IRREGULARITIES IN ENGINEERING WORKS

1. WORKSHOP ON ENFORCEMENT OF CONTRACT CLAUSES AND TIMELY RECOVERY IRREGULARITIES IN ENGINEERING WORKS By Sanjay Jain, GM(Vig) DATE: 23rd February’ 2012

2. PUBLIC PROCUREMENT... • The process of Public Procurement can be categorized in three distinct Stages- • Pre-tender Stage(Project formulation, Appointment of Consultants, Preparation of Detailed Project Report/ Detailed Estimate) • Tender Stage (Preparation of tender documents, inviting & opening of tenders, prequalification, tender evaluation & award of work, Integrity Pact) • Execution Stage (Compliance of agreement conditions, making payments, ensuring quality & timely completion)

3. PRE-TENDER STAGE...Shortcomings • PROJECT FORMULATION • Details of need and possibility of upgrading the available existing facility not explored fully; • Projects planned without ensuring the availability of land / free from encumbrances; • Scope of work not finalized considering the total requirement for commissioning of the project / facility; • Need of various user agencies / departments not explored properly during conceptualization stage.

5. PRE-TENDER STAGE...Shortcomings • APPOINTMENT OF CONSULTANTS: • Should be need based and for specialized jobs only; • Appointment to be transparent and through competitive bidding; • Consultant’s fee should be based on some fixed value of the contract.

6. PRE – TENDER STAGE: Shortcomings • APPOINTMENT OF CONSULTANTS…contd.: • Consultant appointed without well defined responsibilities. • Consultancy fee given (on % basis) for the packages wherein there is no input required from consultants. Also, no ceiling limits stipulated. • Payment not linked to the actual progress of work / site requirement and final completion etc. • Penal clause for deficiency in services by the consultant not stipulated in the contract agreement or inadequate provision.

7. PRE – TENDER STAGE: Shortcomings • Preparation of DPR / detailed estimate • Not based on actual soil condition; • Detailed site survey not conducted resulting into large scale deviations during execution; • Tenders invited without confirming the acquisition / possession of land; • Necessary site approvals and statutory clearances from local authorities not initiated in time resulting into delays and disputes. • Gross over–provision in capacity of new DG sets, chillers etc. procured for power house affecting system efficiency.

8. PRE – TENDER STAGE: Shortcomings • Tender specifications are tailor made to suit particular firm/select firms inviting allegations of favoritism and bias from the competing firms. • Introduction of restrictive eligibility criteria in NIT resulting into inadequate response / competition. • Casual approach in attending / dealing with vital queries from firms.

9. TENDER STAGE: Shortcomings • Firm pre-qualified on the basis of their experience in on-going work/work in progress as against the requirement of completed work as per NIT. • Firms prequalified based on experience of a work executed in Joint Venture without verification of the individual firm’s share / partnership. • Tenders splited so as to bring them within the approval limit of local authorities. • Two firms who had produced same completion certificate were qualified without verification.

10. TENDER STAGE: Shortcomings • Interest free ‘Mobilization Advance’ stipulated in one of the tenders in violation of CVC guidelines. • Post bid relaxation of the qualification criteria. (Had the relaxation been included in the NIT more firms would have participated with a competitive response). • Price variation clause – Fixation of star price (the price considered to be of TS stage/ justification stage and what would be the supporting documents). Contd…

11. TENDER STAGE: Shortcomings….. • Condition for vetting of structural designs by IIT/ Engineering College not clear in certain tenders. • Design Based tender called for HVAC, PA system without stipulating design experience. • Tender evaluated in deviation to the Ambiguity Clause/ NIT conditions. • Adequate Safeguard not taken for supply of spares & technological support for the design life of the system. Contd…

12. TENDER STAGE: Shortcomings • Repeat order placed to a firm without ensuring fulfillment of relevant DoP conditions. • Abnormally long time taken to decide and award the work which is against compliance of the directions issued by the Chairman for time bound processing i.e. award of contract within 30- days of opening of tenders vide letter dt. 30.08.07 are not being complied. • Unrealistic time frame considered for projects without proper analysis. Contd…

14. TENDER STAGE: Shortcomings • Time period increased and tender condition(s) changed during negotiations, thereby denying level playing field to the other bidders. • Evaluation criteria/exclusion criteria followed to decide L-1 bidder not made part of the tender/ agreement. • Contract awarded without establishing reasonability of the offer. Also, there is no uniformity in calculation of justified cost. • Inflated justification statement prepared by including unjustified components and loading factors. Contd…

15. TENDER STAGE: Shortcomings • Budgetary offers received for procurement of (insecticides and weedicide) chemicals were considered as commercial offers leading to procurement at high rates. • Improper provisioning of store purchases without taking into consideration the available stock, past consumption pattern and shelf life of the item etc. • Pre-constructional anti-termite treatment considered in works / projects (Item banned). Contd…

16. TENDER STAGE: Shortcomings • Technical evaluation not done objectively on equitable basis. (Without considering the extent of deviations, when the offers suffer from deficiencies, equal opportunity should be given to all). • Splitting of award in a supply contract after techno-commercial evaluation, although multi sourcing not stipulated in NIT . • Export items being substituted with indigenous make during execution.

