L1 To QCBS: New Government Bidding Norms Impact On Road, Infra Firms

India has included quality and technical criteria while selecting final winners for select government tenders instead of just picking the lowest financial bidder, a move aimed at improving execution, and avoiding delays and cost overruns.

The method, called quality and cost-based selection or QCBS, is a combination of quality scores and technical weight along with financial bids, according to guidelines issued in October end by the Department of Expenditure. These give 30% weight to non-financial parameters. The QCBS can be used for "quality oriented procurement" as defined in the guidelines and for procurement of non-consulting services of up to Rs 10 crore.

While the department also outlined an alternative fixed-budget method for consultancy services, it's the QCBS that's being hailed as a major reform.

Current norms call for selecting the lowest bidder, or L1, from among shortlisted parties. But delays plague about a third of the nation's public sector projects. Building roads to tunnels on time within the approved cost and quality remains a challenge.

To deal with that, the Central Vigilance Commission and the Comptroller and Auditor General of India issued a concept paper and later held a workshop in December last year. Based on inputs from CVC, NITI Aayog and feedback at CAG’s workshop, the Department of Expenditure issued the "general instructions" or guidelines last month.

The QCBS is a major reform which dismantles the L1 system as the only bidding format and allows all non-standard work to be bid out under the new method, Vinayak Chatterjee, chairman of CII's National Council on Infrastructure posted on social media.

The norms provide quality and technical parameters, their weights, scoring methodology, minimum qualification scores and other relevant criteria necessary for “ensuring fair and transparent” evaluation of the bids, according to the guidelines.

How QCBS Helps

India’s last major change was the introduction of the hybrid annuity model for road projects more than five years ago. That was aimed at unclogging the pipeline. Still, a third of these remain behind schedule. And two key reasons are delay in land acquisition and lack of financial closure.

According to the April-June quarter status report for central projects worth at least Rs 150 crore each:

There were 1,873 projects during the quarter.
Of these, 12 were ahead of schedule, 294 were on schedule, 598 projects, or 30%, were delayed.
This proportion has largely stayed steady over the years.

An earlier analysis by Crisil Ratings Ltd. showed that among the delayed projects, nearly two-thirds were being executed by a few weak sponsors with constrained liquidity. And most of them doubled up as contractors, hurting execution pace.

The new method to add quality parameters to selection of bids will be very beneficial since it will ensure timely execution and participation of only serious bidders, according to Rajeshwar Burla, co-group head and vice president, corporate ratings, at ICRA Ratings Ltd.

The QCBS will also add short-term cost pressures for the National Highways Authority of India and other agencies, which now may have to shell out 1.5 to 2 times more, he said. But it will ensure long-term cost and time savings, he said.

Burla said this isn’t the first time the NHAI will be adopting such a practice. The authority already selects independent consultants using this method and QCBS will now cover a larger group of contractors, he said.

Work at the National Highway 24 road widening and bypass project near the Indirapuram township in Ghaziabad, Uttar Pradesh. (Photographer T. Narayan/Bloomberg)

One of the reasons for project delays is that companies focusing on ramping up the order book and revenue would bid for projects offering the lowest cost structures without being mindful of the long-term implications.

They would cut corners if input costs rose, compromise on quality standards and delay projects to match working capital and funding needs, said Burla. The new criteria would ensure selection of bidders based on good track record, technical expertise and the lowest bid.

Rakesh Arora of Go India Advisors said in an interview to the Economic Times that the initiative will “eliminate spurious bidders” who bid unusually low and delivered sub-standard quality, and favour the organised sector companies with good technical capabilities but with higher cost structures. Players like Larsen & Toubro Ltd. and Dilip Buildcon Ltd. will benefit, he said.

Rohan Suryavanshi, strategy and planning head at Dilip Buildcon, told BloombergQuint over the phone that the measure will force the companies to not only match cost efficiencies but also quality and technical expertise. He said the bidders that focused more on order book and revenue would now tread with caution.