Case Study: Ruritania public health project contract provision Background The Ministry of Finance in Ruritania, a tropical country, has allocated the equivalent of US $100 million to the Ministry of Health (MOH) for the purpose of expanded health services delivery in the southern part of the country (it is anticipated that necessary funds would be derived from projected export earnings and that no support from international institutions would be necessary). The MOH has conducted an international competition in accordance with its new procurement law and regulation. It has selected a consortium (OPTIMA) of international and domestic contractors and suppliers to execute the project. Project scope of work: The principal elements of the project scope of work are the following: 1. Repair and rehabilitation of three (3) existing hospitals, selected by the MOH; 2. Construction of five (5) new health clinics, especially for victims of AIDS, at sites to be determined by the MOH; and 3. Creation of low-cost facility for the benefit of orphans and other child-centred activities in Ruritatnia. Contract provisions: On January 1, 2005, the contract was signed between the Ruritania MOH and OPTIMA. The contract called for OPTIMA to begin on February 1, 2006 and to complete the project by August 1, 2006. The MOH agreed to pay a fixed sum of US $95 million, payable at performance milestones as follows: a) Twenty (20) % advance payment (US $19 million) upon signing of the contract and posting of a satisfactory advance payment bond or guarantee; b) Thirty (30) % progress payment upon satisfactory completion of detailed engineering plans regarding the repair and rehabilitation of the 3 hospitals and construction of the three (3) new health clinics; c) Thirty (30) % payment upon substantial completion of the repair and rehabilitation and construction work outlined above; d) Ten (10) % payment upon establishment and initial operation of the credit facility; and e) Ten (10) % retention payment upon submission of a satisfactory final report. The contract also provided that there would be a ten (10) % bonus if the contract were completed by April 1, 2006 and a penalty of 0.05% of the contract price for each day completion was delayed beyond August 1, 2006. The contract provided that it could be amended by the parties at any time and it included standard provisions concerning the termination of the contract for convenience or default. It was agreed that any disputes concerning contract performance would be resolved in accordance with the Rules of Conciliation and Arbitration of the United Nations Commission on International Trade Law (UNCITRAL). The contract signing was accompanied by considerable public ceremony and press coverage and OPTIMA began performance of the contract with much enthusiasm. OPTIMA immediately posted performance security in the form of commercial letter of credit, valid for two (2) years from the date of contract signing and payable upon demand, provided the demand was accompanied by a certificate from the Minister of Health that OPTIMA had failed to perform. With the initial US $19 million payment received on February 1, 2006, OPTIMA was able to prepare the engineering designs and to mobilise its equipment for construction. On July 1, 2006, OPTIMA submitted its engineering plans for review by the MOH and submitted its second invoice for payment of US $19 million. OPTIMA then began to perform its obligations regarding the credit facility. In August, 2006, however, the Ruritania Ministry of Finance advised the MOH that, due to failing prices for exports, and adverse weather affecting production levels, the revenue from export earnings was failing short of expectations. Accordingly, the MOH would now be allocated only US $30 million in 2007, and US $35 million in 2008. In view of these developments the MOH project manager determined not to make payment against the second invoice of OPTIMA until a full review of the project status could be completed. The project manager assembled a team of advisers (engineer, lawyer, financial analyst) to conduct this review. When the second payment from the MOH was not forthcoming on timely basis, OPTIMA became concerned about the implementation of the project. The OPTIMA project manager assembled a team of advisers (engineer, lawyer, financial analyst) to review the status of the project. Consider these questions: OPTIMA: d) What advice would you give the OPTIMA project manager? e) Should OPTIMA stop work until payment is received? f) Should the project manager of OPTIMA begin action to terminate the contract? On what grounds?
Critical Path Method
The critical path is the longest succession of tasks that has to be successfully completed to conclude a project entirely. The tasks involved in the sequence are called critical activities, as any task getting delayed will result in the whole project getting delayed. To determine the time duration of a project, the critical path has to be identified. The critical path method or CPM is used by project managers to evaluate the least amount of time required to finish each task with the least amount of delay.
Cost Analysis
The entire idea of cost of production or definition of production cost is applied corresponding or we can say that it is related to investment or money cost. Money cost or investment refers to any money expenditure which the firm or supplier or producer undertakes in purchasing or hiring factor of production or factor services.
Inventory Management
Inventory management is the process or system of handling all the goods that an organization owns. In simpler terms, inventory management deals with how a company orders, stores, and uses its goods.
