Para 6.5 — CONSULT_MANUAL

6.5 Firm Price, and Variable Price 1. Fixed price: Short-term contracts where the delivery period does not extend beyond 12 (twelve) months should normally be concluded with a firm and price fixed by inviting tenders accordingly.

2. Variable Price: a) In tenders with deliveries longer than 12 (twelve) months, a Price Variation Clause (PVC) may be provided to protect the purchaser’s interests, particularly for high-value (more than Rupees three crore) procurements. However, even for shorter deliveries or lower value, the PVC may be stipulated for items with inputs (raw material, labour, etc.) prone to short-term price volatility - especially for critical or high-value items/ services – otherwise, there is a possibility of the contract failing or the purchaser having to pay a higher price if market prices fall. b) Where it is decided to conclude the contract with a variable price, an appropriate clause incorporating, inter-alia, a suitable price variation formula (to take care of the changes in the input cost of labour, material, and fuel/ power components) should be provided in the tender documents, to calculate the price variation between the base level and delivery date. It is best to proactively provide our own PVC formula and base dates of indices, in the tender document to discourage different bidders quoting different formulae and different base dates, which may lead to problems on bringing their prices on a common comparable footing.

c) The variations are to be calculated periodically (usually quarterly) by using indices published by Governments/ chambers of commerce/London Metal Exchange / any other neutral and fair source of indices. Suitable weights are to be assigned to the applicable elements, that is, fixed overheads and various applicable inputs e.g., material/ fuel/ labour (for which reliable indices are available), in the price variation formula. If the delivery of services needs more than one raw material, the input cost of material may be further sub-divided for various categories of material, for which cost indices are published.

d) Essential elements of PVC: i) Base Date & Time Lag: The price agreed upon should specify the base date, that is, the month and year to which the contract/ bid price is linked, to enable variations to be calculated with reference to the price indices prevailing in that month and year. This base date should be a few weeks/ months (the period is called time-lag) prior to the last date of submission of bids when the last published price indices would be available. Time lag applies both for the base date and delivery date and must be specified in the Tender Documents; ii) Ignorable Variation: The price variation formula must also stipulate a minimum percentage of variation of the contract price, only above which the price variation will be admissible (for example, where the resultant increase is lower than, say, two per cent of the contract price, no price adjustment will be made in favour of the contractor); iii) Inordinate Variation: In rare cases, prices may go up to such an extent that it may render the contract unviable for either party, thus frustrating the contract. Therefore, the price variation clause should provide for a ceiling (a percentage per annum or an overall ceiling or both, say 20%/ 25% of the original price) on price variations, beyond which the price variation would be capped at this level. As soon as it comes to light that price variations are likely to go beyond this ceiling, and if the Contractor is not agreeable to the price variation being capped at that level, he may notify the Purchaser under ‘Frustration of Contract’ provisions in the Tender Document/ Clause, for short-closing the contract. (Refer para 10.8.5). However, if the short closing is not in the interest of the procuring entity, the competent authority, with the concurrence of associated/ integrated finance, may allow the continuation of the contract by relaxing/ removing the cap on the price variation. iv) Where advance or stage payments are made, there should be a further stipulation that no price variations will be admissible on such portions of the price after the dates of such payment; v) Where deliveries are accepted beyond the scheduled delivery date subject to levy of liquidated damages as provided in the contract. The LD (if a percentage of the price) will be recoverable on the price as varied by the operation of the PVC; vi) No upward price variation will be admissible beyond the originally scheduled delivery date for defaults on the part of the contractor (e.g., when an extension

Manual for Procurement of Consultancy Services, Second Edition, 2025 of the delivery date is with denial clause). However, the purchaser would avail a downward price variation as per the denial clause in the letter of extension of the delivery period; vii) Price variation may be allowed beyond the originally scheduled delivery date in case of refixation of delivery date (which is treated like original delivery period – refer para 10.4.2-2 and 10.4.4) through an amendment to the contract in cases of delays attributable to force majeure or defaults by the procuring entity; viii) The clause should also contain the mode and terms of payment of the price variation admissible. ix) The buyer should ensure a provision in the contract for the benefit of any reduction in the price in terms of the PVC being passe x) An illustrative PVC clause is available in Annexure 16.