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Consultant Guidelines - IV. Types of Contracts and Important Provisions



Types of Contracts
    4.1 Lump Sum (Firm Fixed Price) Contract 
    4.2 Time-Based Contract 
    4.3 Retainer and/or Contingency (Success) Fee Contract 
    4.4 Percentage Contract 
    4.5 Indefinite Delivery Contract (Price Agreement) 
Important Provisions
    4.6 Currency 
    4.7 Price Adjustment 
    4.8 Payment Provisions 
    4.10 Bid and Performance Securities 
    4.11 Borrower's Contribution 
    4.12 Conflict of Interest 
    4.13 Professional Liability 
    4.14 Staff Substitution 
    4.15 Applicable Law and Settlement of Disputes


Types of Contracts

4.1 Lump Sum (Firm Fixed Price) Contract.24 Lump sum contracts are used mainly for assignments in which the content and the duration of the services and the required output of the consultants are clearly defined. They are widely used for simple planning and feasibility studies, environmental studies, detailed design of standard or common structures, preparation of data processing systems, and so forth. Payments are linked to outputs (deliverables), such as reports, drawings, bills of quantities, bidding documents, and software programs. Lump sum contracts are easy to administer because payments are due on clearly specified outputs.

4.2 Time-Based Contract.25 This type of contract is appropriate when it is difficult to define the scope and the length of services, either because the services are related to activities by others for which the completion period may vary, or because the input of the consultants required to attain the objectives of the assignment is difficult to assess. This type of contract is widely used for complex studies, supervision of construction, advisory services, and most training assignments. Payments are based on agreed hourly, daily, weekly, or monthly rates for staff (who are normally named in the contract) and on reimbursable items using actual expenses and/or agreed unit prices. The rates for staff include salary, social costs, overhead, fee (or profit), and, where appropriate, special allowances. This type of contract shall include a maximum amount of total payments to be made to the consultants. This ceiling amount should include a contingency allowance for unforeseen work and duration, and provision for price adjustments, where appropriate. Time-based contracts need to be closely monitored and administered by the client to ensure that the assignment is progressing satisfactorily, and payments claimed by the consultants are appropriate.

4.3 Retainer and/or Contingency (Success) Fee Contract. Retainer and contingency fee contracts are widely used when consultants (banks or financial firms) are preparing companies for sales or mergers of firms, notably in privatization operations. The remuneration of the Consultant includes a retainer and a success fee, the latter being normally expressed as a percentage of the sale price of the assets.

4.4 Percentage Contract. These contracts are commonly used for architectural services. They may be also used for procurement and inspection agents. Percentage contracts directly relate the fees paid to the Consultant to the estimated or actual project construction cost, or the cost of the goods procured or inspected. The contracts are negotiated on the basis of market norms for the services and/or estimated staff-month costs for the services, or competitively bid. It should be borne in mind that in the case of architectural or engineering services, percentage contracts implicitly lack incentive for economic design and are hence discouraged. Therefore, the use of such a contract for architectural services is recommended only if it is based on a fixed target cost and covers precisely defined services (for example, not works supervision).

4.5 Indefinite Delivery Contract (Price Agreement). These contracts are used when Borrowers need to have "on call" specialized services to provide advice on a particular activity, the extent and timing of which cannot be defined in advance. These are commonly used to retain "advisers" for implementation of complex projects (for example, dam panel), expert adjudicators for dispute resolution panels, institutional reforms, procurement advice, technical troubleshooting, and so forth, normally for a period of a year or more. The Borrower and the firm agree on the unit rates to be paid for the experts, and payments are made on the basis of the time actually used.

Important Provisions

4.6 Currency. RFPs shall clearly state that firms may express the price for their services, in the currency of any Bank member country. If the consultants wish to express the price as a sum of amounts in different foreign currencies, they may do so, provided the proposal includes no more than three foreign currencies. The Borrower may require consultants to state the portion of the price representing local costs in the currency of the Borrower's country. Payment under the contract shall be made in the currency or currencies in which the price is expressed in the proposal.

