Rule 225 of The General Financial Rules 2017 General Principles For Contract
Original Rule Text
Rule 225 General principles for contract. The following general principles should be observed while entering into contracts: –
(i) The terms of contract must be precise, definite and without any ambiguities. The terms should not involve an uncertain or indefinite liability, except in the case of a cost plus contract or where there is a price variation clause in the contract.
(ii) Standard forms of contracts should be adopted wherever possible, with such modifications as are considered necessary in respect of individual contracts. The modifications should be carried out only after obtaining financial and legal advice.
(iii) In cases where standard forms of contracts are not used, legal and financial advice should be taken in drafting the clauses in the contract.
(iv)
(a) A Ministry or Department may, at its discretion, make purchases of value up to Rupees two lakh and fifty thousand by issuing purchase orders containing basic terms and conditions:
(b) In respect of Works Contracts, or Contracts for purchases valued between Rupees one lakh to Rupees ten lakhs, where tender documents include the General Conditions of Contract (GCC), Special Conditions of Contract (SCC) and scope of work, the letter of acceptance will result in a binding contract.
(c) In respect of contracts for works with estimated value of Rupees ten lakhs or above or for purchase above Rupees ten lakhs, a Contract document should be executed, with all necessary clauses to make it a self-contained contract. If however, these are preceded by Invitation to Tender, accompanied by GCC and SCC, with full details of scope and specifications, Offer of the Tenderer and Letter of Acceptance, a simple one page contract can be entered into by attaching copies of the GCC and SCC, and details of scope and specifications, Offer of the Tenderer and Letter of Acceptance.
(d) Contract document should be invariably executed in cases of turnkey works or agreements for maintenance of equipment, provision of services etc.
(v) No work of any kind should be commenced without proper execution of an agreement as given in the foregoing provisions.
(vi) Contract document, where necessary, should be executed within 21 days of the issue of letter of acceptance. Non-fulfilment of this condition of executing a contract by the Contractor or Supplier would constitute sufficient ground for annulment of the award and forfeiture of Earnest Money Deposit.
(vii) Cost plus contracts should ordinarily be avoided. Where such contracts become unavoidable, full justification should be recorded before entering into the contract. Where supplies or special works covered by such cost plus contracts have to continue over a long duration, efforts should be made to convert future contracts on a firm price basis after allowing a reasonable period to the suppliers/contractors to stabilize their production/execution methods and processes.
Explanation: A cost plus contract means a contract in which the price payable for supplies or services under the contract is determined on the basis of actual cost of production of the supplies or services concerned plus profit either at a fixed rate per unit or at a fixed percentage on the actual cost of production
(viii)
(a) Price Variation Clause can be provided only in long-term contracts, where the delivery period extends beyond 18 months. In short-term contracts firm and fixed prices should be provided for. Where a price variation clause is provided, the price agreed upon should specify the base level viz, the month and year to which the price is linked, to enable variations being calculated with reference to the price levels prevailing in that month and year.
(b) A formula for calculations of the price variations that have taken place between the Base level and the Scheduled Delivery Date should be included in this clause. The variations are calculated by using indices published by Governments or Chambers of Commerce periodically. An illustrative formula has been appended to these rules at Appendix -11 for guidance.
(c) The Price variation clause should also specify cut off dates for material and labour, as these inputs taper off well before the scheduled Delivery Dates.
(d) The price variation clause should provide for a ceiling on price variations, particularly where escalations are involved. It could be a percentage per annum or an overall ceiling or both. The buyer should ensure a provision in the contract for benefit of any reduction in the price in terms of the price variation clause being passed on to him.
(e) The clause should also stipulate a minimum percentage of variation of the contract price above which price variations will be admissible (e.g. where resultant increase is lower than two per cent, no price adjustment will be made in favour of the supplier).
(f) 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
(g) Where deliveries are accepted beyond the scheduled Delivery Date subject to levy of liquidated damages as provided in the Contract, the liquidated damages (if a percentage of the price) will be applicable on the price as varied by the operation of the Price variation clause.
(h) No price variation will be admissible beyond the original Scheduled Delivery Date for defaults on the part of the supplier.
(i) Price variation may be allowed beyond the original Scheduled Delivery Date, by specific alteration of that date through an amendment to the contract in cases of Force Majeure or defaults by Government.
