Program on “ Materials and Supply Chain Mgmt in the Post Covid

Environment “
ASCI , Hyderabad , 14th December 2022

Managing Contract
Modifications / Variations

A. Venkateshwar BE , IRAS
President , Acceleron India
Former Consultant , Ministry of Railways ,
GOI
 In this discussion …

• Introduction of Addl. Items in a Contract / Variations in existing Items

• Excess over Contract Value
• Negotiating Principles …. World Bank guidelines
• Valuation of Variations
• Rates for Extra / new Items of Works
• Large scale variations in CV / Incentive payments
• Deletion/ Modification or Change of Clauses in Agreement
• Powers of Modification to Contract
• Which Clauses can be modified in a Works Contract Agreement
 References

Manual for Procurement of Works 2019 ; Ministry of Finance

( adopted largely by almost all PSUs)
General Conditions Of Contract 2020 , Ministry of Railways

General Conditions Of Contract 2020 , Ministry of Defence

 Introduction of Additional Items in a
Contract /
Variation in Quantities of existing Items
 Introduction of Addl. Items in a Contract / Variations in
existing Items : Ministry of Finance … 1 para 6.5.1

Additional Items / Variations in existing Items / Substituted Items

i) Variation means:
(a) increase or decrease in the quantity of any work included in the BOQ of the contract;
(b) omission of any such work (but not if the omitted work is to be carried out by the
procuring entity by another contractor);
(c) change in the character or quality or kind of any such work;
(d) change in the levels, lines, position and dimensions of any part of the works;
(e) additional work of any kind necessary for the completion of the works; and
(f) change of the specified sequence or timing of construction of any part of the works.
 Introduction of Addl. Items in a Contract / Variations
in existing Items : Ministry of Finance … 2
• The variation or additional work must be a part of the scope of the original work and
should not completely change the purpose of the original contract.
• The variation may result in additional / reduced / nil payments to the contractor .
• Before a variation can be instructed to the contractor, prior approval from the client is
needed, except for certain situations as may be specified in SCC.
• The rate/ price/ valuation do not have to be agreed with the contractor, although this is
preferable.
• Any change in ‘approval for construction’ drawings should be evaluated properly and
their full financial implications worked out at that very stage for submission to the
appropriate authority for approval.
 Introduction of Addl. Items in a Contract / Variations
in existing Items : Ministry of Finance … 3
ii) Keeping Track of Variations/ Extra/ Substituted Items:

• A variations register is used to administer and keep track of the status of a variation.
Normally, the contractor has a tendency to report and claim positive variations
(variations causing higher payments) and may not report negative variations. However,
the client must keep track of such negative variations and issue timely letters.
• This shall cover the following important steps:
a) The client ’s prior approval of the issue of the variation instruction;
b) The client ‘s instruction to the contractor (this letter creates the variation).
c) The variation instruction letter must be given a unique number in the register;
d) The status of the variation has to be updated / summarized in the register monthly
e) The financial implications have to be kept upto date.
 Introduction of Addl. Items in a Contract / Variations in existing Items

• Extra Works:
Should works over and above those included in the contract require to be executed at the site,
the Contractor shall have no right to be entrusted with the execution of such works which may be
carried out by another Contractor or Contractors or by other means at the option of the Railway.
• Separate Contracts in Connection with Works:
The Railway shall have the right to let other contracts in connection with the works.
The Contractor shall afford other Contractors reasonable opportunity for the storage of their
materials and the execution of their works and shall properly connect and coordinate his work
with theirs.
The Contractor's failure so-to inspect and report shall constitute an acceptance of the other
Contractor's work as fit and proper for the reception of his work.
• They shall be performed by the Contractor as provided therein and be subject to the same
conditions, stipulations and obligations as if they had been originally and expressively included
and provided for in the Specifications and Drawings .
Introduction of Addl. Items in a Contract / Variations in existing Items …1

