Audit of LD/EMD/SD including PBG

1. Audit ofLD/EMD/SD including PBG

2. LIQUIDATED DAMAGES (LD) • Fulfillment of Contractual obligations within the stipulated time frame is the essence of any contract. • LIQUIDATED DAMAGES (LD) are charged as acompensation of loss on account of late delivery. • loss should be pre-estimated and mutually agreed • It must be provided for in the contract

3. PROCEDURE TO LEVY LD Case – I Delay in supplies resulted in actual/ demonstrable monetary loss and the Supplier was responsible for the delay Amount of LD chargeable: Full LD, subject to that the LD does not exceed 10% of the value of the contract

4. Case – II Delay in supplies resulted in actual /demonstrable monetary loss but the Supplier was responsible only for a part of the delay and the remaining part was beyond Supplier’s control Amount of LD chargeable: Full LD for the period for which the Supplier was responsible for the delay, subject to the LD not exceeding 10% of the value of the contract

5. Case – III Delay in supplies resulted in actual /demonstrable monetary loss but the entire delay was due to circumstances beyond the control of the Supplier. Amount of LD chargeable: LD may be waived in full by the Competent Financial Authority with the concurrence of Integrated Financial Advisor.

6. Case – IV Actual/demonstrable monetary loss cannot be certified and no inconvenience has been caused. Amount of LD chargeable: LD may be waived in full by the CFA with the concurrence of IFA

7. MAXIMUM QUANTUM OF LD • 0.5% of the prices of any stores which the contractor has failed to deliver, for each week or part thereof subject to a maximum of 10% of the value of the undelivered goods. It cannot exceed the amount stipulated in the contract.

8. POINTS TO BE SEEN IN AUDIT • Select high value supply orders valuing more than 20 lakhs or more during the year 2009-10 and 2010-11. • Call for detailed list of supply orders from the factory management and select ten to twenty supply orders per year . • exclude high values Supply Order of procurement of HSD, furnace Oil which procured through DGSD rate contract and also procurement from some PSUs.

9. From the Case files of the Supply Orders so selected, identify cases where supplies have been delayed. • Extension in delivery period must be granted before expiry of the delivery date by the competent authority in consultation with the Integrated Financial Advisor. • Object cases where ex-post facto extension in delivery period is granted.

10. Further check the following : • whether any LD clause was incorporated in the contract. • Whether extension in DP was with or without LD. • If, it was with LD, whether amount recoverable on account of LD was actually recovered in full or not. • If Extension was without LD, whether reasons given there for are acceptable in audit. • Departure from the procedure mentioned may be pointed out by raising objection.

11. BID SECURITY OR EARNEST MONEY DEPOSIT • To safeguard against a bidder’s withdrawing or altering his bid during the bid validity period in the case of advertised or limited tender enquiry, Bid Security (Also known as Earnest Money Deposit) is to be obtained from the bidders. • The bidders are required to furnish the bid security along with their bids.

12. Points to be seen • Call for Supply orders for two financial years valuing Rs. 20 Lakhs or more for carrying out audit. • Check in case bid security has not been submitted with the bid, whether the firm was exempted from furnishing bid security?

13. Bid security is not required to be obtained from those firms who are registered with the Central Purchase Organization (e.g. DGS&D), National Small Industries Corporation (NSIC) or concerned Departments or Ministries of the Government of India. • Bid security need not be asked for if the value of the tender is Rs two lakh or less.

14. Check whether or not Earnest money is forfeited in case the bidder withdraws or amends, impairs or derogates from the tender in any respect within the validity period of his tender. • In such cases, forfeiture of Bid Security follows on default. • Check whether forfeited Bid Security is credited at once to the Government Account or not.

15. Highlight cases where the EMD refunded to the supplier but the same was otherwise required to be forfeited. • The Bid Security of the successful bidders should be returned, without any interest whatsoever, after the receipt of Performance Security from them as called for in the contract. Check whether any interest have been paid. • Highlight irregularities noticed. • Check safe custody of these documents.

16. PERFORMANCE BANK GUARANTEE (PBG): • PBG is a written undertaking obtained from the Supplier through his bank as a guarantee that the supplier would perform the promise/terms and conditions of the contract and to ensure the discharge of liability of the Supplier in case of his default. The amount of PBG should be 5% of the value of the contract.

17. Points to be seen • Call for Supply orders for two financial years valuing Rs. 20 Lakhs or more for carrying out audit. • Check whether PBG of requisite amount has been furnished by the supplier with the authorized bank within 30 (thirty days) from the date of contract.

18. At present, ICICI Bank Ltd., Axis Bank Ltd. and HDFC Bank Ltd. are the three private sector banks authorized to carry out government transactions. • Check out whether or not the PBG is valid for a period of sixty days beyond the date of completion of contractual obligations, including warranty. • Check whether in any case PBG has been returned to the supplier before successful completion of all the obligations by the supplier as laid down in the contract. Also highlight the loss, if any incurred by the state.

19. Identify cases where the execution of the contract is delayed beyond the contracted period and the purchaser grants extension of delivery period, with or without LD, whether the BG is revalidated or not, if not already valid. • Check out whether or not the PBG contains all the following elements: (a) Amount (b) Address of the Beneficiary, Applicant and the Bank (c) Validity date (d) Contract Number and Date

20. Check Whether or not the PBG is confirmed by the bank. For this, check the following for Indigenous and foreign vendors: • (a) Indigenous Vendors: Bank guarantee issued by any of the Public Sector Banks or private banks duly authorized to conduct government transactions would be accepted.

21. (b) Foreign Vendors: Advice of the SBI should be taken whether the foreign bank providing bank guarantee for advance is a first class bank of International repute before taking a decision whether such PBG should be further confirmed by any Public Sector Bank or private bank duly authorized to conduct government transactions. • NOTE: ICICI Bank Ltd., Axis Bank Ltd and HDFC Bank Ltd are at present the private sector banks authorized to conduct government transactions. IDBI Bank Ltd has been converted into a Public Sector Bank.

22. Contd. • Apart from PBG, cases may also be identified where Security Deposit is recovered from First Bill payment to the vendor. These cases may be objected in audit. • Irregularities as regards the safe custody of Security Deposit may also be highlighted. • Highlight cases where there is departure from the above procedure.

23. THANK YOU