(j) Where contracts are for supply of equipment, goods etc, imported (subject to customs duty and foreign exchange fluctuations) and/or locally manufactured (subject to excise duty and other duties and taxes), the percentage and element of duties and taxes included in the price should be specifically stated, along with the selling rate of foreign exchange element taken into account in the calculation of the price of the imported item. The mode of calculation of variations in duties and taxes and foreign exchange rates and the documents to be produced in support of claims for such variations should also be stipulated in the Contract.
(k) The clause should also contain the mode and terms of payment of the price variation admissible.
(ix) Contracts should include provision for payment of all applicable taxes by the contractor or supplier.
(x) “Lump sum” contracts should not be entered into except in cases of absolute necessity. Where lump sum contracts become unavoidable, full justification should be recorded. The contracting authority should ensure that conditions in the lump sum contract adequately safeguard and protect the interests of the Government.
(xi) Departmental issue of materials should be avoided as far as possible. Where it is decided to supply materials departmentally, a schedule of quantities with the issue rates of such material as are required to execute the contract work should form an essential part of the contract.
(xii)
(a) In contracts where government property is entrusted to a contractor either for use on payment of hire charges or for doing further work on such property, specific provision for safeguarding government property (including insurance cover) and for recovery of hire charges regularly, should be included in the contracts.
(b) Provision should be made in the contract for periodical physical verification of the number and the physical condition of the items at the contractor’s premises. Results of such verification should be recorded and appropriate penal action taken where necessary.
(xiii) [Copies of all contracts and agreements for purchases of the value of Rupees Twenty-five Lakhs and above entered into by civil departments of the Government, should be sent to the Audit Officer and or the Accounts officer as the case may be.]
(xiv)
(a) The terms of a contract, including the scope and specification once entered into, should not be materially varied.
(b) Wherever material variation in any of the terms or conditions in a contract becomes unavoidable, the financial and other effects involved should be examined and recorded and specific approval of the authority competent to approve the revised financial and other commitments obtained, before varying the conditions.
(c) All such changes should be in the form of an amendment to the contract duly signed by all parties to the contract.
(xv) Normally no extensions of the scheduled delivery or completion dates should be granted except where events constituting force majeure, as provided in the contract, have occurred or the terms and conditions include such a provision for other reasons. Extensions as provided in the contract may be allowed through formal amendments to the contract duly signed by parties to the contract.
(xvi) All contracts shall contain a provision for recovery of liquidated damages for defaults on the part of the contractor. Only in exceptional circumstances to be justified by procuring entity in writing, an exemption from such provision can be made.
(xvii) A warranty clause should be incorporated in every contract, requiring the supplier to, without charge, repair or rectify defective goods or to replace such goods with similar goods free from defect. Any goods repaired or replaced by the supplier shall be delivered at the buyer’s premises without costs to the buyer.
(xviii) All contracts for supply of goods should reserve the right of the Government to reject goods which do not conform to the specifications.
(xix) No claim for the payment from contractor shall be entertained after the lapse of three years of arising of the claim.
(i) The terms of contract must be precise, definite and without any ambiguities. The terms should not involve an uncertain or indefinite liability, except in the case of a cost plus contract or where there is a price variation clause in the contract.
(ii) Standard forms of contracts should be adopted wherever possible, with such modifications as are considered necessary in respect of individual contracts. The modifications should be carried out only after obtaining financial and legal advice.
(iii) In cases where standard forms of contracts are not used, legal and financial advice should be taken in drafting the clauses in the contract.
(iv)
(a) A Ministry or Department may, at its discretion, make purchases of value up to Rupees two lakh and fifty thousand by issuing purchase orders containing basic terms and conditions:
(b) In respect of Works Contracts, or Contracts for purchases valued between Rupees one lakh to Rupees ten lakhs, where tender documents include the General Conditions of Contract (GCC), Special Conditions of Contract (SCC) and scope of work, the letter of acceptance will result in a binding contract.
(c) In respect of contracts for works with estimated value of Rupees ten lakhs or above or for purchase above Rupees ten lakhs, a Contract document should be executed, with all necessary clauses to make it a self-contained contract. If however, these are preceded by Invitation to Tender, accompanied by GCC and SCC, with full details of scope and specifications, Offer of the Tenderer and Letter of Acceptance, a simple one page contract can be entered into by attaching copies of the GCC and SCC, and details of scope and specifications, Offer of the Tenderer and Letter of Acceptance.
