Non-obtaining of performance security, non-levy/ non-recovery of compensation for delay, inadmissible payment of cost-escalation, and non-recovery of royalty and useful stones from contractors resulted in an extension of undue financial benefit/favor of Rs. 10.94 crores in 119 contracts.
Non-provision of performance security in contracts
With a view to safeguarding the interest of procuring departments, Himachal Pradesh Financial Rules (HPFRs), 2009 provide for obtaining performance security for an amount between five and 10 percent of the contract value from the successful contractor upon the award of contract. Audit noticed that:
• Out of 57 contracts in four (out of 17) test-checked divisions, performance security of Rs. 2.70 crores was not obtained from the contractors in 35 contracts worth Rs. 53.91 crores resulting in an extension of undue favor to the contractors besides putting public money at risk against losses. It was found that in the absence of performance security, in two contracts for Rs. 2.02 crore (Dhami and Dalhousie divisions), the contractors had left the works without completion but the divisions could not take any action in the absence of performance security.
• On the request of contractors, the ACS waived (March 2016) the condition of obtaining performance security in violation of the above rules, which constituted undue favor to the contractors besides jeopardizing public interest. Due to this decision, an amount of Rs. 0.63 crore on account of performance security was not obtained in 11 contracts for Rs. 12.62 crores executed by four test-checked divisions during 2016-18.
The ACS stated (December 2018) that the clause for performance security was deleted in order to enhance the bid capacity of contractors for the successful completion of works. However, the absence of a clause for performance security meant that public interest was not safeguarded against damages/ losses.
The Department would not have the option of forfeiting the performance security of defaulting contractors for breach of agreement as no clause for performance security was included in the contract agreement. The decision of the ACS to waive the condition of obtaining performance security on the request of contractors constituted undue favor to the contractors besides jeopardizing public interest.
Recommendation: The State Government may consider providing clauses for performance security and defect liability period uniformly in all contracts to secure public interest against losses.
Non-levy of compensation for the delay
In terms of clause-2 of the contract, work should be completed by a contractor within the stipulated time, and where the time is the essence of the contract, the contractor is required to adhere to the prescribed time schedule. For breach of the contract, the contractor is liable to pay compensation up to a maximum of 10 percent of the contract value.
Audit noticed that in eight divisions, 30 (out of 84) contracts were awarded (2013-18) for Rs. 62.10 crores to 25 contractors were not completed within the stipulated period of six to 24 months. However, the Department had not taken any action to levy compensation of Rs. 6.21 crore under clause-2 of the contract for delay ranging between one and 31 months. Non-levy of compensation for breach of contractual provisions constituted an extension of undue favor to the contractors. In the exit conference, the ACS accepted the facts and stated that necessary directions would be issued to all the divisions.
Inadmissible payment of cost escalation
As per E-in-C instructions (October 2012), price escalation under Clause-10(CC) of the contract is to be paid to a contractor if the completion gets delayed due to unavoidable circumstances (beyond the control of the contractor) and the requisite extension is applied for by the contractor within 30 days of the date of occurrence of a hindrance.
In two test-checked divisions, price escalation cost of Rs. 48.42 lakh was paid (between July 2013 and September 2017) under Clause-10(CC) ibid in four contracts to contractors without receiving a request for time extension within the stipulated period of 30 days for the hindrances that occurred. The contractors had submitted extension applications after 14 to 40 months from the stipulated dates of completion. The divisions had not maintained a record of the occurrence of hindrances despite which extension was granted on the basis of hindrances mentioned in the applications. In the absence of records, the actual occurrence of hindrances could not be verified. Non-adherence to the contractual provision resulted in irregular expenditure of Rs. 48.42 lakh for price escalation and constituted an extension of undue favor to the contractors.
In the exit conference, the ACS accepted the facts and stated that recoveries would be made from the contractors.
Non-recovery of royalty
As per terms and conditions of the contract, royalty charges for material (stone, sand, stone aggregate) should be deducted from each running bill of the contractors as per rates approved by the Mining Department. M-form issued by the Mining Department to the crusher owner/ quarry owner is the proof of royalty paid on the material to be used on the work by the contractor. Audit noticed that:
• In five (out of 17) test-checked divisions, the EEs had neither obtained M-form from the contractors as a proof of payment of royalty nor deducted (between April 2013 and March 2018) royalty of Rs. 47.49 lakh27 from the running account bills of contractors in nine (out of 129 projects) completed projects ( Rs. 27.59 lakh) and six (out of 102) ongoing works (Rs. 19.90 lakh).
• In four (out of 17) test-checked divisions, against the royalty of Rs. 53.06 lakh due from the contractors in 16 projects, royalty of Rs. 26.26 lakh was recovered (between April 2013 and March 2018) from the contractors resulting in short recovery of Rs. 26.80 lakh.
The ACS stated (December 2018) that recovery would be effected after verification.
Short recovery of useful stones
As per the schedule of a quantity of the contract, recovery of useful stones @ 170 and 300 per cubic meter (on the basis of strata) for excavation in hilly areas should be made from contractors as per rates prescribed in the contract.
Audit noticed that against recovery of useful stones of Rs. 59.85 lakh due from the contractors in eight projects (2009-17) in four test-checked divisions, Rs. 42.18 lakh were deducted from their running account bills resulting in a short recovery of Rs. 17.67 lakh (two completed projects: Rs. 3.50 lakh and six ongoing projects: ` Rs. 14.17 lakh). Non-recovery of useful stones resulted in the loss of revenue to the government and extension of undue benefit to the contractors. The EEs concerned stated (March to June 2018) that recovery of useful stones would be affected by the contractors.
The Department had granted undue benefit to contractors and caused financial loss to the State exchequer due to non-providing of performance security in the contract, non-levy of compensation for delay, providing cost escalation without receiving the request for time extension within the stipulated period, non-recovery of royalty and short recovery of useful stones.
The cases pointed out are based on the test check conducted by Audit. The Department may initiate action to examine similar cases and take necessary corrective action.