Government contracts : all
you need to know
February 15, 2024
1033
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.
Table of Contents
Introduction
Constitutional provisions related to government contracts
Elements of government contract
o Transparency
o Economy
o Responsibility
o Accountability
o Contractual balances
Types of government contracts
o Fixed price contracts
o Cost plus / cost reimbursement contracts
o Incentive contracts
o Indefinite delivery / indefinite quantity contract
o Time and material contract
o Labour hour contract
Advantages and disadvantages of government contract
Advantages
o Disadvantages
Conclusion
References
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.
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
https://www.govconwire.com
https://www.drishtiias.com/daily-updates/daily-news-analysis/article-
299-of-the-constitution-government-contracts
https://blog.ipleaders.in/need-know-government-contracts/
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2953560
https://blog.ipleaders.in/need-know-government-contracts/
https://www.thehartford.com/business-
insurance/strategy/government-contracts/finding-contracts
https://www.gsa.gov/sell-to-government/step-1-learn-about-
government-contracting