(d) Contract document should be invariably executed in cases of turnkey works or agreements for maintenance of equipment, provision of services etc.
(v) No work of any kind should be commenced without proper execution of an agreement as given in the foregoing provisions.
(vi) Contract document, where necessary, should be executed within 21 days of the issue of letter of acceptance. Non-fulfilment of this condition of executing a contract by the Contractor or Supplier would constitute sufficient ground for annulment of the award and forfeiture of Earnest Money Deposit.
(vii) Cost plus contracts should ordinarily be avoided. Where such contracts become unavoidable, full justification should be recorded before entering into the contract. Where supplies or special works covered by such cost plus contracts have to continue over a long duration, efforts should be made to convert future contracts on a firm price basis after allowing a reasonable period to the suppliers/contractors to stabilize their production/execution methods and processes.
Explanation: A cost plus contract means a contract in which the price payable for supplies or services under the contract is determined on the basis of actual cost of production of the supplies or services concerned plus profit either at a fixed rate per unit or at a fixed percentage on the actual cost of production
(viii)
(a) Price Variation Clause can be provided only in long-term contracts, where the delivery period extends beyond 18 months. In short-term contracts firm and fixed prices should be provided for. Where a price variation clause is provided, the price agreed upon should specify the base level viz, the month and year to which the price is linked, to enable variations being calculated with reference to the price levels prevailing in that month and year.
(b) A formula for calculations of the price variations that have taken place between the Base level and the Scheduled Delivery Date should be included in this clause. The variations are calculated by using indices published by Governments or Chambers of Commerce periodically. An illustrative formula has been appended to these rules at Appendix -11 for guidance.
(c) The Price variation clause should also specify cut off dates for material and labour, as these inputs taper off well before the scheduled Delivery Dates.
(d) The price variation clause should provide for a ceiling on price variations, particularly where escalations are involved. It could be a percentage per annum or an overall ceiling or both. The buyer should ensure a provision in the contract for benefit of any reduction in the price in terms of the price variation clause being passed on to him.
(e) The clause should also stipulate a minimum percentage of variation of the contract price above which price variations will be admissible (e.g. where resultant increase is lower than two per cent, no price adjustment will be made in favour of the supplier).
(f) 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
(g) Where deliveries are accepted beyond the scheduled Delivery Date subject to levy of liquidated damages as provided in the Contract, the liquidated damages (if a percentage of the price) will be applicable on the price as varied by the operation of the Price variation clause.
(h) No price variation will be admissible beyond the original Scheduled Delivery Date for defaults on the part of the supplier.
(i) Price variation may be allowed beyond the original Scheduled Delivery Date, by specific alteration of that date through an amendment to the contract in cases of Force Majeure or defaults by Government.
(j) Where contracts are for supply of equipment, goods etc, imported (subject to customs duty and foreign exchange fluctuations) and/or locally manufactured (subject to excise duty and other duties and taxes), the percentage and element of duties and taxes included in the price should be specifically stated, along with the selling rate of foreign exchange element taken into account in the calculation of the price of the imported item. The mode of calculation of variations in duties and taxes and foreign exchange rates and the documents to be produced in support of claims for such variations should also be stipulated in the Contract.
(k) The clause should also contain the mode and terms of payment of the price variation admissible.
(ix) Contracts should include provision for payment of all applicable taxes by the contractor or supplier.
(x) “Lump sum” contracts should not be entered into except in cases of absolute necessity. Where lump sum contracts become unavoidable, full justification should be recorded. The contracting authority should ensure that conditions in the lump sum contract adequately safeguard and protect the interests of the Government.
(xi) Departmental issue of materials should be avoided as far as possible. Where it is decided to supply materials departmentally, a schedule of quantities with the issue rates of such material as are required to execute the contract work should form an essential part of the contract.
(xii)
(a) In contracts where government property is entrusted to a contractor either for use on payment of hire charges or for doing further work on such property, specific provision for safeguarding government property (including insurance cover) and for recovery of hire charges regularly, should be included in the contracts.
(b) Provision should be made in the contract for periodical physical verification of the number and the physical condition of the items at the contractor’s premises. Results of such verification should be recorded and appropriate penal action taken where necessary.
(xiii) [Copies of all contracts and agreements for purchases of the value of Rupees Twenty-five Lakhs and above entered into by civil departments of the Government, should be sent to the Audit Officer and or the Accounts officer as the case may be.]
