hand exactly what the work will cost.

(ii) Detailed measurements of the work done are not required to be recorded except in respect
of additions and alterations.

(iii) Since the complete picture of the work from detailed drawings and also the total cost of
work is known beforehand, excellent planning and efficient management for the execution of
work is more convenient.

Disadvantages of Lump-Sum Contract :-

(i) Under such a contract it is essential that the work be accurately and completely shown on
the drawings and described in the specifications and that full information as to site conditions
should be available, otherwise, disputes can easily arise.

(ii) Difficulty arises to make any intermediate payment, generally a certificate is given by a
responsible officer to the effect that, by superficial or general measurement, he has satisfied
himself that the value of the work is not less than a specified amount in conformity with the
contract agreement.

(iii) Although often used in conjunction with a schedule of prices it is not a suitable form of
contract where considerable additions or variations are expected or contemplated.

4. Labour contract

This is a contract where the contractor quotes rates for item work exclusive of the element of
materials that are supplied by the Department free of cost.
Advantages of Labour Contract:-

(i) The materials stored by the Government are thus utilised.

(ii) The increase in the cost of the work is checked inspite of any rise in the prices of such
materials in the market.

(iii) Difficulty in obtaining certain materials in the open market can be avoided and thus
better progress with standard quality of materials can be mentioned.

Disadvantages of Labour Contract

(i) There may be a delay in obtaining the materials by the department subsequently the
contractor is required to keep himself in touch with the day-to-day position regarding the
supply of materials from the department.

(ii) A large storage area is required to store the different kinds of materials and constant
guarding, etc. is essential. Besides these, constant accounting of materials by employing
additional staff is necessary. For all such expenditures, the ultimate cost of materials may be
higher than the cost of materials procured directly by a contractor from open market.

(iii) Thefting from the store, shortage of materials, and difficulty during handing over storage
charge accounting all materials are constant troubles for a department.

(iv) Refund of surplus departmental materials by a contractor in good condition, wastage,

damarage etc. are also involved in this type of contract.

5. Materials supply contract or contracts for the supply of materials

In this form of contract, the contractors have to offer their rates for the supply of the required
quantity of materials inclusive of all local taxes, carriage, and delivery to the specified stores
within the time fixed in the tender. This form of contract is generally used when purchase of
materials, viz., Bricks, stone chips, furniture, pipes and specials etc. are involved. All
materials received should be examined and counted or measured, as the case may be when
delivery is taken.

Advantages of materials supply contract:-

(i) Payment of this type of contract can be made promptly, and so the contractors try to take
the supply order even at less profit, resulting in low cost of the materials.

(ii) As the supply of materials is taken through a contractor, the department receiving the
supply of materials does not worried due to loss of materials, breakage, damarage charges
during transit.

Disadvantages of materials supply contract:-(i) Constant control for quality of materials to be

received at several batches at different times is required.
(ii) During submission of tender intending contractors may form a ring to get the supply order
at a higher rate at different turns.

6. Piece Work Agreement

As the name signifies, the Piece Work Agreement is that for which only a rate is agreed upon
without reference to the total quantity of work to be done or the quantity of work to be done
within a given period. In case of petty work valued up to Rs. 10,000/-each inclusive of the
cost of materials may be carried out through contractors by Piece Work Agreement. In this
type of agreement, detailed specifications and the total cost of the whole work to be done are
mentioned. It is terminable from either side at any time and can not be called a contract in the
true sense. Work may be executed in a simple "work order" agreement form, there is no
security money and penalty clause.

Advantages of Piece Work Agreement

(i) Urgent small work may be taken up for execution without inviting tender and a reasonable
time is saved.

(ii) If a contractor delays executing the work or uses inferior quality materials or leaves the
work partially complete separate contractor may be engaged at any time.

Disadvantages of Piece Work Agreement

For this type of Small Work, approved contractors find little interest, and as such work
becomes in hands of petty contractors having little management system and adequate
knowledge to carry out the work following departmental procedures.

7. Cost plus percentage rate contract:-

In tendering for work on a "Cost plus" basis, the contractor is paid the actual cost of the work,
plus an agreed percentage addition to allow for profit. This type of contract is generally
adopted when conditions are such that labour and materials rates are liable to fluctuate. In
adopting this system of tendering no "Bill of Quantities" or "Schedule of Rates" has to be
priced but the owner or the Depart- ment should carefully define the actual cost and record
exactly what is permissible in the cost of the work.