17. EXECUTION STAGE : Shortcomings • BGs accepted with conditional stipulation and not verified from the Issuing Bank / controlling branch. • Use of departmental machinery was allowed for use by cargo agents without recovery of charges as per contract provisions. • In small airports / works vendors are allowed to use AAI quarters / land for contractors use as site office, laboratory, labour camp, store etc. but no provision made in agreement nor any recovery made on account of rent, electricity and water charges. • Payment of substituted item without making financial adjustments.

18. EXECUTION STAGE : Shortcomings • Recoveries reported consequent to the observations of CTEO / Vigilance inspection.(CVC’s circular No. TE(NH)/2011/Recoveries/144262 dt. 12.09.11) • Organizations while effecting the recoveries from contractor’s bill indicates that the recoveries are consequent to the observation by CTEO. • As the contract is between the organization and the contractor, any endorsement mentioning that the recoveries are at the instance of third party could weaken the arbitration / court case at later stage. • Therefore, observations / advise are to be considered in terms of relevant contract clause and are to be enforced as per the conditions of that contract. • Justifications / reasons for recovery in-line with the relevant contract clauses should be recorded while notifying / effecting recovery. • Recently, CVC vide circular dt. 13.01.12 issued guidelines regarding consideration of bid by Indian Agent on behalf of OEMs.

19. EXECUTION STAGE : Shortcomings • Acceptance of tack welding in place specified continuous welding in steel fabrication work. • Filing system adopted in project was not in order. Part files are opened as and when new action are initiated, but subsequently not merged with the main file. No pagination. • Payment of secured advance against certain items without obtaining requisite insurance cover.

20. EXECUTION STAGE : Shortcomings • Non/part implementation of contract clauses related to Insurance policy (CAR), Workmen Compensation, ESI, labour licenses. • Defective contract management: Not maintaining mandatory site records/registers. Various registers maintained at site are not at all being checked / signed by visiting officers. • Large scale sub contracting by the main agency without approvals of the competent authority.

21. EXECUTION STAGE : Shortcomings • Inordinate delay in processing of EOT and final bill. • Liquidated damages not levied despite time over-run attributed to the contractor because site order books not maintained properly (contractor’s signature not obtained). • Shortfall in mandatory tests on items reflecting slackness in supervision and possibility of acceptance of sub-standard material/work. • Mobilization advance/secured advance not recovered as per provisions of the contract.

22. A PERSON MAY CAUSE EVIL NOT ONLYBY HIS ACTION ; BUT ALSO BY HIS INACTION

23. EXECUTION STAGE : Shortcomings • Wide cracks, low density values, settlement in portions of flexible runway noticed within 3-months of execution. • Non submission of documents like excise duties pass, custom duty receipts for imported items – Bill cleared. • Order for supply of equipment was placed on FOR destination, locations of consignees changed without freight adjustments. • Exchange of correspondence with the Contract Agency after expiry of time period and without extension of time to keep contract alive.

24. EXECUTION STAGE : Shortcomings • Over payment in running bills and recovery in final bill. • Interest on over payment not deducted properly. • Over payment on A/c of party payment of extra items / secured advance considering extra material.

25. FINALLY…….. We may have to add one more stage • i.e. COMMISSIONING (to put into operation)

26. Some additional observations • CVC’s instruction regarding posting summary details of contracts awarded during the month on web site not being complied fully. • Complete tender document not available on web site in downloadable format. • E-payment through ECS or RTGS not fully implemented.

27. Inference………. • Negligence in supervision, project management and contract administration. • Willful acts of omission and commission with possible malafide for extending undue benefit to the contractor. • Contractors queries not attended properly resulting to disputes / loss to AAI.

28. Consequences………. • Additional time and cost for rectifications and remedy at Maintenance Stage • Audit observation • CTE paras • Vigilance Cases • Departmental enquiries

29. VIGILANCE INITIATIVES FOR EFFECTIVE PROCUREMENT IN AAI • Leveraging Technology (e-payment, e-billing, e-receipt, e-procurement) • Time bounded processing of procurement / tenders • Introduction of ‘Integrity Pact’ • Project management and clean procurement workshops • Introduction of ‘Integrity Pledge’ in all tenders. • E-tendering • CTE - Type Inspections

30. Common Points to be discussed • If application received and tender not issued the application fee to be refunded or not. • Similar Experience – Work of DG/HVAC set installation to be accepted for O&M. • In a tender – three makes are given • Agency is free to choose any make. or • First priority on the product mentioned first.