(xiv)
(a) The terms of a contract, including the scope and specification once entered into, should not be materially varied.
(b) Wherever material variation in any of the terms or conditions in a contract becomes unavoidable, the financial and other effects involved should be examined and recorded and specific approval of the authority competent to approve the revised financial and other commitments obtained, before varying the conditions.
(c) All such changes should be in the form of an amendment to the contract duly signed by all parties to the contract.
(xv) Normally no extensions of the scheduled delivery or completion dates should be granted except where events constituting force majeure, as provided in the contract, have occurred or the terms and conditions include such a provision for other reasons. Extensions as provided in the contract may be allowed through formal amendments to the contract duly signed by parties to the contract.
(xvi) All contracts shall contain a provision for recovery of liquidated damages for defaults on the part of the contractor. Only in exceptional circumstances to be justified by procuring entity in writing, an exemption from such provision can be made.
(xvii) A warranty clause should be incorporated in every contract, requiring the supplier to, without charge, repair or rectify defective goods or to replace such goods with similar goods free from defect. Any goods repaired or replaced by the supplier shall be delivered at the buyer’s premises without costs to the buyer.
(xviii) All contracts for supply of goods should reserve the right of the Government to reject goods which do not conform to the specifications.
(xix) No claim for the payment from contractor shall be entertained after the lapse of three years of arising of the claim.
Visual Summary
Precision & Clarity
Contracts must be precise, definite, and unambiguous, avoiding uncertain liabilities.
Legal & Financial Scrutiny
Standard forms should be used with advice; non-standard forms require legal and financial counsel.
Execution & Compliance
Agreements must be properly executed, with provisions for timely completion, penalties, and warranties.
Executive Summary
Rule 225 of the General Financial Rules, 2017 outlines the fundamental principles for entering into government contracts. It emphasizes precision, clarity, and the avoidance of ambiguous terms. The rule mandates seeking financial and legal advice for contract drafting, especially for non-standard forms. It also details specific requirements for contract execution, including timelines, provisions for price variation, liquidated damages, warranties, and the handling of government property, ensuring transparency and accountability in public procurement.
In-Depth Analysis of the Rule
Introduction: Rule 225 sets the foundational guidelines for government contract management, aiming to ensure financial propriety, transparency, and efficiency.
Breakdown of the Rule:
- Clarity and Certainty (i): Contracts must be precise, definite, and free from ambiguity. Uncertain or indefinite liabilities are generally prohibited, with exceptions for cost-plus or price variation clauses.
- Standardization and Expert Advice (ii, iii): Encourages the use of standard contract forms with necessary modifications. For non-standard contracts, mandatory legal and financial advice is required during drafting.
- Contract Execution (iv, v, vi): Specifies thresholds for different types of contracts (purchases up to Rupees two lakh and fifty thousand; works/purchases between Rupees one lakh to Rupees ten lakhs; works/purchases above Rupees ten lakhs) and the corresponding documentation. No work should commence without a proper agreement, which must be executed within 21 days of the letter of acceptance. Failure to execute can lead to annulment and forfeiture of Earnest Money Deposit.
- Cost-Plus and Lump Sum Contracts (vii, x): Generally discourages cost-plus contracts, requiring full justification if unavoidable. Similarly, lump-sum contracts should be avoided unless absolutely necessary, with adequate safeguards for government interests.
- Price Variation Clause (viii): Detailed provisions for price variation in long-term contracts (over 18 months), including base levels, calculation formulas (referencing Appendix-11), cut-off dates, ceilings, and non-admissibility on advance payments or for supplier defaults.
- Other Key Provisions (ix, xi, xii, xvi, xvii, xviii, xix): Contracts must include provisions for contractors to pay all applicable taxes. Departmental issue of materials should be avoided; if done, a schedule with issue rates must be part of the contract. Safeguards for government property entrusted to contractors (insurance, regular hire charge recovery, periodical physical verification). Copies of contracts for Rupees Twenty-five Lakhs and above must be sent to Audit/Accounts Officer. Material variations in contract terms require financial/legal examination and competent authority approval, formalized by amendment. Delivery/completion date extensions only for force majeure or specific contract provisions, formalized by amendment. Mandatory provision for liquidated damages for contractor defaults, with rare exceptions. Essential warranty clause for repair/rectification of defective goods. Government retains the right to reject non-conforming goods. Contractor claims lapse after three years.
