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 “Contract” is derived from the Latin word
“contractum” which means “a promise or set
of promises which the law will enforce”

 Contract is an agreement between competent

parties, upon a lawful consideration, to do or
abstain from doing some act which is binding

 A contract which ceases to be enforceable by

law becomes Void
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 Contract Agreement is a Binding Agreement
Between the Parties ie “Promisor” and
“Promisee” to Accomplish a Task for a Valid
Consideration
 Contract to be Executed in Accordance with the
Terms of the Contract Agreement
 Contract Agreement has Two Aspects:
 Legal Aspect – Contractual Provisions should be in
accordance with Law of the Land – Indian Contract
Act,1872, Limitation Act, Interest Act etc
 Managerial Aspect - Contract Management 3
 All Contracts to be Signed in the Name of President
of India as Authorised under Article 299 (1) of the
Constitution
 In Exercise of Executive Powers of the President,
Various Classes of Contracts to be Signed by
Different Authorities as per Notifications issued by
Ministry of Law, or
 As per Procedures Prescribed for Various Classes of
Contracts as Laid down in Delegation of Financial
Power Rules,1978

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 The terms of contract must be:
 Precise
 Definite, and
 Without any ambiguities
 Standard forms of contracts should be adopted
 Modifications May be Required as are considered
necessary in respect of individual contracts
 The modifications should be carried out only after
obtaining financial and legal advice.
 Contract Agreement has Legal status as per Indian
Contract Act
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 For Works Contracts & Stores Contract below
Rs. Ten Lakhs against standard bidding
documents, the Offer of the Bidder and Issue of
Letter of Acceptance will form the Binding
Contract
 For Value of Rs.10 Lakh or More, invariably
Contract Document Should be Executed
 Contract Document Should be Self Contained
Document Comprising, NIT, ITB, GCC, SCC,
Scope of Work & Specification etc
 No Work to Commence Without Execution of an
Agreement
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 Performance Guarantee
 Inward Logistics
 Advances
 LD Clause
 Extension With/Without LD
 PVC
 Taxes & Duties
 Force Majeur
 Termination & Forfeiture of Performance Guarantee

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 Performance Guarantee by the Successful Bidder is
required for Successful Execution of Work/Supply
 Performance Guarantee May be in the Form of
Bank Draft, Fixed Deposits, Bank Guarantee etc
 To be given by All Successful bidders irrespective of
its Registration Status
 Value Should be 5 to 10% of Contract Value
 Should Remain Valid for the Period 60 days beyond
the Completion of the Contractual Obligations
including Warranty

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 Bid Guarantee should be returned on submission of
Performance Guarantee
 Bank Guarantee is the Most Common Form of
Performance Guarantee
 Contractual Failure & Irrevocable Right of
Purchaser for encashment of BG
 The Clauses of the Bank Guarantee have to be
carefully worded to avoid Litigation with Bank
 A System has to be in place to keep a Control on the
Expiry of its Validity

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 Supply is FOR Destination of the Consignee –
Rate is Inclusive of freight on Rail or Road
 Till Materials are delivered to Consignee,
Insurance Cover is by Supplier
 For Supply of Over Dimension Consignment
(ODC) Clearances have to be Arranged by the
Client
 In Fabrication Contracts Where Material is To
be Supplied at Site, Client Has to Provide
Road Permits etc
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 In case of Imports, Ocean Freight & Marin
Insurance is by :
 By Consignee – FOB or CFR
 By Supplier - CIF
 Tenders are Invited With both the options of
FOB & CIF/CFR and Decision is taken after
detailed evaluation by the Tender Committee
 On Arrival of Consignment at Port, Clearance,
Transportation & Insurance is by Consignee

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 Quality Assurance (QA) is a way of preventing
mistakes or defects in manufactured products
 Avoiding problems when delivering solutions or
services to customers
 Quality management focuses on Providing
Confidence that Quality Requirements will be
fulfilled
 Specifies Standards & Tests in All Components
Contributing to Quality of Manufacture

