1. Inflated Justified Cost Fleeces the Organization
Heavily
1
Brief Background
1.2
Technical
Evaluation
Committee (TEC) evaluated the
samples submitted by A and B and
recommended
procurement
of
BRITON-1000 equipments of B.
Management approved opening of
the single price bid of B on
08.01.2007.
1.1
Global tender was invited by
an organization Z in 3-envelop
system for supply of 200 nos. of
High
Intensity
Refractive
Equipments (HIRE) for its various
units. Five firms submitted their
tenders. Envelop-A consisting of
Earnest
1.3
Price
Money
bid of B was
Lessons Learnt
Deposit
opened
on
(EMD) and
09.01.2007,
 Report of TEC should be examined
documents
and was found
meticulously by the competent
regarding
to be 13.92%
authority
under
single
tender
eligibility
above
the
situation.
criteria, were
justified cost.
opened on
On
 Opportunity should be given to the
22.08.2006
negotiation,
vendors to meet the technical
and
the
firm
deviations
for
encouraging
shortcoming
initially offered
competition.
s
were
a discount of
intimated to
5% on FOB
 Preparation of cost estimation and
the bidders.
price
vide
justification
should
be
realistic
to
On receipt of
letter
dated
avoid award of work at a higher rate.
clarifications
17.01.2007.
, documents
Subsequently,
 Analysis should be done on a realistic
etc., M/s A
vide
letter
basis
considering
all
available
factors.
of USA and
dated
M/s B of
18.01.2007,
 Examination
of
prequalification
Singapore
firm offered a
documents
should
be
carried
out
were found
special FOB
carefully.
to
be
price of US$
complying
69,500/- per
 Single tender situation should be
with the NIT
piece with free
avoided.
prequalificati
consumables
on
during the first
requirements;
accordingly
their
year of warranty. The offer now
technical bids were opened on
worked out to be Rs. 91.04 crore i.e.
03.11.2006.
1.59% higher than the justified cost.
1.4
Recommendation
of
Procurement Committee for award
of work at the negotiated price was
approved by Competent Authority.
2
Complaint
2.1
A
source
information
regarding procurement of HIRE at
exorbitant price on single tender
basis was received by Chief
Vigilance Officer (CVO). It was
alleged that organization C received
the same equipments from B at
lower price of US$ 53,000.00 per
unit with discount of 7.8% with one
year warranty and US$ 5,800.00 for
subsequent year’s warranty. A
detailed investigation into the
allegations was conducted by DGM
(Vig.) under guidance of CVO.
3
Findings
3.1
Cost Comparison
3.1.1 Budgetary
offers
for
estimation were obtained from A and
B before inviting tender; they quoted
FOB rates of US$ 45,000.00 and
US$
80,000.00
respectively.
Concurrently, another tender for
Advanced Lighting Works (ALW)
which included supply of 10 nos. of
HIRE was invited; and two firms,
which were technically qualified
offered BRITON-1000 equipments
@ US$ 73,500.00 and US$
65,000.00. Justified cost was
prepared by the Engineer-in-Charge
(EIC) on 09.01.2007 based on the
average of budgetary quote of B and
the quoted rates in ALW tender, and
considering a quantity discount of
8%, for an amount of Rs.89.62
crore, inclusive of freight, insurance
and customs duty.
3.1.2 During
financial
scrutiny,
Director (Finance) desired to put up
detailed justification alongwith cost
comparison with respect to the offers
of similar nature. EIC submitted this
and brought out that FOB cost of
each equipment in the instant tender
was US$ 1456.90 less than that in
ALW tender after considering the
discount of 13.1% offered by L-1 in
that tender.
3.1.3 B had initially quoted FOB @
US$
78,780.00
with
free
consumables for two years, costing
US$ 2,073.00 and 10 lamps for US$
1,744.40. During negotiation, the
firm initially reduced 5% on FOB rate
and subsequently offered special
price of US$ 69,500.00 with free
consumables for one year only.
While working out cost of one
equipment in the instant tender
without consumables, an amount of
US$
5,341.00
i.e.
difference
between the two negotiated rates of
B was presumed to be the cost of
consumable for one year. This was
compared w.r.t. per piece rate of L-1
firm in ALW tender, without
consumables, which was @ US$
63,871.50 after 13.1% negotiated
discount. Though the cost of 10
spare lamps supplied alongwith
HIRE were accounted for by
reducing that from the negotiated
rate, quoted cost of consumables i.e.
US$ 2,073.00 was disregarded.
Further, the quantity discount of 8%,
as was envisaged for bulk purchase,
was conveniently ignored.
3.1.4 On clarification, EIC stated
that the comparison was made as
per tender offers and submitted a
letter dated 04.03.2008 from B
indicating free consumables to be
supplied for one year, costing US$
4,185.00. This amount is irrelevant
in view of tender opening date.
year consumable to be US$
2,073.00, the difference per unit
works out to be US$ 6,920.80 more
in the instant tender. Hence, the
justification submitted that per piece
rate is US$ 1456.90 less than ALW
tender was grossly misleading.
3.1.5 Even though the comparison
was made as per offers, the quantity
discount
should
have
been
incorporated to make it realistic in
view of the large quantity being
procured in the instant tender as
compared to very small quantity in
ALW tender. Since B’s offer included
the details of free consumables for
two years, its intention vide letter
dated 04.03.2008 seems to be
dubious.