Advantages of cost plus percentage rate contract

(i) It has the merit that contracts can quickly be drawn up and agreed and also work of an
urgent nature put in hand without delay. It is for this reason, useful to a large extent during
the war period when urgency prevails and work is required to be started at short notice.

(ii) This type of contract is suitable when work can not be executed by other types of
contracts at a competitive rate due to uncertainty and fluctuation in the market rates of labour
and materials.

Disadvantages of cost plus percentage rate contract:-

(i) Close supervision and checking of delivery notes and invoices which it involves, makes it
unsuitable for works where the necessary staff is not available.

(ii) It is to the contractor's advantage to make the cost as high as possible by wasting material
and employing inefficient workmen, as the contractor takes little risk and his profit is assured.
This form of tender is not popular with contractors, despite the fact that they can not lose on
it, for it tends to spoil the pushing qualities of those carrying out the work.

8. Cost Plus fixed fee contract

In this type of contract the contractor is paid by the owner an agreed fixed lump sum amount
over and above the actual cost of the work. This fixed fee shall cover overheads and profit to
the contractor The fee does not vary

with the actual cost of the work as in the case of a cost plus percentage rate contract.

Advantages of cost plus fixed fee contract

Since the fixed fee cover the contractor's overhead charges and profit the contractor shall
naturally try to complete the work speedily in order to earn his fee as soon as possible.

Disadvantages of cost plus fixed fee contract

This form of tender is not popular with contractors, despite the fact that they can not lose on
it. The contractor shall try to complete the work as early as possible even by purchasing
materials at a higher rate and engaging labour at high charges and thus the owner may lose a
reasonable amount to carry out the work by this type of contract.

9. Cost plus sliding or fluctuating Fee scale contract

In this type of contract, the contractor is paid by the owner the actual cost of construction plus
an amount of fee inversely variable according to the increase or decrease of the estimated
cost agreed first by both the parties. Thus higher the actual cost lower will be the value of fee
and vice versa.

(i) Advantage- In this case a contractor shall not try to increase the actual cost as in
the case of "cost plus percentage rate" or shall not be indifferent as in the case of
"cost plus fixed fee contract" Because the interest of a contractor is totally
involved with the variation of the actual cost. Thus is the actual cost lower both
the owner and the contractor will benefit. This is the best of the cost-plus type
contract.
(ii) Disadvantage- The estimated cost must be very accurately determined. In case if
the estimate is very higher than the actual cost due to inefficiency of the estimator
a contractor will get more amount on the basis of savings and vice versa.
 10. Target contract

This is the type of contract where the contractor is paid on a cost-plus percentage basis for
work performed under this contract, and in addition he receives a percentage plus or
minus on savings or excess effected against either a prior agreed estimate of total cost or a
target value arrived at by measuring the work on completion and valuing prior agreed
rates.

Advantages of Target Contract!-The contractor is encouraged to use his skill and

experience in keeping the cost as low as possible. This type of contract is
profitable to both the contractor as well as to the owner.
Disadvantages of Target Contract :-The contractor may show higher cost of
construction and thus he gains more amount even covering the penalty due to
excess expenditure.

11. Measured Contract or Schedule Contracts

Except lump-sum contract all other types of contracts are measured contract In this case
the total cost of a work is worked out by detailed measurement of different items of work
after i's completion A bill is then prepared by multiplying the measured quantities by their
respective rates. Examples of measured contract are item rate contract, percentage
contract, cost-plus type contract, material supply contract etc. but not Lump-Sum
contract.

12 Negotiated Contract

When work is awarded on contract by mutual negotiation between the parties without call of
tenders, it is said to be a negotiated contract.

The advantages of this system are that it brings some economy in expenditure. The parties
selected being always reliable and financially sound, ensure uninterrupted work with fewer
chances of a dispute.

Contract Documents
When a work other than a petty work to be executed under the “Work Order" system is
proposed to be given out on contract the Engineer-in-Charge (on behalf of the owner)
prepares "Contract documents." Both the parties entering into a contract must put their
signatures at each page of the contract documents and, in the case of sealed contracts, their
seals under each signature. Special care shall be taken to see that all corrections, additions
alterations, omissions, over-writings, or slips attached to the agreements are duly signed or
initiated by the contractor and the accepting authority. In cases the contractor fails to sign the
above particulars may result in dispute and disregarding claims of the department.
Engineering contract documents usually contain the following:-

(1) Title Page-This is the front page of the set of the decuments having the name of work,
contract agreement number, estimated amount put to tender etc.
(2) Index-Showing contents and page references.