Practical Example: A Ministry plans to procure specialized IT equipment with a long delivery period (24 months). Rule 225(viii) mandates including a price variation clause. The Ministry must define the base price, a clear formula linked to relevant indices (e.g., WPI, CPI for labor), and a ceiling on variations. They must also ensure that the contract specifies that no price variation applies to advance payments made. Additionally, Rule 225(xvii) requires a warranty clause for maintenance and defect rectification.
Related Provisions
Understanding Rule 225 is enhanced by considering these related provisions:
- Rule 224 of The General Financial Rules 2017 Contract Authority: Details the authority empowered to make contracts on behalf of the President.
- Rule 144 of The General Financial Rules 2017 Public Buying Principles: Outlines the fundamental principles for all public procurements, including works.
- Rule 226 of The General Financial Rules 2017 Contract Management: Focuses on the monitoring and management aspects of contracts post-execution.
Learning Aids
Mnemonics
- Precise Contracts Safeguard Government Property With Legal Advice. (Precision, Clarity, Standardization, Government Property, Warranty, Legal Advice)
Process Flowchart
Multiple Choice Questions
1. According to Rule 225 of the General Financial Rules, 2017, what is a primary characteristic required for contract terms?
- A) They must be flexible and adaptable to changing circumstances.
- B) They must be precise, definite, and without any ambiguities.
- C) They should allow for uncertain or indefinite liability in most cases.
- D) They must prioritize speed of execution over clarity.
Show Answer
Correct Answer: B) They must be precise, definite, and without any ambiguities.
2. Under Rule 225 of the General Financial Rules, 2017, when are cost-plus contracts generally permitted?
- A) They are always encouraged for complex projects.
- B) They should ordinarily be avoided, but allowed with full justification if unavoidable.
- C) They are only allowed for short-term contracts.
- D) They are permitted without any special conditions.
Show Answer
Correct Answer: B) They should ordinarily be avoided, but allowed with full justification if unavoidable.
3. As per Rule 225 of the General Financial Rules, 2017, what is the stipulated timeframe for executing a contract document after the issue of the letter of acceptance?
- A) Within 7 days
- B) Within 30 days
- C) Within 21 days
- D) Within 60 days
Show Answer
Correct Answer: C) Within 21 days
4. Rule 225(viii) of the General Financial Rules, 2017 states that a Price Variation Clause can be provided only in which type of contracts?
- A) Short-term contracts with fixed prices.
- B) Contracts where the delivery period extends beyond 18 months.
- C) Contracts for services with insignificant material inputs.
- D) All contracts, regardless of duration.
Show Answer
Correct Answer: B) Contracts where the delivery period extends beyond 18 months.
5. According to Rule 225 of the General Financial Rules, 2017, what action should be taken if a contractor fails to execute a contract within the stipulated time after the letter of acceptance?
- A) The contract period should be automatically extended.
- B) The award may be annulled, and Earnest Money Deposit forfeited.
- C) A penalty equal to 1% of the contract value should be imposed.
- D) The contractor should be given an additional 30 days to comply.
Show Answer
Correct Answer: B) The award may be annulled, and Earnest Money Deposit forfeited.
Frequently Asked Questions
Q: Why is legal and financial advice crucial for government contracts under Rule 225 of the General Financial Rules, 2017?
A: Legal and financial advice is crucial to ensure that contract terms are precise, definite, and unambiguous, safeguarding government interests and preventing uncertain or indefinite liabilities, especially when standard forms are not used or modifications are made.
Q: What are the key considerations for a Price Variation Clause in long-term contracts as per Rule 225 of the General Financial Rules, 2017?
A: For long-term contracts (over 18 months), a Price Variation Clause must specify a base level, a clear calculation formula (often linked to indices), cut-off dates for material and labor, and a ceiling on variations. It should also ensure that any reduction in price benefits the buyer and that no variations are admissible on advance payments or for supplier defaults.
Q: What happens if a contractor’s claim for payment is submitted too late under Rule 225 of the General Financial Rules, 2017?
A: Rule 225(xix) explicitly states that no claim for payment from a contractor shall be entertained after the lapse of three years from the date the claim arose.
Key Takeaways
- Government contracts must be precise, definite, and unambiguous, with uncertain liabilities generally avoided.
- Legal and financial ad