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 Organizational structure Detailing
 Each employee's responsibilities, and
 Qualifications an employee needs to fulfill those
responsibilities.
 Suppliers, and the materials Supplied correspond
to the requirements for the product.
 Has Appropriate Plants & Equipments
 Specifies adequate product testing at Different
Stages
 Feeds back test results and customer complaints
to solve problems and encourage improvements in
Quality
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 Quality Assurance Plan Is to Specify:
 Organizational structure
 Technical Details of Process
 List of Plant & Equipment
 Laboratory Test Facilities the Manufacturer has
 Tests Being Performed at each stage of Production to
ensure Quality
 Manufacturer’s Test Certificate
 Visit of the Quality assurance Facilities by Technical
Team

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 30% Variation Clause in the Tender Document to
Cater to the Variation in Demand During the
currency of the Contract
 The Clause is Optional
 The Clause Is to be Incorporated In Tender
Document If It is to be Operated Later
 Financial Implication of the Clause
 Operation of (+) 30% Clause May Change the
Competency of Approval

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 The Clause has to be operated during the
currency of the Contract
 Price Remains the same for Supply of Additional
Quantity
 Appropriate Extension in Delivery Period may be
required
 Price Variation Clause Will be applicable to
Supply of Additional Quantity Also

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 LD(Liquidated Damage) is leviable for Delay in
Supply of Materials at the rate of 0.5 % for delay per
week or part there of, on the value of Delayed Stores
with a maximum of 10% of the Contract Value of
Delayed Supply
 LD to be recovered at the time of Payment
 ‘Severable’ or ‘Whole’ Contract
 Waival of LD
 Refixation of Delivery Schedule by the Competent
Authority

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 Supplier May ask for Extension of Delivery
Period for Completing Supplies
 If Reasons are attributable to Supplier, Normally
Extension is with LD
 Extension may be without LD if the Reasons are
beyond the control of Supplier
 For Extension without LD, it will require
Concurrence of Finance

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 Situation beyond the control of Supplier
 Such Situation may be Natural Calamity, Civil
Commotion, War, Lock Out etc
 There is No Damage or Any Sort of Claim by
Either party
 The Supplier is Entitled for Extension without
LD to complete the Supplies
 Vetting by Finance and Sanction of Competent
Authority may be required
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 Bill payment is based on Measurement Certified
by Engineer
 On Completion of Work, Final Measurement is
taken by the Engineer and Work Completion
Certificate is issued
 Final Payment after Exercising following
Checks:
 Amounts recoverable from Contractor, like LD
(Liquidated Damage), Materials issued to Contractor
etc are correctly accounted for
 BUDGET allotment & Exchequer Exists
 Amount is within Sanctioned Estimate

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 Payment on Receipt & Acceptance of Materials
 For Regular Suppliers, Purchase Order generally
has Part Payment Clause (90%, 95%, 98%)
based on proof of Despatch or Delivery in Depot
{GFR- 172(2)}
 Bill is Checked with respect to Vetted Copy of
Purchase Order and Despatch/ receipt Documents
 Final Payment is made on Receipt of Material, its
Inspection & Acceptance

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 Payment Clause Is Incorporated in tender
Documents and Forms part of the Contract
 Price Break up of components like Supply,
Installation, Commissioning, Trainings etc Is
Detailed in the Contract
 Payment Terms –Inspection & Submission of
Documents Forms Basis of Payment
 Front Loading of Payment Should be Avoided
 Currency of Payment for imports has to be as per
the Terms of the Contract
 Exchange Rate Variation Clause for Substantial
Imports Component in Domestic Contracts
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 Stage Payments for Consultancy Contracts
 Payments are Correlated to Man Months
 10% On Preparation of Inception Report
 Detailing Understanding of the Scope and the Mode of
executing the Consultancy Work
 60% On submission of Draft Report
 Draft Report is Presented to the Client
 The Views of the Client is Taken on Various Outcomes and
Findings
 The Consultant also Offers Intellectual Inputs on Various
Issues
 Agreed points are Incorporated in the Final Report
 30% on acceptance of Final Report
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 In Intermediate Payments for Fabrication,
Turn Key Contracts etc Front Loaded
Payments to be avoided
 Payment Terms to be suitably devised
keeping financial safeguards in mind
 Mode Of Payment:
 Accounts Payee Cheque to be duly despatched
& Acknowledgement kept in record
 Electronic Payments through RTGS is the
current preferred mode even by CVC