31. Common Points to be discussed…. • Consideration of experience certificate with levy of Penalty for the completed work. • What is the standard method for calculation of star prize / basic rate during tender? • If contractor writes/ specifies one of the approved makes out of those than is it a conditional tender or not. • If tender is conditional whether EMD to be forfeited or not. If yes, how much?

32. HOW TO VERIFY EMD…. • In EMD, DD is valid for 90 days and BG is valid for 180 days. If BG is valid for 179 days whether we should accept it as tender is valid only for 90 days. Yes or No - Why? • How to verify the BG for EMD before tender opening? • What to do when tender is Tie in item rate / % rate? (Two parties became lowest)

33. FINANCE A CHECK MECHANISM • BUILT IN CHECK SYSTEM • INCONSISTENCY IN FINANCIAL SCRUTINY • NEED FOR FINANCE MANUAL • DUTIES AND RESPONSIBILITIES

34. Role of Finance Officer? • Financial Concurrence (AA&ES Stage) • Budget Allocation; • Monitoring of utilized budget to check the balance available; • Assessment of need/ viability of project; • Phasing of proposed expenditure in-line with progress of work.

35. Role of Finance Officer? • Tender Opening • Check justification of cost available; • Ensure numbering of tender; • Ensure opening of Cover No. 1 of all firms first; • Checking of EMD(DD/BG); • Ensure CIO properly; • Ensure cellophane tape fixed on all cuttings/ insertion and total amount • Signing of each paper in tender • Check rates quoted in figure/ words • Entry in register

36. Role of Finance Officer? • Tender Processing • Check comparative statement (Calculate rebate etc.); • Verification of quoted rates with comparative statement available; • Check A/A & E/S, TS issued by appropriate authority. • Any other requirement

37. Role of Finance Officer? • WAB/ WAC/ RCAC proposals • WAB note be processed through Finance Directorate; • Finance Officers shall ensure all the parameters of concurrence have been followed; • Any adverse remark/ important issue must be recorded upfront.

38. Role of Finance Officer? • Billing • Check agreement signed or not; • Check Measurements; • Test Check statement; • Completion Certificate; • Part rate statement/ Theoretical statement; • Check Stock Entry/ MAS/ Challan etc.; • Check deduction (Statutory + contract); • Check deviation so that relative position of L1 does not change.

39. Role of Finance Officer? • Billing….. • Monitoring of BG/ DD etc.; • Ensuring timely recovery of various advances (Mobilization/ secured etc.); • In case of over payment, recovery of interest as applicable; • Check EOT, approval of Competent Authority.

40. List of Documents required at Various Stages of Contracts • Preliminary Estimate; • Detailed Estimate; • Technical Sanction (TS); • Draft NIT (DNIT); • Tender Document; • Agreement; • Bill.

41. Be a Positive Contributor in achieving Organizational Goal

42. Issues emerged out of the workshop held at Ahmedabad Airport on 18-19th Feb., 2011 • Financial Issues • Need for detailed order regarding the implementation of mandatory deduction for ESI / PF. (Whether the contractor should have valid ESI/ PF registration at the time of tendering? How to implement ESI/ PF for construction workers? Whether to load contractor's profit on ESI/ PF components in AMCworks? Where this deducted amount is to be deposited directly if contractor does not deposit to ESI/PF Department?) • AAI is exempted from service tax liability and Worker’s tax (cess)is also not yet applicable in some States. Therefore, instructions need to be issued regarding payment of Service Tax, Worker’s tax and handling of deducted tax amount etc. • Performance Guarantee (PG) should be made valid only for three months after completion of project instead of existing provision of six months period. Because it has financial impact, which is ultimately loaded on AAI. Also, the responsibility for the safe custody and monitoring of Bank Guarantee needs to be specified.

43. Issues emerged out of the workshop held at Ahmedabad Airport on 18-19th Feb., 2011 • Financial Issues • In case of imported items, there should be provision in contract, of taking break-up of payment details from the agency i.e. basic rate + custom duty + service tax + cartage etc. and the payment terms to be made accordingly. • It is observed that there is lack of clarity amongst Finance Officers regarding their roles and responsibilities while according Financial Concurrence & releasing the paymentsetc. Accordingly, a ‘FINANCE MANUAL’ must be prepared clearly describing the procedures, roles & responsibilities of executives at each level.