• Items with rates higher or lower by more than 30% of the estimated rates shall be
considered as abnormally high or low rated items.
• During the course of execution, a constant watch shall be kept on any upward
variation in respect of the items having abnormal high rates (AHR)- for “Vitiation
of Contract”
• Normally, the quantity of AHR items should not be allowed to exceed the quantity
mentioned in the BOQ.
• However, in case of if quantity of AHR items > BOQ , the same shall have to be
approved by competent authority immediately on such increase , after checking
interse position of the bidders against the tender and supported by adequate
justification.
• The same procedure shall also be followed for deviation in any single item, which
has significant impact on the contract value (say above 5%).
 Introduction of Addl. Items in a Contract / Variations in existing Items …2
Excess over Contract Value:

• In case of Item rate contracts, when the executed value is about 80% of the contract
value and is likely to be exceeded, the revised deviation statement shall be processed
for approval of competent authority.
• The circumstances leading to the excess with proper justifications of each item need
to be recorded.
• It is usually stipulated in the tender document that the contractor must enclose the
proposed deviation statement with the RA Bill once the executed value of work has
reached 80% of the awarded value.
• In case of maintenance contracts, there could be variation in individual quantity of
items.
• For variation in quantity within the contract value, the final deviation statement
should be approved by concerned HOD /DGM with due concurrence by associate
finance department.
Fixation of Rate in
Negotiations
 Negotiating Principles …. World Bank guidelines

• In terms of Negotiation behaviors, the following 5 principles should be followed:

• Empathy - Would I want to be treated this way if I was the Bidder/Proposer?
• Publicity – Would I be happy if my actions were exposed to public scrutiny?
• Professional Ethics – Would I advise colleagues to undertake a Negotiation in the
same manner?
• Impact – Will my approach to Negotiation negatively impact how a Bidder/Proposer
works with the client post contract award?
• Complaints – Is my approach to Negotiation likely to give rise to a formal complaint
for not following an ethical approach based on the general procurement Principles?
• The Probity Auditor will be required to confirm Negotiations have been carried out in
accordance with the principles of transparency, integrity and fairness.
 Fixation of Rate in Negotiations for Variations ..Ministry
of Finance

Valuation of Variations:

• In this regard variations , the perceived risks in quick finalisation of variations against the
opportunity costs of delayed decision making e.g. project delays, cost escalations, loss of
transparency etc must be balanced.
• The following are the steps to be taken by the Engineer:
a) To decide as to the applicability of the rates in BOQ and agree to use them
b) If not considered applicable, to use BOQ rates as the basis for a fresh valuation;
c) In the event of a disagreement, to develop new rates from first principles;
d) If there is disagreement, to fix the appropriate rate; and
e) To determine provisional rates to allow monthly certification.
• In case it is noticed that there is a significant variation in terms of both quantity and cost , the
client may seek the reasons of the Consultant if appointed and take action as deemed fit based
on the same.
 Fixation of Rate in Negotiations for
Variations ..Ministry of Railways…1
Rates for Extra / new Items of Works:

• To be finalized in a meeting between Contractor and the Engineer i/c. ( Negotiating Tender
Committee)
• Any new SOR item of work - as per the "Schedule of Rates of Railway" at the tender % .
• Any new non – SOR items - at the rate agreed upon mutually . before their execution .
• Contractor to notify at least 7 days in advance of such execution.
• In case there is no agreement , the Railway shall get the extra works executed by other means .
• Contractor shall have no claim for loss or damage that may result from such procedure.
• The new / extra items added to the agreement ‘s scope shall not affect its validity.
• The rates shall be assessed based on
(i) the prevailing rates
(ii) Analysis of Unified Schedule of Rates of Indian Railways
(iii) Analysis of Delhi Schedule of Rates issued by CPWD
(iv) Market Analysis
 Fixation of Rate in Negotiations for
Variations ..Ministry of Railways…2
Rates for Extra / new Items of Works:

• Variation in Non - Minor items ( except in case of foundation work) -

• (a) Quantities > 100% but upto 125% - 100% of the agt. rate
• (b) Quantities > 125% but upto 140% - 98% of the agt. rate
(c) Quantities > 140% but upto 150% - 96% of the agt. rate
(d) Quantities > 150% - 96% of the agreement rate ( only in exceptional circumstance)
• Variation in Minor Value Item ( an item which is less than 1 % of the total contract value ) :
(e) Quantities > 100% but upto 200 % - 98% of the agt. rate
(f) Quantities > 200% but upto 150% - 96% of the agt. Rate (only in exceptional circumstance)
• Variation in earthwork quantities – 25% shall apply on gross quantity ( not classification qty)
• Variation in foundation quantities – agt. rate shall apply to full variation
• Variation in SOR quantities - rates same as in Non Minor items ; but variation is on full SOR
schedule and not individual items.
 Fixation of Rate in Negotiations for Variations
Large scale variations in CV / Incentive payments

• If the contract value fall below 75% or exceed 150% of the awarded value for tenders for capital
nature work estimated above Rs. 2 crore following may be incorporated in SCC.
• If due to variation/ amendments ,the gross value of work actually performed is < 75% of CV ,
then an additional 5% on the amount by which the CV falls short of 75% of total CV is payable to
the Contractor.
• Similarly if due to variation/ amendments , the gross value of work actually performed by the
Contractor is > 150% of CV, then a discount of 5% on the amount by which the CV exceeds
beyond 150% of total CV is leviable.
• Provision of incentives for completion of work before schedule should be sparingly made after
careful assessment of tangible benefits there from .
• If work completed is ahead of schedule a bonus limited to max. 5% of CV or executed CV ,
whichever is lower , is payable . The Incentive/bonus clause shall be included in SCC.
 Deletion/ Modification or
Change of Clauses in Agreement
 Deletion/ Modification or Change of Clauses in Agreement
Ministry of Finance

• No specific clauses in the Manual issued by Ministry of Finance .

 Deletion/ Modification or Change of Clauses in Agreement
Ministry of Railways …1

• In case any of the provisions of the contract are required to be modified after the
contract documents have been signed, the modifications shall be made in writing and
signed by the Railway and the Contractor
• No work shall proceed under such modifications until this has been done.
• Any verbal or written arrangement abandoning, modifying, extending, reducing or
supplementing the contract or any of the terms thereof shall be deemed conditional
• No modification shall be binding on the Railway unless and until the same is
incorporated in a formal instrument and signed by the Railway and the Contractor .
• Till then the Railway shall have the right to repudiate such arrangements.
 Deletion/ Modification or Change of Clauses in Agreement
Ministry of Railways …2
Powers of Modification to Contract:

• The Engineer on behalf of the Railway shall be entitled by order in writing

- to enlarge or extend, diminish or reduce the works
- or make any alterations in their design, character position, site, quantities, dimensions
- or in the method of their execution or in the combination and use of materials
- or to order any additional work to be done or any works not to be done

• The Contractor will not be entitled, to any compensation for any increase/reduction in
the quantities of work but will be paid only for the actual amount of work done and for
approved materials supplied against a specific order.
 Deletion/ Modification or Change of Clauses in Agreement

Which Clauses can be modified in a Works Contract Agreement :

• Parties to the contract Cannot be modified
• Definitions Can be modified
• Scope of both Parties
• Terms of Delivery - Time , cost , quality
• Covenants / Obligations of both Parties
• Events of Default / Term and Termination
• Force Majeure Events and treatment
• Statutory / Legal Compliances by both Parties - Extent and liability
• Assignability ; modifications procedure and authorities etc
• Claims and Indemnification / Confidentiality
• Resolution Dispute Mechanism & Arbitration / Jurisdiction
• Miscellaneous – Special Conditions ( Technical and Financial) ; Notices/ correspondence
• General Conditions of Contract ( organization specific) - non negotiable
 Thank You !
[email protected] ; 9948291319