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 Advance payment demanded by firms holding
maintenance contracts for servicing of Air-
conditioners, computers, other costly equipment,
etc.
 Advance payment demanded by firms against
fabrication contracts, turn-key contracts etc.
 Mobilisation Advance Interest Bearing in
Construction Contracts to be Included in the Tender
Not Exceeding 10 to 15% of the Contract Value

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 Such advance payments should not exceed the
following limits :
 Thirty per cent. of the contract value to private firms
 Forty per cent. of the contract value to a State or
Central Government agency or a Public Sector
Undertaking
 In case of maintenance contract, the amount should
not exceed the amount payable for six months under
the contract.

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 Ministries or Departments of the Central
Government may relax the Ceiling in consultation
with their Financial Advisers
 Payment should be secured through Bank
Guarantee
 Advance should be set off pro-rata against
successive payments and recovered over the
Period of Contract
 Beyond Date of Completion of the Contract, the
Advances not Recovered May invite Levy of Penal
Interest

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 During Execution of the Contract, Situations Do
Arise When the Contract Price Has to Undergo
Adjustment
 Such Adjustment Is With Respect to Changed or
Unforeseen Situation at Delivery Stage Compared to
that Prevailing At the Time of Bid Submission
 Normally Two Types of Situations Arise:
 Change in Statutory Tax Structure
 Increase/ Decrease in Input Cost Due to Inflation

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 Locally manufactured Goods Are Subject to
Variation in GST
 Specific Provision may be kept in Tender
document for Variation of Statutory Duties &
Taxes by the Government after the Opening of the
Bid
 To Determine Variation, the percentage and element
of duties and taxes included in the price should be
specifically stated in the Tender Document

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 Contracts for Supply of Imported Equipment,
goods etc, are Subject to Customs Duty and
Foreign Exchange fluctuations
 The Bidder Should Indicate Customs Duty along
with the selling rate of foreign exchange element
taken into account in the calculation of the price
of the imported item
 The Variation Permitted has to Be Clearly Laid
Down in the Tender Documents

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 Contracts for Deliveries more than 12 months
should have a clause for Price Escalation
 Applicable Even for shorter Deliveries for certain
items with non-ferrous and other Raw Materials
prone to Short Term Price Volatility
 To be Incorporated in Tender clauses Itself to
maintain Transparency
 For Tender Evaluation this Clause is Not Taken
into Account
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• Objectives
• Reduce Risk for Bidders
• Protect Employer from Speculative bidding
• Provide Contractor Reasonable Compensation for
Price Fluctuations
• Fixed Price
• Minor Works or Short Delivery Contracts Less than
12 months
• Supply of Machinery & Equipments

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 A Fixed Element Say 10 % in respect of Fixed
Over Heads, Profit etc
 Base Indices (Material and Labour) pertains to
prior Period Say One Month Prior to Date of
Tender Opening
 Variation of Indices on Delivery – Indices 2
months prior to Delivery as Defined in the
Contract
 Suitable Weight to be assigned to Variation of
Material and Labour Components to Calculate
Escalation/De-escalation

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 P = Po (10 % + W1 X L1/Lo
+ W2 X M1/Mo)
 W1 and W2 are Appropriate Weight
 Lo and L1 are average Consumer Price Index for
Industrial Workers Published by Labour Bureau for
the base month and 2 Months prior to the Delivery
respectively.
 Mo and M1 are Material Price Indices, Average of
the Base month and 2 months Prior to the Month in
which Date of Delivery Falls respectively.

