Guidance

G1: What is the risk of corruption in the carrying out of the works and services under Project Contracts?

There is a significant risk of corruption in relation to the carrying out of the works and services under Project Contracts.  For example:

• A Supplier may pay a bribe so that:
  • additional work which is unnecessary or over-priced is awarded to the Supplier under the Project Contract
  • defective or incomplete work, products or services by the Supplier are approved
  • failures by a Supplier to comply with building, safety or environmental regulations under the contract are ignored
  • payments to a Supplier at a higher level than is due under the Project Contract are approved.
• A Supplier may conceal defective work or under-supply products so as to increase its profit.
• A payment may be extorted from the Supplier in return for issuing an approval or payment recommendation which was properly due.

Furthermore, corruption which previously took place in relation to the procurement process for the relevant Project Contract (see PACS Standard 3) or the agreement of contract terms (see PACS Standard 4) may impact on the carrying out of the works and services under the Project Contract.   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.

Contract management plays an important role in managing these risks.  Inadequate or corrupt contract management allows corruption to prosper.

Therefore, effective anti-corruption contract management measures need to be implemented to manage this risk.  PACS Standard 5 recommends these measures.

G2:  Contract management

Paragraph 2 of PACS Standard 5 recommends the contract management measures which should be put in place in relation to Project Contracts in order to minimise the corruption risks.  These measures include the following:

• That an appropriate number of managers of appropriate skill and seniority are appointed to manage each Project Contract.
• That these managers must undertake the obligations set out in paragraph 2 of PACS Standard 5, which include the following:
  • A general obligation to comply with the requirements of PACS Standard 7, paragraph 1(2).  This sets out general anti-corruption measures which should apply to all management processes on the Project, including procurement, contract management and financial management.  These measures include, for example, ensuring that all parties comply with anti-corruption laws and regulations, the Procedures and the Project Code of Conduct, and ensuring that the managers make decisions, communicate, and keep records in the manner specified.
  • An obligation to ensure that the Project Contracts were awarded pursuant to a procurement process carried out in accordance with PACS Standard 3, and that the Project Contracts are at arm’s length and on market terms and conditions.  This is a deliberate overlap with the obligations of the Project Owner’s procurement managers under PACS Standard 3.  If there has been corruption by a procurement manager, and a Project Contract has been awarded without a competitive process, or the contract terms and conditions are not at arm’s length, then it is incumbent on the Project Owner’s contract managers (who should be different personnel and from a different department from the procurement manager) to identify and report that failure.
  • Obligations in relation to contract performance, including:
    • ensuring that the Supplier is properly undertaking its obligations under the Project Contract
    • making decisions on behalf of the Project Owner, such as:
      • approving work, products and services provided by the Supplier
      • approving contract modifications and claims
      • approving payment
      • making modifications to the contract
      • making payment recommendations.

G3:  Modifications to or under a Project Contract

Modifications to or under an awarded 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, products or services to be supplied).

Modifications may include:

• changes to the contract price
• additions to, or deductions from, the contractual quantity of works, products or services to be supplied
• changes to the contractual type or quality of works, products or services to be supplied
• changes to the contract programme
• changes to the 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 3 of PACS Standard 5 recommends such control measures.

G4:  Recommendation for payment

In order to reduce the risk of corruption, a manager of the Project Owner should not approve both: (i) works, products or services provided by a Supplier, and (ii) payment to that Supplier.  Accordingly, there should be a separation of functions whereby the contract manager approves the works, products or services provided by the Supplier and the finance function approves payment.

However, finance managers who are responsible for approving payments will not normally have the necessary skill or involvement with a contract to be able to assess whether the contract has been properly performed and whether the payment is actually due.  Therefore, there needs to be a process whereby an appropriately skilled manager(s) who has suitable knowledge of the contract and its performance makes a recommendation for the payment prior to payment being made.

The manager who approves work done may also recommend payment.  Alternatively, the two functions may be divided as an additional anti-corruption safeguard.

The manager approving work and/or recommending payment should always be different from the manager approving payment.

Paragraph 4 of PACS Standard 5 provide measures in relation to recommending payment.

Controls over the making of payments are dealt with in PACS Standard 6. 

G5: Can the contract management process be abused?

There is a risk that, even though the contract management procedures are effectively designed to limit corruption, a corrupt public official or contract manager may ensure that the anti-corruption procedures are improperly 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 contract management procedures are properly followed (PACS Standard 1)
• the raising of awareness among Project personnel of the importance of preventing and dealing with corruption through training (PACS Standard 9) and the Project Code of Conduct (PACS Standard 8)
• the contract management process being monitored by the independent monitor (PACS Standard 11)
• the independent technical and financial audits (PACS Standard 12)
• the ability of Suppliers, Project personnel 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).

G6:  Delegation of contract management responsibilities

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).  However, if it does so, it is imperative that it retains responsibility for ensuring that these functions are carried out properly and without corruption.  Paragraph 4 1(2) refers to this individual or organisation as the “Delegated Contract Manager”.  Alternative terms used in contracts may, for example, be “Project Engineer” or “Project Supervisor”.  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, and/or agreeing modifications to the contract works and programme within pre-established parameters.  In this case, it is vital that the Project Owner takes reasonable steps to monitor and verify, on an on-going basis, that the Delegated Contract Manager is undertaking its responsibilities honestly and effectively.  The Project Owner could incur enormous losses if the Delegated Contract Manager corruptly approves payments to the Supplier which are not due, or work which is defective, or claims which are invalid or inflated.