Project Management
Project Management is all about management and optimum utilization of the resources in the best possible manner to develop the software as per the requirement of the client. Here the Project refers to the development of software to meet the end objective of the client by providing the required product or service within a specified Period of time and ensuring high quality. This can be done by managing all the available resources. In short, it can be defined as an application of knowledge, skills, tools, and techniques to meet the objective of the Project. It is the duty of a Project Manager to achieve the objective of the Project as per the specifications given by the client.
Case Study: Ruritania public health project contract provision
Background
The Ministry of Finance in Ruritania, a tropical country, has allocated the equivalent of
US $100 million to the Ministry of Health (MOH) for the purpose of expanded health
services delivery in the southern part of the country (it is anticipated that necessary
funds would be derived from projected export earnings and that no support from
international institutions would be necessary). The MOH has conducted an
international competition in accordance with its new procurement law and regulation.
It has selected a consortium (OPTIMA) of international and domestic contractors and
suppliers to execute the project.
Project scope of work:
The principal elements of the project scope of work are the following:
1. Repair and rehabilitation of three (3) existing hospitals, selected by the MOH;
2. Construction of five (5) new health clinics, especially for victims of AIDS, at sites
to be determined by the MOH; and
3. Creation of low-cost facility for the benefit of orphans and other child-centred
activities in Ruritatnia.
Contract provisions:
On January 1, 2005, the contract was signed between the Ruritania MOH and
OPTIMA. The contract called for OPTIMA to begin on February 1, 2006 and to
complete the project by August 1, 2006. The MOH agreed to pay a fixed sum of US
$95 million, payable at performance milestones as follows:
a) Twenty (20) % advance payment (US $19 million) upon signing of the contract
and posting of a satisfactory advance payment bond or guarantee;
b) Thirty (30) % progress payment upon satisfactory completion of detailed
engineering plans regarding the repair and rehabilitation of the 3 hospitals and
construction of the three (3) new health clinics;
c) Thirty (30) % payment upon substantial completion of the repair and
rehabilitation and construction work outlined above;
d) Ten (10) % payment upon establishment and initial operation of the credit
facility; and
e) Ten (10) % retention payment upon submission of a satisfactory final report.
The contract also provided that there would be a ten (10) % bonus if the contract were
completed by April 1, 2006 and a penalty of 0.05% of the contract price for each day
completion was delayed beyond August 1, 2006. The contract provided that it could
be amended by the parties at any time and it included standard provisions concerning
the termination of the contract for convenience or default. It was agreed that any
disputes concerning contract performance would be resolved in accordance with the
Rules of Conciliation and Arbitration of the United Nations Commission on
International Trade Law (UNCITRAL).
The contract signing was accompanied by considerable public ceremony and press
coverage and OPTIMA began performance of the contract with much enthusiasm.
OPTIMA immediately posted performance security in the form of commercial letter of
credit, valid for two (2) years from the date of contract signing and payable upon
demand, provided the demand was accompanied by a certificate from the Minister of
Health that OPTIMA had failed to perform.
With the initial US $19 million payment received on February 1, 2006, OPTIMA was
able to prepare the engineering designs and to mobilise its equipment for construction.
On July 1, 2006, OPTIMA submitted its engineering plans for review by the MOH and
submitted its second invoice for payment of US $19 million. OPTIMA then began to
perform its obligations regarding the credit facility.
In August, 2006, however, the Ruritania Ministry of Finance advised the MOH that,
due to failing prices for exports, and adverse weather affecting production levels, the
revenue from export earnings was failing short of expectations. Accordingly, the MOH
would now be allocated only US $30 million in 2007, and US $35 million in 2008.
In view of these developments the MOH project manager determined not to make
payment against the second invoice of OPTIMA until a full review of the project status
could be completed. The project manager assembled a team of advisers (engineer,
lawyer, financial analyst) to conduct this review.
When the second payment from the MOH was not forthcoming on timely basis,
OPTIMA became concerned about the implementation of the project. The OPTIMA
project manager assembled a team of advisers (engineer, lawyer, financial analyst) to
review the status of the project.
Consider these questions:
OPTIMA:
d) What advice would you give the OPTIMA project manager?
e) Should OPTIMA stop work until payment is received?
f) Should the project manager of OPTIMA begin action to terminate the contract?
On what grounds?
General:
How does a contractor protect itself from the risk of slow payment from the
government?
Step by step
Solved in 5 steps