3.2
3.1.6 Moreover, considering the
cost of free consumables as US$
4,185.00 the comparison works out
as under:
A. FOB cost of HIRE in ALW tender
US$ 63, 871.50 less 8% quality discount
= US$ 58,761.80
B. FOB cost of HIRE in instant tender
a) Negotiated rate of B
= US$ 69,500.00
b) Less consumables for one year
= US$ 4,185.00
c) Less towards cost of 10 nos. Lamps
= US$ 1,744.40
Cost per equipment =US$ 63,570.60
3.1.7 Hence, FOB rate of HIRE in
the present tender was US$
4,808.80 more per piece as
compared
to
ALW
tender.
Considering the quoted rate of one
Justified Cost
3.2.1 On clarification, EIC stated
that justified cost was prepared in
accordance with the provisions of
the ‘Draft Works Manual’. He
mentioned that since A was not
meeting the tender specifications,
their rate was not considered.
Regarding quantity discount, he
stated that it was incorporated in
view of the large quantity being
procured.
3.2.2 As per the Draft Manual,
justified cost was to be prepared
based on average of the budgetary
offers collected from prospective
vendors before floating the tender.
Therefore, the offer of A should have
been considered.
3.2.3 Quantity discount of 8% is
generally
abnormal
unless
specifically known; therefore, it
appears that the EIC was aware of
the rates offered by B to
organization
C,
however,
he
considered the budgetary offer of B,
which was quite high and ignored
the offer of A, possibly to inflate the
justified cost. Since the Manual was
still not finalized and the competitive
rates were available from ALW
tender, the justified cost should have
been prepared based on these
rates, and that could have worked
out to be Rs. 77.84 crore as against
Rs. 89.62 crore prepared by EIC.
Had the justified cost been prepared
in a realistic manner, the award of
work at higher rate could have been
avoided.
3.3
Inland
Insurance
Freight
and
3.3.1 An amount of Rs. 85.27 lakh
i.e. 1% of Cost, Insurance & Freight
(CIF) was assessed towards inland
transportation
for
200
HIRE
equipments. B quoted a rate of Rs.
3.81 lakh per equipment amounting
to Rs.7.62 crore towards this which
is
794%
higher
than
the
assessment.
Neither
during
negotiations
nor
during
the
acceptance, EIC brought out this
unjustifiably high quote for freight
and insurance.
investigation, the amount quoted by
B works out to be Rs.1.32 crore
higher.
3.4
3.4.1 The cut-off date towards
experience / performance certificate
as per NIT was 31.12.2005. B
submitted a certificate with date of
completion as 31.03.2006; therefore,
this should not have been accepted
for eligibility. However, Asstt.
Manager while scrutinizing the
documents brought out that B met
the pre-qualification criteria.
3.4.2 On clarification, EIC stated
that this happened due to oversight;
however, before opening the price
bid, clarification was obtained from B
to ascertain their eligibility.
3.5
3.3.2 On clarification, EIC stated
that the higher rate was discussed
during negotiation but the firm
asserted that they had quoted
correctly; however, this was missed
in recording. He further clarified that
detailed calculation was not done
while preparing the justified cost;
hence, there was an error. He added
that now after detailed working, the
quoted amount was found to be
roughly 21% above and furnished a
justification of the likely costs to be
incurred by the firm amounting to
Rs. 3.15 lakh per equipment.
3.3.3 This justification submitted
was an afterthought. Moreover,
various charges considered were
lumpsum rather than the actuals or
were without any basis. Even this
justified cost furnished during the
Pre-qualification
Technical Evaluation
3.5.1 Technical
Evaluation
Committee
(TEC)
tested
the
samples submitted by A and B and
inferred that A’s sample was not
meeting the tender specification on
three grounds. It was observed
during investigation that some of the
parameters, including the testing
protocol, were not spelt out in the
tender document. It was further
noted that no effort was made to
avoid single tender situation by
allowing A to comply with the
deviations,
which
were
quite
insignificant.
3.5.2 As per NIT, firms had to
submit performance certificate in
respect of works claimed by them
towards experience. B was qualified
based on performance certificate of
BRITON-500 equipments, even
though the item procured in the
instant tender was for BRITON-1000
i.e. a higher version.
4
Systemic Improvement
4.1
Technical instructions were
issued that:
i)
ii)
iii)
5
Performance certificate should
be in consonance with the item
being procured under the
tender;
To
improve
transparency,
fairness and accountability in
sample testing by stating all
parameters and testing protocol
in NIT and carrying out tests in
presence of all vendors; and
To encourage competition.
Questionnaire
Q.1
What could be the motive for
evaluation
of
the
sample
equipments
on
technical
parameters not specified in NIT?
Q.2
If the equipment is not proprietary
item, how can only one firm be
found eligible?
Q.3
Was A rejected only to favour B?
How? Why?
Q.4
Was the conduct of the Engineerin-Charge dubious?
Q.5
What are the remedial measures to
get best products at the best price?
Q.6
What guidelines are required to
ensure organizational interest in
preparing justified cost etc.?
Q.7
Is evaluation of only the samples
for technical compatibility in order?
What could be possible lapses/
malpractices? What are remedies?
Decision
5.1
With concurrence of Central
Vigilance Commission, disciplinary
proceedings for major penalty was
initiated against EIC and an
Administrative Warning was issued
to the Asstt. Manager.
5.2
The concerned Directorate
was instructed to release payment
towards
inland
transportation,
insurance etc. on actual basis,
based on documentary evidences
submitted by the firm.