(3) Tender Notice-The tender notice or Notice Inviting Tender (NIT) papers are very
important documents on which call of tenders and subsequent agreement's with the
contractors are based. It contains essential informations in a standard printed form such as
name of the work and its location, estimated cost of works, earnest money to be deposited,
last date of sell of tender papers, last date, time and place of receipt of tender paper etc., time
of completion, accepting authority etc.

4. Letter of acceptance of tender and written order to commence work!-In order to avoid legal
complications, it is essential that the date of accepting of tender and the date of written order
to commence work forms part of the agreement. But the date on which the agreement is
finalised shall not be considered at all.

5. Any letter giving by the Contractor with the tender in clarification of rate or terms therein.

6. Tender form :-Printed form giving general directions for guidance of contractors, general
description of work, estimated cost, earnest money, security deposit, time of completion and
conditions of contract etc. There are columns in the tender form for signature of contractor,
signature of witness to contractor's signature and of the officer by whom accepting. These
columns are signed and sealed by the respective persons to enter into a formal agreement.

7. Conditions of Contract :-There are several clauses in the condition of contract to govern
the character of the work to be carried out. Governments have their own standard conditions
of contract provided in the printed tender form (as mentioned in 6 above). The conditions
specify mainly the following clauses (1) Amount of security deposit, (2) Compensation for
delay, (3) Action when whole of security deposit is forfieted, (4) Contractor remains liable to
pay compensation, (5) Extension of time, (6) Final Certificate, (7) Payment on certificate, (8)
Monthly bill. (9) Payment of bill, (10) Departmental materials, (11) Execution of work in
accordance with specifications, (12) Alteration in designs and specifications, (13) No
compensation for alteration, (14) Compensation in case of bad work, (15) Works to be
opened for inspection, (16) Presence of contractor, (17) Maintenance period, (18) Care of
departmental Tools and Plants, (19) Labour, (20) Work on Sunday, (21) Contract may
rescinded, (22) Sum payable by way of compensation by the cantractor, (23) Changes in
constitution, (24) Supervision by higher officers etc.

8. Additional condition :-Additional conditions are inserted in the condition of contract

according to the character of the work to be carried out viz., Insurance, Lighting and
watching, etc.

9. Schedule of items of Works with quantities and units (and with rates and amounts in the
case of percentage rate contract only) gives brief descriptions of completed items of works
involved and the approximate quantities are to be executed with their units of rates (and rates
with amounts in the case of percentage rate contract) under this contract. For item rate
contract a contractor gives his item wise rate in the schedule. But for percentage rate contract
the unit rates, amount of each item and the total amount are given in the schedule. A
contractor puts his overall percentage rate above or below or at per in the tender form at the
last page of the schedule. This schedule is the basis of financial aspect of the contract, and
preparation of bills. Payment against a contract is made according to this agreed schedule of
rates by both the parties under a contract.

10. General and additional specifications :-Each engineering departmant have their own
printed standard detailed specifications for the general types of works commonly involved.
Unless otherwise mentioned all works under a contract are to be carried out in accordance
with the general specification of the department. (Note that the general specifications mean
the detailed specifications of all items of works generally involved but not the general
specification of a work).

Additional specifications are provided to carry out the items of works those are not covered
by the departmental printed general specification. These are specially written and provided
after the printed specification for a particular contract.

11. Schedule of issue of materials and Tools & Plants ;-Giving the list of departmental
materials, T. & P, to be issued departmentally, their issue rates or hire charges and place of
delivery etc., terms and conditions for recovery their costs etc. Departmental materials, as
specified in the tenders is issued to a contractor from time to time as required in the opinion
of the Engineer-in-Charge to maintain the work program. The contractor remains solely
responsible for carriage and safe custody of such materials, T. & P. including all necessary
loading and unloading. No claim on account of transportation, handling or storage of any
such materials is admissible. The contractor remains solely liable for any loss or damage to
such materials until these are used up in works and the works are taken over by the
department. Excess quantities of materials are to be returned back by the contractor. If the
contractor fails to return any excess quantity of departmental materials in good condition to
the departmental stores the cost of such materials is recovered at a penal rate as specified in
the contract.

12. Schedule of fair wages: Labour regulations and safety code where these are not
incorporated in standard form of condition of contract.

