The lowest cost selection method also known as the lowest bibber (L1) will no longer be the default way to select contractors for government projects in the tendering process.
The Public Procurement Division in the Ministry of Finance published a notification issuing general instructions to radically overhaul the public procurement process of the Centre.
The Economic Survey had also batted for this reform. In the chapter ‘Process Reforms: Enabling decision-making under uncertainty’ of Volume 1, it had noted that the L1 method has persisted because it’s considered as a regulatory default mechanism.
Moreover, not just the L1 method has been revamped but other important aspects of procurement that have been changed which, if followed in letter and spirit, will drastically improve the business environment at least with respect to the government-related works.
The five major changes in the latest general instructions are:
First, the government entities have now been allowed to use quality-cum-cost-based selection (QCBS) for procurement of works on the condition that it’s a quality-oriented procurement (QOP) and for non-consultancy services if the value of the procurement doesn’t exceed Rs 10 crore. The weightage of non-financial parameters has to be less than 30 percent.
Earlier, QCBS could be resorted to by the government only for consultancy services and special projects. Now, this would become the standard method for all non-standard works where quality is of concern.
Since only QOP projects can be tendered via QCBS, ministries, departments or Central public sector enterprises will have to constitute a special technical committee which will comprise experts in the work being contracted, procurement, financial management, etc and this committee will declare certain procurement as QOP.
A procurement should be declared as a QOP only if there is enough justification in terms of value addition or enhancement of delivery or paramount importance of quality.
Second, the revised guidelines have junked the common practice of rejecting a single bid by procuring entities during open tenders. A lack of competition will not be determined solely on the basis of the number of bidders. Even when only one bid is submitted, the process should be considered valid provided the procurement was satisfactorily advertised and sufficient time was given for submission of bids, the qualification criteria were not unduly restrictive and prices are reasonable in comparison to market value.
The government has given three reasons for this move. There is a cost attached to re-tendering which puts the burden on the finances. It leads to delay in execution of the work with consequent delay in the attainment of the purpose for which the procurement is being done. Lastly, there is good chance that the re-bid may result in a higher bid, again increasing the cost for the agencies.
Third major change is about payment to vendors. The delay in payment to contractors leads to delay in execution of projects, cost overruns and disputes and thus it has mandates that ad-hoc payments of at least 75 percent of eligible running account bill/due stage payment be made within 10 working days of the submission of the bill by contractors and even the remaining payment has to be made within 28 working days of the submission of the bill.
And if there is delay beyond 30 working days, there is provision under which contractors can be paid interest on the due amount.
Fourth, the government has noted a flaw in how its entities operate in case of legal disputes with contractors. Whenever there is a ruling against it, the default modus operandi is to go for appeal and challenge the decision. In most cases, the end result doesn’t change and the government ends up wasting time and resources. If the latest guidelines are implemented, this will also change.
In such cases, the amount becomes payable with interest, at a rate which is often far higher than the government's cost of funds. This results in huge financial losses to the government. Hence, in aggregate, it is in public interest to take the risk of paying a substantial part of the award amount subject to the result of the litigation, even if in some rare cases of insolvency,etc recovery of the amount in case of success may become difficult.
The latest instructions state that decision to appeal should not be taken in a routine manner, but only when the case genuinely merits going for the appeal and there are high chances of winning in the court or higher court.
In future, procuring entities that have lost a case will need to set up special board/committee to review the case before an appeal is filed against an order and only after considering both legal merits and the practical chances of success and after considering the cost of, and arising through, litigation/appeal/further litigation, as the case may be, it is satisfied that such litigation/appeal/further litigation cost is likely to be financially beneficial compared to accepting the arbitration/court award, the appeal can be filed.
Lastly, even for consultancy services, the revised guidelines have provided an additional method of procurement apart from L1, single source selection and QCBS. The procuring agencies will be able to also resort to fixed budget-based selection for consultancy proposals which allows them to specify a specific budget as the cost of consulting services in the tender document itself.