Facilitating Quicker Contract Negotiations


primary objective of the DPP is to ensure expeditious procurement, but procurement remained elusive in spite of efforts made over the years. Contract negotiation is one of the bottlenecks. The negotiations conducted by the CNC are based on the terms of the RFP, vendor's response thereto, and the terms and conditions of the standard contract, however from the CNC's standpoint, the terms of the RFP are as good as cast in stone.

 The first ever Defence Procurement Procedure (DPP) promulgated by the Ministry of Defence (MoD) in 2002 declared somewhat grandiosely that  the ”primary objective of this procedure is to ensure expeditious procurement of the approved requirements of the Armed Forces in terms of capability sought and time frame prescribed by optimally utilising the allocated budgetary resources.”

But for the mysterious disappearance of the word 'primary' from the text in the next DPP issued in 2006, every version of DPP since then has used precisely the same language to express its aim.

That this aim remains elusive in spite of efforts made over the years is unquestionable. This is more than evident from the fresh initiative taken by MoD in May 2015 to address the problems besetting defence procurements. On the 1st of May, it set up a Committee of Experts (CoE) to, inter alia, “suggest the requisite amendments in DPP 2013 to remove the bottlenecks in the procurement process and also simplify/rationalise various aspects of the Defence procurement”.

The committee has made wide-ranging recommendations in its report submitted in July 2015. The new version of the DPP, based on these recommendations, was expected to be released by the end of the last year but that did not happen, probably because the groundwork is not yet complete. . There is no saying when will the new DPP be released and what impact it will have on defence procurements.

Since the committee's recommendations are based on the inputs from a cross-section of the stakeholders, including the MoD officials, it will be fair to expect these recommendations, if and when implemented, to fix the myriad problems besetting defence procurements. Whether or not that happens, it is not going to be easy to work out the modality of implementing some of the recommendations.

Some of recommendations made by the committee relate to the larger policy framework, such as appointment of 'a proactive defence procurement executive, with specialist wings and personnel working outside the staff oriented environment of a Government of India Ministry' or creating an 'innovative funding mechanism' to channelize Foreign Direct Investment (FDI) that comes through the offsets route. Assuming that these recommendations are acceptable to the government, it would take a long time to make these mechanisms functional.

While implementation of such recommendations poses a big challenge, making procedural changes in the existing provisions of the DPP, as recommended by the committee, is also not going to be any less daunting. For one thing, MoD will need to work out the modality of implementation of these recommendations. More importantly, MoD will need to consider whether doing so would solve the problem that a particular set of recommendations seeks to address.

This dilemma is best illustrated by the committee's recommendation concerning contract negotiation. These negotiations are conducted by the Contract Negotiation Committee (CNC) based on the terms of the Request for Proposal (RFP), vendor's response thereto, and the terms and conditions of the standard contract.

Whatever goes into formulation of a procurement proposal is important but the die actually gets cast the moment the RFP is issued as it is very difficult, though not impossible, to make any changes in the terms set out in the RFP at the negotiation stage. From the CNC's standpoint, the terms of the RFP are as good as cast in stone. It can deviate from the terms of the RFP only at the risk of being blamed for favouring the vendor.

One can argue that such inflexibility is incompatible with the very idea of negotiation and, in any case, this could derail a procurement programme at a fairly advanced stage in the acquisition cycle. Surely, the procedure would not get vitiated if some minor deviations are accepted by the CNC to prevent failure of the negotiations. Ironing out differences is undoubtedly the very purpose of negotiations and, there is no denying that minor accommodations during negotiations, especially in single-vendor cases, are not unheard of.

That is a valid view to take. The problem, however, is that what constitutes a minor accommodation and what does not is ultimately a matter of subjective opinion and this often causes difficulties for the negotiators, particularly the finance member of the team. For example, what if an Indian vendor offers a discount on the quoted price on the condition that all payments will be released within, say, three days of the proof of dispatch being submitted to the paying authority? Or, what if the vendor expresses inability to use 'seasoned wood' for packing or paint in yellow the packing case in which the full set of the cargo list is to be placed? Believe it or not, these requirements are set out in the standard contract document that forms a part of the DPP. Although the standard contract is only a guideline template, it is no often that the CNC agrees to deviate from it even in some minor respect.

There are some very valid reasons for such intransigence. As per the terms of the standard RFP and well as the contract, transhipment of goods is not allowed, but what constitutes transhipment is not defined. Any attempt on the vendor's part to have this elaborated in the contract is bound to create a stalemate in the negotiations as the CNC is not empowered to take a call on this.

The CoE has not talked much about the issues relating to the RFP format in its report but two sets of recommendations have been made concerning the conduct of negotiations by the CNC and the changes required to be made in the standard contract document. These can be looked at in the reverse order because, as observed earlier, the standard contract document forms the basis for negotiations along with the RFP and the vendor's response thereto.

The committee has recommended inclusion of a section that contains definition of all key terms used in the contract and some changes in the following existing clauses of the standard contract document:

  • (a) Article 2: Effective date of Contract
  • (b) Article 3: Advance Bank Guarantee & Article 4 Performance-cum-Warranty Bond
  • (c) Article 5: Payment Terms
  • (d) Article 13: Liquidated Damages
  • (e) Article 15: Warranty
  • (f) Article 18: Taxes and Duties
  • (g) Article 19: Termination
  • (h) Article 24: Force Majeure
  • (i) Article 32: Option Clause

It has also recommended addition of new clauses on (a) Severability, (b) Complete Agreement, and (c) Survival after Cancellation or Expiration.

Some of these recommendations, especially those related to termination, force majeure, and the option clause could be contentious.