13. A complete set of drawings including plans, sections and elevations :-Gives a list of the
drawing forming part of the contract and refer to them by number or title. Further drawings
may be issued from time to time at the discretion of the Engineer-in-charge as need arises.

Tender
A tender is a written offer submitted by the contractors in pursuance of the notification given,
to execute certain work or supply of some specified articles or transport of materials at
certain rates with the terms and conditions laid down in the tender documents. The form in
which it is to be submitted is supplied by the department to eligible contractors on usual
payment of cost. The tender duly filled in placed in the Tender Box with locking
arrangements kept in the room of the Officer inviting tender on or before the specified hours
and date notified through the tender notice (P. W. D. Form 6. ).
Tender Form

A tender form is a printed standard form of contract giving standard conditions of contract,
general rules, and directions for the guidance of contractors There is also a memorandum for
giving (i) a General description of work, (ii) Estimated cost, (iii) Earnest money, (iv) Security
deposit, (v) Time allowed for the work from the date of a written order to commence and (vi)
Columns for signature of the contractor before submission of tender, the signature of a
witness to contractor's signature and signature of the officer by whom accepted. This is a part
of tender document. The price of the tender form is given on the form. This printed form and
other documents are to be purchased on cash payment from the office inviting the tender
during office hours on all working days.

Tender documents

The various terms and conditions of contract which are to be formulated while inviting tender
for a Civil Engineering work are

(i) The Notice Inviting Tenders (N. I. T.) is a standard approved form of a department;

(ii) Tender form with standard conditions of contract;

(iii) Schedule of quantities of works to be done and materials, Tools and Plants to be supplied
by the department if any;

(iv) Special terms and conditions;

(v) Complete specification of the work to be executed; (Generally departmental specifications

is referred)

(vi) Special specification and additional condition of contract;

(vii) One set of approved drawings where necessary.

Before tenders for a work are invited a detailed estimate showing the quantities, rates and
amount of the various items of work also the specifications to be adopted shall be prepared
and sanctioned.

TYPES OF TENDERS:

➢Open tenders: This type of tender invites the contractors to bid by open advertisement in
ITJ or newspaper.

➢ Limited tenders: Only selected number of contractors are invited to quote their rates.

➢ Single or negotiated tender: Only one firm to render a service by quoting their rates.
Procedure for Inviting Tenders:

✓ Preparation of tender documents

✓ Issue of tender notice

✓ Submission and opening of tenders

✓ Acceptance of tender and award of contract.

Earnest Money-

Earnest money is an assurance or guarantee in the form of cash on the part of the contractor
to keep open the offer for consideration and to confirm his intension to take up the work for
execution accepted in his favour as per terms and conditions in the tender. In cases where a
tenderer fails to commence the work awarded to him, the earnest money is forfeited to
Government. No interest is payable upon earnest money to the contractors.

If the amount of the earnest money is not large (i. e. not exceeding Rs. 250/-) it may be
deposited in cash in Divisional or Sub-Divisional Office. In other cases the contractor has to
deposit the same in the Treasury/Bank and to produce the receipted challan with the tender.
The contractor may also deposit the same in the form of Deposit at call Receipt of a
scheduled Bank duly guaranted by the Reserve Bank of India, if so desired. The amount of
the earnest money which a contractor should deposit with the tender is regulated by the
department and generally for works up to the of Rs. 5 Lakhs @2% of the estimated cost
subject to a maximum of Rs 10,000/-, for works above 5 Lakhs @ 2% of the estimated cost
subject to a maximum of Rs. 20,000/- Enlisted contractors of a department mostly deposit a
fixed permanent security according to their classification and departmental rules in order to
enable them to secure exemption from payment of earnest money.

Earnest money given by all the contractors except the three lowest tenderer should be
returned within a week from the date of receipt the tenders. Earnest money of the second
lowest and third lowest tenderers should be returned within 15 days of the acceptance of the
tender, if their offers are not considered, The earnest money of the lowest tender whose
tender is normally accepted is retained by the Department as a part of the security deposit for
due performance of the contract.

Security Deposit –

Security deposit is an amount of money which shall be deposited by the contractor whose
tender has been accepted in order to render himself liable to the department to pay
compensation amounting to the part or whole of his security deposit if the work is not carried
out according to the specification, time limit and conditions of contract.
After acceptance of the tender of a contractor the earnest money which he has deposited at
the time of tender is treated as part of the security money and additional amount of security
money is deducted from the progressive bills so that the total amount thus constitute is 10%
on the first lakh and 74% on the balance. In case of works costing more than Rs 2 lakhs, 10%
on the first one lakh, 71% on the next one lakh and 5% on the balance, subject to a maximum
of Rs 1 lakh only (The rates as mentioned here is followed by C.P.W.D.)