4.7 Price Adjustment. To adjust the remuneration for foreign and/or local inflation, a price adjustment provision shall be included in the contract if its duration is expected to exceed 18 months. Exceptionally, contracts of shorter duration may include a provision for price adjustment when local or foreign inflation is expected to be high and unpredictable.

4.8 Payment Provisions. Payment provisions, including amounts to be paid, schedule of payments, and payment procedures,26 shall be agreed upon during negotiations. Payments may be made at regular intervals (as under time-based contracts) or for agreed outputs (as under lump sum contracts). Payments for advances (for example, for mobilization costs) exceeding 10 percent of the contract amount must normally be backed by advance payment securities.

4.9 Payments shall be made promptly in accordance with the contract provisions. To that end,

(a) consultants can be paid directly by the Bank at the request of the Borrower or exceptionally through a Letter of Credit (see Appendix 3);

(b) only disputed amounts shall be withheld, with the remainder of the invoice paid in accordance with the contract; and

(c) the contract shall provide for the payment of financing charges if payment is delayed due to the client's fault beyond the time allowed in the contract; the rate of charges shall be specified in the contract.

4.10 Bid and Performance Securities. Bid and performance securities are not recommended for consultants' services. Their enforcement is often subject to judgment calls, they can be easily abused, and they tend to increase the costs to the consulting industry without evident benefits, which are eventually passed on to the Borrower.

4.11 Borrower's Contribution. The Borrower normally assigns members of its own profes-sional staff to the assignment in different capacities. The contract between the Borrower and the Consultant shall give the details governing such staff, known as counterpart staff, as well as facilities that shall be provided by the Borrower, such as housing, office space, secretarial support, utilities, materials, and vehicles. The contract shall indicate measures the Consultant can take if some of the items cannot be provided or have to be withdrawn during the assignment, and the compensation the Consultant will receive in such a case.

4.12 Conflict of Interest. The Consultant shall not receive any remuneration in connection with the assignment except as provided in the contract. The Consultant and its affiliates shall not engage in consulting activities that conflict with the interest of the client under the contract, and shall be excluded from downstream supply of goods or construction of works or purchase of any asset or provision of any other service related to the assignment other than a continua-tion of the "Services" under the ongoing contract.

4.13 Professional Liability. The Consultant is expected to carry out its assignment with due diligence, and in accordance with prevailing standards of the profession. As the Consultant's liability to the Borrower will be governed by the applicable law, the contract need not deal with this matter unless the parties wish to limit this liability. If they do so, they should ensure that (a) there must be no such limitation in case of the Consultant's gross negligence or willful misconduct; (b) the Consultant's liability to the Borrower may in no case be limited to less than the total payments expected to be made under the Consultant's contract, or the proceeds the Consultant is entitled to receive under its insurance, whichever is higher,27 and (c) any such limitation may deal only with the Consultant's liability toward the client and not with the Consultant's liability toward third parties.

4.14 Staff Substitution. During an assignment, if substitution is necessary (for example, because of ill health or because a staff member proves to be unsuitable), the Consultant shall propose other staff of at least the same level of qualifications for approval by the Borrower.

4.15 Applicable Law and Settlement of Disputes. The contract shall include provisions dealing with the applicable law and the forum for the settlement of disputes. International commercial arbitration may have practical advantages over other methods for the settlement of disputes. Borrowers are, therefore, encouraged to provide for this type of arbitration. The Bank shall not be named an arbitrator or be asked to name an arbitrator.28

(next section: V. Selection of Individual Consultants)

24.   Standard form of Contract for Consultants' Services (Lump Sum Remuneration).
25.   Standard form of Contract for Consultants' Services (Complex Time-Based Assignments).
26.   Refer to Appendix 3.
27.   The Borrower is encouraged to secure insurance for potential risks above these limits.
28.   It is understood, however, that officials of the International Centre for Investment Disputes (ICSID) shall remain free to name arbitrators in their capacity as ICSID officials.