At present, the standard contract document provides for termination of contract by the buyer. The committee has recommended that the vendor should also be allowed to terminate the contract if MoD commits a material breach of contract. Assuming that this is acceptable to MoD in principle, it will still be necessary to formulate a comprehensive definition of what would constitute a 'material breach of contract' before the recommendation can actually be given effect to.

The committee has been recommended that 'force majeure' should include 'acts of the government'. MoD might be weary of this as acceptance of this recommendation would make it easier for the foreign governments to impose sanctions, thus leaving MoD high and dry if such a contingency arises while protecting the interest of the vendor.

As for the 'option clause', the committee has observed that it is not feasible for the vendor to hold the price to execute the order, if placed, for additional quantity of the equipment. It has, therefore, recommended that the existing clause should be amended to the effect that any additional follow on order will be subject to a separate proposal from the vendor and a mutually agreed price and schedule.

It is somewhat difficult to understand why should there be an option clause at all in a contract if the price and schedule is to be renegotiated with a vendor for additional quantity of the same equipment. A vendor, in such situation, will naturally dictate the terms of the subsequent contract.

Making such changes may be tricky because of their implications. It would, therefore, be desirable to focus on the recommendations that are apparently free from questionable implications. Incidentally, there are several other changes that need to be made in the standard contract document, starting from improving the syntax of several clauses to removing textual ambiguities.

In any case, while these changes might help improving the standard format of the contract, this is unlikely to solve the problem arising from the existing system of contract negotiation. The CoE has made the following recommendations to improve this system:

  • (a) The constitution of CNC should not be linked with acceptance of Technical Oversight Committee (TOC) report. The CNC may be constituted on acceptance of the Staff Evaluation Report, with the caveat that opening of commercial bids and negotiations with the vendor would not be done till acceptance of TOC report by the Defence Secretary or CFA, as the case may be. The interim period should be utilised by CNC to determine the 'benchmark' price or analyse any other aspect of the scheme.
  • (b) In a multi-vendor situation, at the CNC stage, price negotiation with the L1 vendor should not be required. In such cases there should also be no need to establish the 'benchmark' price.
  • (c) In a single vendor situation, 'benchmark' price should be fixed by the CNC before opening of the commercial bid.
  • (d) For the purpose of 'benchmarking' with the approval of the DG (Acq), services of the experts could be utilised by the CNC and/or training could be imparted to the acquisition executives, wherever felt necessary.
  • (e) A provision for price escalation to address the unforeseen delays beyond one year between conclusion of contract negotiation and signing of the contract may be made and stated upfront in the RFP.

Delinking constitution of the CNC from acceptance of the TOC report may be of little help. Given the fact that the standard CNC composition is prescribed in the DPP, it should not take a long time to constitute the CNC in a particular case. However, if the committee found that in reality it is taking a long time to constitute CNCs, the remedy would have been to address the root cause of such delay.

The factor that contributes to delay is the time actually taken by the committee to wrap up the negotiations rather than the time taken to constitute the CNC. For a long time, the Central Vigilance Commission has been discouraging post-tender negotiations in multi-vendor cases but contract negotiations are conducted almost as a matter of course in all defence purchases.

In theory, it stands to reason that there be no negotiation on price in the multi-vendor cases but it seems somewhat queer to assume that the delay takes place because of the higgle-haggle on prices. There are several other technical issues which are as, if not more, time-consuming when it comes to resolving them. Therefore, proscribing negotiation on price is likely to be of little help in expediting conclusion of the CNC proceedings.

The members of the CNC cannot be oblivious of their responsibility to ensure that the procurements are made at a fair price. Considering that defence purchases involve huge amounts of tax-payers' money, no one can afford to be gloss over the financial aspect of procurement.

The real issue concerns reasonableness of price. The system of determining the 'benchmark' price before starting the contract negotiations is meant to give an indication to CNC as regards the reasonableness or otherwise of the quoted price and to negotiate with the vendor with reference to the benchmark price. If the system has been found to be not as efficient as it ought to have been it is not on account of inaptitude of the officials responsible for determining the benchmark.

In the absence of reliable historical databases on detailed breakup of prices that is accessible to all concerned, current prices of raw material and labour, defence inflation indices of different countries, and other related inputs, determining 'benchmark' price with reasonable accuracy is always going to be difficult. This makes the committee's recommendation to utilise experts for benchmarking or train the acquisition executives to carry out this task somewhat perfunctory.

If the time taken by the CNC is to be minimised, greater attention needs to be paid to formulation of the RFP, which straightjackets all subsequent processes, and aligning it completely with the format of the standard contract. The terms of the RFP and the contract must be carefully customised as per the requirement of the contract, on the basis of the inputs to be obtained at the Expression of Interest (EoI)/RFP stage. The vendors must know when they respond to the RFP what the contract is going to look like so that no time is wasted later on to negotiate the terms of the contract.

If the terms of the RFP are crystal clear, it would be reasonable to expect that there will be no major issues in pre-bid meetings, the response of the vendors would be easy to tabulate, the possibility of non-compliance with the RFP would get minimised, it would be possible to carry out technical evaluation quickly, and, consequently, not very many issues will be left to be negotiated by the CNC after the field trials and staff evaluation are over.

This is not a plea for rejecting these, or any other, recommendations but to point out that some of the recommendations, which are either contentious or merely conceptual, have the potential of delaying promulgation of the new DPP inordinately.

It would serve the objective of removing bottlenecks in the procurement procedure if whatever changes can be made without any further delay and other changes are left to be notified in the next DPP which need not wait for another two or three years.

The writer is former Financial Advisor (Acquisition) and Additional Secretary and Member, Defence Procurement Board, MoD.


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