This article has been written by Muzzammil Hayat Mohammed Jaman Shaikh pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution course from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction

The Indian Contract Act of 1872, defines the term “contract” under Section 2(h) as “an agreement enforceable by law.” In other words, we can say that a contract is anything that is an agreement and enforceable by law.

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The contracts shall be between two or more parties or individuals, where the government (union or state) is one of the parties to the contract. The government plays an important role when entering into a contract with private individuals or entities. In the case of a government contract, it is the public resources or funds being utilised for the betterment of society, the development of the state, or adhering to international obligations.

As per the Indian Contract Act of 1872, contracts can be oral or written; however, if an oral contract is made, the parties should be able to prove its terms before the Court in case of disputes. The contract can be implied or expressed, as the case may be.

Government contracts are drafted and executed as per the “terms and conditions,” and prescribed formats are followed as laid down in Article 299 of the Indian Constitution. Even though government contracts can be very lucrative, they can also come with a lot of red tape and paperwork involved, which makes them very time-consuming. 

Constitutional provisions related to government contracts

Article 298 of the Constitution of India confers the power to the Union as well as the State to carry out trade, business or acquisitions, hold and dispose of property, and further make contracts for any purpose. Saying so, the Union and the state government would be liable for the disputes arising out of such contracts executed by the government.

Article 299 of the Constitution of India deals with government contracts and outlines how the contracts are made and the procedure for or format of the contracts. Such contracts made on behalf of the government, either by Union or state, must adhere to the below conditions:

  • The contract must be expressed by the President of the Union or by the Governor of the state.
  • The contract must be extended by the President or Governor, as the case may be
  • An authorised or directed person shall execute the contract on behalf of the President or Governor .
  • The contract must be executed in writing.

Elements of government contract

Transparency

The contract must be clear to both  parties in order to remove the ambiguity. The process of awarding government contracts is done through a properly defined procedure of tendering and awarding as per the guidelines, with some exceptional cases where expertise is required. The contracts should have a clear objective, and the same should be conveyed to the entities taking part in the process. The authorities should conduct awareness campaigns or meetings so that the proponents can clarify their concerns with regard to objects related to applications, documents, queries, and questions and express doubts (including those of third parties) where support is required.  

Economy

This is one of the crucial aspects of the contract where, before the proposal, the authorities, financial requirements or allocation of funds are available with properly defined objectives and goals. The government contracts must have the proper procedures in place along-with the timelines for achieving the goal. Governments need to ensure that optimum resources are used to ensure the proper utilisation of public funds.

Responsibility

This principle balances both entities for the accountability of the contract. Here, the concerned authorities of the state are held responsible for the disputes arising during the selection process. Similarly, the contractors or the proponents are held responsible for their actions leading to damages, acts or omissions and a necessary course of action will proceed, such as civil, criminal or disciplinary.

Accountability

In government contracts, clear guidelines are prepared elaborating the accountability. The guidelines will provide the details of the clauses referring to the resolution of the disputes amicably and further the actions to be followed in case of no resolutions. The mechanism for addressing such disputes between the government and proponents or entities needs to be clearly defined.

Contractual balances

The principle ensures that there is proper contractual balance or equality between the parties with respect to the rights, obligations and considerations as stated in the contract, and each has an equal say in representation. If an imbalance is observed, proper steps should be taken to restore it through a suitable mechanism.

Types of government contracts

The government contracts have no codified contracts, but the types of government contracts are classified based on their structure and application in various categories. Thus, government contracts are further classified on the basis of their services, financial parameters, time durations, etc.

Fixed price contracts

These are the contracts basically related to the supply of goods and services where the price is pre-determined in the contract and there is no variation with respect to quantity or time. Although, in some cases, there are clauses included for the variations, such as the cost of transportation, which might vary with changes in fuel prices. These contracts provide certainty for both parties.

Cost plus / cost reimbursement contracts

These types of contracts are variable, where the contractors are tied to a fixed budget, but it goes along with the work done. In such contracts, the contractor gets a fixed percentage along with the actual cost incurred for the execution. The contractor is guaranteed the payment of the actual cost as well as any additional payments made by him as additional fees.

Incentive contracts

These types of contracts are made to motivate the contractor for the work involved in the execution of the contract. The conditions of the contract elaborate the remuneration based on the conditions of the execution of the contract. These contracts provide the best results by the contractor and execution, with the least inefficiency from the contractor These contracts include fixed-price incentive contracts, cost plus award fee contracts, delivery incentives, performance incentives, multiple incentive contracts, and cost-plus incentive contracts.

Indefinite delivery / indefinite quantity contract

As the name suggests, such contracts do not have a time period for the delivery of material, as it is unknown when the requirement is there. The duration of such contracts is mentioned, but the delivery of contract services and goods is not fixed. Usually, such contracts are open blanket contracts for the delivery of goods within the stipulated duration. Example  “A” has to supply a part of the machinery for six months. Here, the duration is fixed, but the quantity of machinery part is not fixed, and when the supply is to be started is not mentioned

Time and material contract

In this type of contract, the contractor is supposed to complete the work using the materials specified in the contract and, with skilled manpower, execute it as per the agreed  upon time. Such contracts are less risky to the contractor as he is being paid for the time and material incurred. 

Labour hour contract

It is another form of Time and material contract in which the work needs to be completed within the stipulated time. The contractor is obligated to complete the work as agreed with the use of his manpower at the hourly labour rate and the cost of the project is calculated by the government. The efficiency of the manpower will not benefit such types of contracts   

Advantages and disadvantages of government contract

Advantages 

The advantages of government contracts are:

  1. Good pay: The government needs the work to be done correctly and thoroughly with good efficiency, so the rate offered for government contracts is lucrative, which is much better than what the government’s department workers are getting.
  2. Good reputation: Work done for the government adds value to the business. It helps in growing the business, which reflects the capability of the contractor, who has already qualified the government’s norms, which are more stringent.
  3. Good value: The contracts with the government are secure. and the payment for work is guaranteed. Also, any delay in the payment is added to the interest for that period.
  4. Long term: The government contracts are usually for a long term. Also, once the entity is a qualified contractor, the contractor also becomes eligible to be qualified on the contractor list for future contracts, and the process of qualification is eliminated. This makes it easy to bid on future contracts.

Disadvantages

The disadvantages of government contracts are:

  1. Rules and regulations: Usually, government contracts have too many rules and regulations, which make them too complicated. All the codes need to be followed, and a lot of paperwork needs to be retained, which is required for audit purposes, too.
  2. Stability: The government contacts are less stable and subject to government decisions, which may be political in nature. The work may be stopped with any change in government policy 
  3. Payment: The process of the release of payment for the work done is a very slow process, going through various scrutinies and leading to delays in the payment. The contractor has to keep his own funds for the operations of the project to avoid any default due to a shortage of workers or non-payment to his workers.

Conclusion 

Government contracts are similar to individual contracts in that the contracts follow a legal procedure and norms based on the principles of reasonableness and rationality. The government cannot enter into the contract unless it conforms to some standard or norm that is rational and non-discriminatory. Government contracts are always preferred by the contractors due to the guarantee of payments and well-defined rules and regulations regarding the contractual terms and conditions in writing.   

References

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