44. Issues emerged out of the workshop held at Ahmedabad Airport on 18-19th Feb., 2011 • Technical Issues: • Most of the participants expressed their concern regarding non-finalization of drawings by the Consultant/ Architect till the final phase of the project implementation. Delay in finalization of drawings was attributed as a major cause for delay in projects implementation. All drawings need to be finalized upto a certain stage of project execution so as to avoid adverse effect on the progress of the project. • Most of the CTE observations are related to EOT due to time overrun. The general view was that the stipulated project completion duration need to be derived on scientific & realistic approach based on local site conditions. • General Condition of Contract (GCC) has been approved by AAI Board and, therefore, any change in GCC shall be allowed only with the approval of Board and not by Technical Sanctioning Authority as per prevailing practice, which sometimes results into vigilance related complaints.

45. Issues emerged out of the workshop held at Ahmedabad Airport on 18-19th Feb., 2011 • Technical Issues: Contd… • In case LOI/ Award letter are issued on two different dates and subsequently, agreement is signed on 3rd date. Therefore, each letter has different time frame for submitting the BG/ PG which are mismatching. • CPWD has discontinued the practice of preparation of justification cost. In non-Engineering contracts also i.e. IT/CNS, no justification cost is being worked out. Shall AAI continue the existing practice of preparation of ‘justified cost’ in Engineering works or amend the practice? • As per stipulation in contract agreement, EOT is to be withheld @ 0.5% per week, which is not practically applicable at some places as the same may have adverse effect on the progress of the work. A technical instruction issued in the matter covers release of EOT amount against Bank Guarantee, but it is also not a sufficient measure. Some participants suggested that the interim EOT shall be processed and approved during different stages of contract.

46. Issues emerged out of the workshop held at Ahmedabad Airport on 18-19th Feb., 2011 • Technical Issues: Contd…. • There is a need to develop the system of generating Project Closure Report by Project-In-Charge as a feedback mechanism which need to be considered for future projects to avoid the recurrence of shortcomings observed in previous projects. • It is observed in AMC contracts that different pre-qualification criteria is adopted. What should be the experience / financial criteria for contracts of same value having completion period of 6 months or 2 years? • It is observed that while executing the work, due to deviation in items / scope of work, sometimes L-1 position changes or L-2 becomes L-1. How can L-1 agency be restricted to L-2 rates?

47. Issues emerged out of the workshop held at Ahmedabad Airport on 18-19th Feb., 2011 • Technical Issues: Contd…. • The methodology of deriving the rates i.e. the components to be taken should be standardized and specified in the tender for calculating the extra/substituted items. • In case of non-issuance of tender due to any reason, tender fee to be refunded or not?  • Can we issue tender to a firm who is registered with autonomous body like DDA, NDMC, MCD but not with Central/ State Govt./ PSUs? • There was an instance quoted in which, main contractor and sub-contractor both have applied for issue of tender for the same work. What should be the proper approach in such a situation?

48. Issues emerged out of the workshop held at Ahmedabad Airport on 18-19th Feb., 2011 • Technical Issues: Contd…. • In case of poor/non-performance of an agency, whether we have to go for rescinding the work on risk and cost basis only or any change in contract clause is required? In case the work is rescinded, if re-tendering takes place and the same agency applies again, whether we have to issue the tender to him or not, as the process of debarring the contractor takes time? • There was difference of opinion among the participating finance officers that in case of contracts having supply of material only, after opening of tenders, can the splitting on the basis of lowest quoted rates in each item be allowed or not? • Since more than 70 Technical Instructions have been issued and some are contrary to the Works Manual provisions, thus, Engineering Works Manual is required to be updated.

49. Issues emerged out of the workshop held at Guwahati Airport on 8-9th September, 2011 • Technical issues: • Our contract stipulates about levy of compensation only. In case of delay in execution of work, we cannot levy the penalty without justifying the direct loss to the AAI. Therefore, it was of considered view that there should be a suitable penalty clause in this regard in the contract. • It is observed that in AMC contracts, work is awarded for ‘X’ amount and completed for an amount of 2 ‘X’ or 3 ‘X’ after getting revised A/A & E/S which should be avoided as far as practicable & possible. • If a contractor submits the experience certificate with levy of compensation in any work, whether this experience is to be considered for future works or not?

50. Issues emerged out of the workshop held at Guwahati Airport on 8-9th September, 2011 • Technical issues: • If NIT specifies three makes of a particular item ‘X’, ‘Y’ & ‘Z’ and the contractor mentions that he will supply ‘X’ make in the tender itself at the time of quoting the tender. Whether it is to be considered as a conditional tender or not and / or whether it needs to be cancelled or accepted? • If some amount is withheld due to defects at the time of preparation of final bill, whether the completion certificate can be issued or not? • Consultancy contract documents need to be finalized and circulated at all stations/ Regions.