Para 6.6 - Price Variation Clause | KartavyaDesk

Original Rule Text

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 production of goods needs more than one raw material, the input cost of material may be further subdivided into 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 date of supply 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 supplier); 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 Supplier 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. (A provision for this exists in the Model Tender Document for Procurement of Goods – clause 12.2.2). 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 supplier (e.g., when an extension of the delivery date is with LD). 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 by specific alteration of that date through an amendment to the contract in cases of force majeure or defaults by the Government;

What This Means

This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.

Key Points

• •Variations are calculated periodically (usually quarterly) using indices from neutral sources like government publications or the London Metal Exchange.
• •The PVC must specify a 'base date' and 'time lag' to link the contract price to relevant price indices.
• •A minimum 'ignorable variation' percentage is set below which no price adjustment is made.
• •A ceiling ('inordinate variation') is established to limit the maximum price variation, protecting both parties from extreme price swings.
• •Advance or stage payments are generally excluded from price variation adjustments after the payment date.

Practical Example

This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.

Frequently Asked Questions

This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.