Defence Industry

Commercial evaluation is the weakest link
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Issue Vol 25.4 Oct-Dec 2010 | Date : 11 Mar , 2011

The Indian defence procurement process consists of two distinct phases – technical and commercial. In the first phase, detailed technical evaluation is carried out of all competing systems to ascertain their compliance with the laid down parameters and to identify the systems considered acceptable for introduction into service. The most important activity carried out in this phase is the conduct of field trials in actual terrain and climatic conditions to validate performance claims. All systems that meet the specified criteria are considered at par and no inter-se merit list is prepared. Technical phase is primarily handled by the concerned Service Headquarters (SHQ), albeit under the close oversight of the Ministry of Defence (MoD). At every step, concurrence of MoD is mandatory to proceed further.

In the second phase, commercial proposals received in respect of all technically successful vendors are examined in detail, financial quotes are compared and the lowest compliant bidder is identified for the award of the contract. Commercial phase is exclusively the domain of MoD. SHQ has no role to play except render advice on issues of technical nature that crop up during the evaluation of commercial quotes and subsequent contractual negotiations with the selected vendor.

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It needs to be recalled here that India’s technical evaluation regime has acquired a reputation for its meticulousness and stringency. It is on record that India has never purchased a sub-standard product. Even the much maligned Bofors guns proved their mettle in operations and have never been faulted for their performance. On the other hand, the commercial process draws flak in every procurement case for numerous inconsistencies and incongruities. It is commonly acknowledged that India’s commercial process is appallingly dismal and flawed. In fact, it is an abject anti-thesis of the technical process.

It is on record that India has never purchased a sub-standard product. Even the much maligned Bofors guns proved their mettle in operations”¦

The commercial phase consists of the two distinct activities – one, ascertaining the lowest compliant bidder and two, negotiating contract with the said bidder. This article restricts itself to the analysis of the functions leading to the identification of the lowest acceptable vendor for the award of the contract.

Organisational Structure

Once the Staff Evaluation Report is accepted by MoD, the case gets transferred from the concerned SHQ to the corresponding Acquisition Manager (AM). A note is initiated by AM proposing constitution of a Contract Negotiating Committee (CNC) to undertake the entire gamut of commercial evaluation activities. The Defence Procurement Procedure (DPP) has laid down standard composition of CNC, as follows:-

  • For all major procurements (having indicative cost above Rs 75 crores), CNC is headed by AM. He is assisted by the Technical Manager (TM) and the Finance Minister (FM). Other members of CNC include representatives of Directorate General of Quality Assurance, Contract Management Branch of the concerned SHQ, procurement agency, users and repair outfit. In case the proposal entails Transfer of Technology (ToT), representatives of Department of Defence Production, Defence Research and Development Organisation and the nominated Production Agency are also included. Similarly, a representative of Defence Offset Facilitation Agency is included in case the proposal carries offset obligations. If considered essential, an Advisor (Cost) may be co-opted.
  • For proposals of value above Rs 50 crores and up to Rs 75 crores, CNC is headed by Deputy Secretary/Director. Representation of all the above mentioned agencies remains unchanged but the level is suitably readjusted.
  • Authority to constitute CNC for proposals up to Rs 50 crores has been delegated to SHQ. Although such CNC are normally headed by service officers, broad representational pattern remains the same.

Provision has been made in DPP to nominate a service officer or any other officer from the Acquisition Wing as Chairman of CNC for proposals of value above Rs 50 crores, if considered necessary. This can, however, be done only with the express approval of the Defence Minister.

Identification of the Lowest Bidder

Identification of the lowest bidder is by far the most critical, sensitive and complex task that CNC has to perform. There are four distinct steps that precede the final selection.

Fixation of Fair and Reasonable Cost

With a view to obviate need for time consuming price negotiations with the lowest bidder, DPP mandates that CNC must establish a benchmark for reasonableness of price of equipment under procurement in an internal meeting before opening the commercial offers. In case the price quoted by the lowest bidder is found to be within the benchmark fixed, no further negotiations concerning price need be carried out.

Indias commercial evaluation process has been criticised both by domestic and foreign participants for subjectivity”¦

As details of defence deals are never made public by any country, no reference price is available for use as datum. Undoubtedly, fixation of reasonable price of military equipment is a highly specialised task requiring thorough knowledge of the equipment with special reference to the technology involved.

Opening of Commercial Proposals

Once CNC has acquired full knowledge of the equipment under procurement and arrived at acceptable price bracket, it fixes date, time and place for opening commercial offers of the technically accepted vendors. Participating vendors or their authorised representatives are invited to be present. Sealed covers of commercial bids are opened by the Chairman of CNC in front of all present and read out. Thereafter, all members of CNC sign them. Being a procedural step, its execution is easy and smooth.

Preparation of Compliance Statement

Commercial offers are studied by CNC to ascertain their compliance with the terms of reference given in Request for Proposals (RFP). A Compliance Statement is prepared to check if any vendor has sought materially different terms and analyse the impact of the said discordant stipulations. Deviations noticed in the delivery schedule, performance warranty, guarantee provisions, acceptance criteria and Engineering Support Package are also noted. It is a painstaking task and has to be carried out with due diligence. In case of material non-compliance, vendors may be given an option by CNC to make their offers RFP-compliant by dropping unacceptable conditions.

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The views expressed are of the author and do not necessarily represent the opinions or policies of the Indian Defence Review.

About the Author

Maj Gen Mrinal Suman

is India’s foremost expert in defence procurement procedures and offsets. He heads Defence Technical Assessment and Advisory Services Group of CII.

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