G1: What is the purpose of PACS Standard 5
The contract management process under PACS Standard 5 comprises the process by which the Project Owner manages contracts placed by it with Suppliers for the supply for the Project, as appropriate, of works, equipment, materials, products, services, or finance.
The purpose of PACS Standard 5 is to provide for measures which:
- reduce the risk of corruption in the performance and management of Project Contracts
- help to identify any corruption which may have previously occurred:
- in the procurement of those Project Contracts (PACS Standard 3)
- in the agreement of the terms of the Project Contracts (PACS Standard 4).
Such corruption may, for example, include the following circumstances which may take place in the performance and management of Project Contracts:
- A Supplier may pay a bribe so that:
- defective, incomplete or overpriced works, equipment, materials, products, services, or finance are approved
- failures by a Supplier to comply with building, safety or environmental regulations under the Project Contract are ignored
- payments to a Supplier of more than is due under the Project Contract are approved
- additional work which is unnecessary or over-priced is awarded to the Supplier under the Project Contract
- the interest rate or fees payable to a funder are increased.
- A Supplier may conceal defective work or under-supply products so as to increase its profit.
- A payment may be extorted by a contract manager from the Supplier in return for issuing an approval or payment recommendation which was properly due.
In addition, corruption may have previously taken place in relation to the procurement process for the relevant Project Contract or in relation to the agreement of contract terms. For example, a Supplier may have paid a bribe so that:
- the Project Contract was awarded corruptly to the Supplier in breach of the procurement process
- the terms of the Project Contract were drafted so as to unduly favour the Supplier.
This previous corruption could impact on the carrying out of the works and services. For example:
- the corruptly appointed Supplier may not have the skill and experience to properly undertake the works and services
- the corruptly obtained contract terms may enable the Supplier to extract improper benefits from the Project, such as unjustified price increases.
The contract managers should be different persons to, and work in a different department from, the managers responsible for the procurement of the Project Contract. Therefore, imposing an obligation on the contract managers to take reasonable steps to verify that the Project Contract was awarded pursuant to a procurement process carried out in accordance with PACS Standard 3, and that the Project Contract is at arm’s length and on market terms and conditions, both reduces the risk of corruption taking place during the procurement and agreeing of contract terms, and increases the chance that any corruption which did previously occur will be uncovered.
G2: General management controls (paragraph 1 of PACS Standard 5)
Paragraph 1 of this PACS Standard provides that the general anti-corruption measures in paragraphs 10 (conflict of interest), 11 (decisions), 12 (communication) and 13 (records) of PACS Standard 1 should apply to the management of all Project Contracts. This means, for example, that:
- no manager should act where s/he has a conflict of interest
- there should be appropriate separation of functions
- decisions should be made by an appropriate number of skilled, senior persons
- all decisions, approvals, recommendations and outcomes should be properly communicated and recorded.
G3: Appointment and employment of contract managers (paragraph 2 of PACS Standard 5)
Paragraph 2 of this PACS Standard provides that the Project Owner’s contract managers should be employed in accordance with paragraph 9 (employment procedures) of PACS Standard 1. This means, for example, that:
- they should be obliged by their conditions of employment to comply with applicable anti-corruption laws and regulations, the Project Code of Conduct and relevant Project Procedures, and can be disciplined if they do not comply
- if they are in a position which is exposed to more than a low corruption risk, then they should be vetted before they are employed, should be competent to undertake their role, and should declare any conflict of interest, and their performance bonuses and targets should be reviewed periodically to verify that there are reasonable safeguards to prevent the bonuses and targets from encouraging corruption.
G4: Modifications to or under a Project Contract (paragraph 4 of PACS Standard 5)
Modifications to or under a Project Contract are modifications which take place after the contract has been entered into between the Project Owner and the Supplier. A modification is also often called a ‘variation’.
There are two types of modification:
- A modification to the contract, whereby the contract terms are changed by agreement between the contract parties
- A modification under the contract, whereby the contract contains a procedure under which modifications to the contract obligations can be made (e.g. an increase in the contractual quantity of works, equipment, materials, products, services, or finance).
Modifications may include:
- changes to the contract price
- additions to, or deductions from, the contractual quantity of works, equipment, materials, products, services, or finance
- changes to the contractual type or quality of works, equipment, materials, products, services or finance
- changes to the contract programme
- changes to other contract terms.
There is a significant risk that a Supplier may bribe the Project Owner’s contract manager to allow improper modifications to or under the contract. Alternatively, a corrupt manager of the Project Owner may extort a payment from the Supplier in order to approve a valid modification. It is therefore important that modifications to the contract are properly regulated and managed. Paragraph 4 of PACS Standard 5 recommends such measures.
G5: Delegation of contract management responsibilities (paragraph 7 of PACS Standard 5)
A Project Owner may delegate some or all of its contract management functions in relation to Project Contracts to another individual or organisation (e.g. to a consulting engineering firm with contract management expertise). Paragraph 7 of this PACS Standard refers to this individual or organisation as the “Delegate Contract Manager”. Alternative terms used in contracts may, for example, be “Project Engineer” or “Project Manager”. This individual or organisation may be given specific responsibilities on behalf of the Project Owner to carry out certain functions such as approving work, approving payment, or agreeing modifications to the contract works and programme within pre-established parameters (e.g. authority may be given to agree contract modifications of a cumulative value of up to 10% of the contract price). The Project Owner could incur significant losses if the Delegate Contract Manager corruptly approves work which is defective, or claims which are invalid or inflated, or approves payments to the Supplier which are not due. Consequently, it is imperative that the Project Owner:
- retains responsibility for ensuring that these functions are carried out properly and without corruption
- takes reasonable steps to monitor and verify this, on an on-going basis.
G6: Could the controls in this PACS Standard be abused?
There is a risk that, even though the controls in this PACS Standard are designed to limit corruption, a corrupt public official or contract manager may ensure that these controls are by-passed. This risk is limited in PACS by:
- the obligation on the Project Owner’s top management and compliance manager (who should be independent from the contract management process) to ensure that the PACS Standards are properly implemented (PACS Standard 1)
- the raising of awareness among Project personnel of the importance of preventing and dealing with corruption through the Project Code of Conduct (PACS Standard 8) and training (PACS Standard 9)
- the monitoring of the contract management process by the independent monitor (PACS Standard 11)
- the independent technical and financial audits (PACS Standard 12)
- the ability of Project personnel (e.g. of the Project Owner, Suppliers and Sub-suppliers) and the public to report suspected corruption or breach of procedures (PACS Standard 13)
- the obligation on the Project Owner to publish to the public all relevant information in relation to the contract management process (PACS Standard 15).