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 Material Indices are Published by:
 Ministry of Commerce and Industry
 Chamber of Commerce like IEEMA,
 RBI
 London Metal Exchange or
 Any Fair Source of Indices Periodically

 For International Contracts, Indices of the Country

of Origin becomes Applicable

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 P = Po/100 ( 16 + 24 C/Co + 20 S/So +
7 IS/ISo + 8 PV/PVo + 25 W/Wo)
 Co – Average LME Price of Copper Wire
 (Two months Prior to Tendering)
 So – Price of Electrical Steel Sheets
 (1 month Prior to Tendering)
 ISo – Whole Sale Price Index of Iron &
Steel
 (4 months Prior to Tendering)
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 PVo – Whole Sale Price Index of “Paints, Varnishes
& Lacquers (4 months Prior to Tendering)
 Wo – All India Average Consumer Price Index for
Industrial Worker (2 months Prior to Tendering)
 Date of Inspection/ Despatch will be taken as Date
of Delivery
 Final Index Will be Taken Prior to Delivery for the
Same months as for Initial Index

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 In case of Stage Payment on Staggered Supply,
Payment Should be made as per Basic Rate

 Price Adjustment may be made separately after

verifying the Indices

 Particular Care has to be taken to Obtain Price

Benefit on Downward Variation of Indices

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 All Material Prices will be Basic Prices without any
Taxes and Duties and Octroi
 No Price Increase is Allowed beyond Original
Delivery Unless Extended with Price Variation
 In Case of Levy of LD, generally no PVC is
applicable
 No Price adjustment is Admissible on Advances Paid
to Supplier
 Price Adjustment may be payable if price Variation is
more than a specified Percentage
 Total Price Adjustment may be subject to a Maximum
Ceiling

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 A Supply Contract awarded during Yr 2009 had
PVC Clause based on “Whole Sale Price Index”
of 1993-94 Series Published by Economic
advisor, Ministry of Commerce
 The Above Series was discontinued from
September,2010 and another Series Issued
pertaining to Indices 2004-05 was in place
 There was No Correlation formulae to Switch
over from Old Indices to New Ones

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 The Issue was Referred to Economic Advisor,
Ministry of Commerce.
 They Issued “Regression Equation” for
Correlation to Update Price of Steel etc as on
August,2010 in New Series
 Taking this as Base Price, the PVC formulae was
made applicable Up to December,2011
 They Also directed to devise New Formulae for
New Contracts

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 Applicable to International Trade - Imports
and Export
 Buyers and Sellers do not know Each Other
 Two Countries may have different Legal and
Statutory framework
 Both need some conditions to be fulfilled
before actual Transaction takes place

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 Buyer Wants:
 Assurance that Goods Will be Delivered as per
Contract in time
 To Pay for Goods only after they are Shipped by
Seller
 Seller Wants:
 Payment soon after Shipment
 Assured payment by Buyer’s Bank as per Contractual
Obligation
 Convenience of receiving payments in his own
Country

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 Letter of Credit is a Written Undertaking
given by Buyer’ Bank on behalf of Buyer
through a Bank in Seller’s Country to
Seller to Effect Payment
 In a Specified Period

 Provided Conditions Laid Down in

Documentary Credit are Fully satisfied

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 Clear on Board Airbill/Bill of Lading
 Original Invoice
 Packing List
 Certificate of Origin
 Test Certificate from OEM
 Insurance Policy
 Warranty Certificate/Performance Bond
 Authenticated Signature of Supplier

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 Type of LC
 Contractual Details
 Delivery Schedule & Basis of Delivery (FOB/CIF)
 Amount of Credit and Currency of LC
 Part Shipment allowed or Not
 LD Clause
 Documents to be produced by beneficiary for release
of payment from LC

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 Irrevocable Letter of Credit – Issuing Bank gives
Absolute Undertaking to Honour its Obligations
if Beneficiary Complies with all Terms &
Conditions
 Confirmed Letter of credit – By another Bank
in Beneficiary’s Country adds its confirmation
at request of issuing bank to Pay/ negotiate
/accept to Enforce the Agreement
 Revolving Letter of Credit – Utilised when buyer
is to receive partial shipment at specific intervals
for long duration