The security deposit is refundable to a contractor after the prescribed maintenance period is
over.” In order to afford relief to the contractor a percentage (normally 50%) of the security
money is refunded for the portion of the work which has been completed and whose
maintenance period is over.

Retention money

Whenever any claim or claims for payment of a sum of money arises out of or under the
contract against the contractor, the Engineer in-charge is entitled to withhold and also lien to
retain such sum or sums in whole or in part from the security till finalisation or adjustment of
any such claim. In the event if the security amount being insufficient to cover the claimed
amount the Engineer-in-charge is entitled to withhold and have lien to retain to the extent of
such claimed amount referred to above, from any sum or sum found payable to the contractor
under the same contract or any other contract with the Engineer-in-charge pending
finalisation or adjustment of any such claim.

Differences between 'security deposit' and Retention money :—

Security deposit Retention money

1. This is compulsory to be deposited before 1. This is not compulsory and very rairly
entering a contract. arises out.
2. The amount depends on the tendered 2. It has no relation with the tendered amount
amount. but depends on the amount of claim against a
3. This is refundable after the maintenance contractor.
period is over. 3. This has no relation with the maintenance
4. The amount can not be collected from any period and can only be released after
other contract even under the same Engineer- finalization or adjustment of the claim.
in-charge. 4. The amount can be withhold from any
5. This is meant for nonfulfillment of the other contract under the same Engineer-in-
conditions of contract against a tender. charge.
6. This is a compulsory clause of the 5. This is meant for fulfillment of any claim
condition of contract. against this tender or other tender under the
Retention money Engineer-in-charge.
6. This is not a compulsory clause and
provided in some tenders as an Additional
clause.

Liquidated damage
Liquidated damage is an amount of compensation payable by a contractor to the owner or
Government due to delayed construction having no relationship with real damage. If the
contractor shall fail to complete the works within the time prescribed in the tender then the
contractor shall pay to the owner or Government the sum stated in the tender as liquidated
damages for such default and not as a penalty for every day for the excess period taken
between the date of completion specified in the tender or the extended time as the case may
be and the date of actual completion of the work. The payment or deduction of such damages
shall not relieve the contractor from his obligations and liabilities under the contract. If before
the completion of the whole works any part of the.

Details to be mentioned in the notice inviting tenders:

The name and address of the procuring entity.

The designation and address of the Tender Inviting Authority.

Name of the scheme, project or program for which the procurement is to be affected. The
date upto which and places from where the tender documents can be obtained.

The amount of earnest money deposit payable.

The date, time and place for opening of tenders received.

Any other information the Tender Inviting Authority considers relevant.

Receiving of Tenders:

➢ After issue of tender document to bidders, the tender opening authority permits an officer
to receive the tenders.

➢ Tender box marked with the date and time of opening the tender is placed in a suitable
place.

➢ Contractors places the tenders in the tender box which will be locked and kept.

Opening of Tenders:

➢ The sealed tenders received are to be opened in the presence of contractors or their
representatives tendering for the work at the time and place already notified.

➢ The divisional accountant is requested to presence on such occasion whenever possible.

➢ The officer opening the tenders has to read out the rates offered in case of item rate and
percentage rate tenders and amount in case of lump sum tenders for information of all those
present.
Selection and Acceptance of Tenders:

➢ After investigation the comparative statement, the lowest tender shall be accepted as a rule
by the competent authority.

➢ If for any reason the lowest tender is not accepted, reasons should be recorded
confidentially.

Power of Accepting Tender:

➢ Chief Engineer – Full Power

➢ Superintending Engineer - Full Power

➢ Executive Engineer – Upto Rs.5,00,000

➢ District Engineer or S.D.O - Upto Rs.50,000

➢ Assistant Engineer - Upto Rs.20,000

E-TENDER:

It is a process of carrying out the entire tendering cycle online including the submission of
price bids such that efficiency, economy, and speed of the internet can be harnessed.

Advantages of E-Tendering:

✓ Completely automated process

✓ Shortens time

✓ Great transparency

✓ Minimize human errors

✓ Anytime and anywhere the contractors can bid

✓ No dependence of newspaper, courier and bank

✓ Saves travelling cost

✓ No tender can be missed because of distance

✓ Can submit bid on last minute.