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 In case of Extension of delivery date in contract,
corresponding amendment in LC for revised date
of shipment may be needed
 Performance Bank Guarantee may also need
extensionextension
 Onus of Bearing Charges for Extension in the
above situation will be met by defaulting party

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 Warranty – Guarantee by Manufacturer for
Replacement In the Event of Manufacturing
Defects
 Warranty Has to be Claimed within the Warranty
Period

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 Contractor/ Supplier abandoned or repudiated the
Contract
 Has without valid reason failed to commence work
on the Site/System promptly
 Persistently fails to execute the Contract in
accordance with the Contract or persistently neglects
to carry out its obligations under the Contract
without just cause
 Refuses or is unable to provide sufficient Materials,
Services, or labor to execute and complete the
System in the manner specified

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 Supplier/Contractor becomes bankrupt or insolvent
 Supplier assigns or transfers the Contract or any right
or interest therein in violation of the provision of
GCC
 Supplier has engaged in corrupt or fraudulent
practices in competing for or in executing the
Contract
 Supplier has entered into Unfair Trade Practices

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 In Case of Default, the Incidence has to be Dealt
with in accordance with the Clauses of the
Contract:
 Notice Pointing Out Bad/ Unsatisfactory Performance
 Levy LD / Imposing Penalty
 Termination Has to be followed as Last Option
 Adequate notice pointing out defaults as a matter
of Natural Justice before Termination
 In case of Termination, Bank Guarantee Should
be Promptly Encashed
 Short Closure of the Contract by the Contractor
/Client

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 Cease all further work, except for such work as the
Purchaser may specify in the notice of termination
to Safeguard the Executed Work
 Terminate all subcontracts
 Deliver to the Purchaser the parts of the System or
Work executed by the Supplier up to the date of
termination
 Deliver to the Purchaser all drawings, specifications,
and other documents prepared by the Supplier or its
Subcontractors
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 Warranty – Guarantee by Manufacturer for
Replacement In the Event of Manufacturing
Defects
 Warranty Has to be Claimed within the Warranty
Period

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 Mutual Obligations
 Adequate Planning before Award of Work
 Regular Inspection
 Clarity in Directions
 Quick Decision Making

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 Arbitration & Conciliation Act, 1996 (amended)
 Initially Conciliation is Resorted to Resolve
Disputes
 On Failure of Conciliation, Contractor may ask for
Arbitration
 Provision & Procedure to Constitute Arbitration
Panel as per Clause in the Contract
 Jurisdiction of High Court to Appoint Arbitrator
 Arbitration Award Enforceable by Court of Law

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 Parties are free to choose number of Arbitrators in Odd
numbers – Sole or Three
 One Arbitrator by each party and the Two Arbitrators
will appoint the Third as Presiding Arbitrator
 Clause not applicable if Arbitrator already defined by
name or designation in the Agreement
 Arbitrator to be Independent and Impartial and possesses
any qualification if defined in Agreement
 Arbitration Award

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 The Award may be set aside by Court only if:
 The Party making an Application Produces Proof that It was under

some Incapacity
 Arbitration Agreement is not valid under law

 Party making application was not given proper notice of

appointment of Arbitrator or was unable to present his case during

arbitral proceedings
 Award deals with a dispute not contemplated by terms of

submission to arbitration or decision on matters beyond scope of

submission to arbitration
 The composition of the arbitral tribunal or the arbitral procedure

was not in accordance with the agreement of the parties

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 Award May Also be Set Aside if Court Finds:
 the subject-matter of the dispute is not capable of
settlement by arbitration under the law
 the arbitral award is in conflict with the public policy
of India.
 Court may, where it finds appropriate, adjourn
the proceedings of a period & direct the Tribunal
to resume proceedings to eliminate ground for
setting aside the award
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