NHAI Issues Standard Operating Procedures For Implementing Works By Third Party Contractors At Risk And Cost Of Concessionaire

NHAI, vide circular dated July 8, 2024, issued a policy circular issuing standard operating procedures (“SOPs”) which the authority engineers/independent engineers appointed under the concession agreements must follow while appointing third party/replacement contractors for carrying out works which were not duly performed by the concessionaire/delays caused by concessionaire in completing such works, at the risk and cost of the original contractor/concessionaire. The policy circular, at the outset, specifies that the SOP would be applicable for Engineering Procurement Construction (“EPC”), Hybrid Annuity Mode (“HAM”), Build Operate Transfer (“BOT”), Toll Operate Transfer (“TOT”) and item rate contracts/concession agreements. The object and purpose of issuing these SOPs are as follows:

1. to establish a risk and cost framework to be followed by the project implementing governmental authority;
2. to enable timely identification and replacement of non-performing and/or defaulting contractor/concessionaire;
3. to maintain transparency and rationality in execution of works by a third party contractor at the risk and cost of the contractor/concessionaire; and
4. to minimise litigations arising out of ambiguities in the risk and cost procedure.

The circular specifies that the first and foremost step is timely detection by the independent engineer of the delays, lapses, defects, defaults in the construction/maintenance work being carried out by the contractor/concessionaire. The circular lists out a set of Trigger Events (“Trigger Events”) which may lead to the independent engineer appointing a third party contractor to complete/carry out the works for which defaults/delays have been caused by the contractor/concessionaire, at the risk and cost of the original contractor/concessionaire.

The circular lays down step wise process to be followed by the independent engineer upon identification of a Trigger Event. Some of the key steps are as follows:

1. upon noticing the occurrence of any Trigger Event, independent engineer will within 3 (three) days report to the governmental authority and the contractor/concessionaire, the details of the Trigger Event. The independent engineer will also issue a letter to the contractor/concessionaire with details of the Trigger Event and request the contractor/concessionaire to remedy the defects/complete the works;
2. no later than 7 (seven) days from such occurrence, the AE/IE will prepare a proposal to the project director of NHAI containing: (a) details about the Trigger Event; (b) analysis of the cause of the Trigger Event; (c) methodology to be adopted with detailed estimation in terms of ‘bill of quantities' for executing the works, details of equipment to be deployed, traffic management and measures for ensuring safety; (d) impact of the Trigger Event on the project; (e) recommendation regarding execution of the works through a third party at risk and cost of the contractor/concessionaire and estimates regarding time and cost for carrying out the works by a third party; and (f) any other information which may be required;
3. the project director will give comments and recommendations to the Regional Office, NHAI (“RO”) within 3 (three) days from the receipt of the proposal from the Independent Engineer;
4. the RO will consider and decide on the proposal within 5 (five) days from the receipt of the same from the project director. Any request for additional information/clarification/further working will have to be responded to by the Independent Engineer and/or project director immediately so as to enable the RO to meet the aforesaid deadline of 5 (five) days;
5. thereafter RO will send the proposal to NHAI Headquarters (“HQ”). However, before sending the proposal to NHAI HQ, RO will invite quotation through notice of 15 (fifteen) days for submission of quotation only from the empanelled/onboarded contractor. Simultaneously the project director will immediately also issue a notice to the contractor/concessionaire that the delayed/incomplete works will be completed by a third party at risk and cost of the concessionaire. In case, it is expected that the contractor/concessionaire may approach court for obtaining stay/challenge the notice of risk and cost, caveat before the competent court may also be filed by NHAI; and
6. NHAI HQ will provide its decision within 7 (seven) days of the receipt of the proposal from the RO.

In terms of onboarding of replacement/third party contractor, the circular has prescribed the following procedure:

1. each RO will identify and empanel a pool of qualified agencies with requisite expertise based on standard request for qualification document duly approved by NHAI HQ, once in 2 (two) years;
2. as and when required, quotations from the above empanelled agencies will be invited through tender notice. The activities related to quotation process will be completed within 22 (twenty-two) days (15 (fifteen) days for submission of bids, and 7 (seven) days for opening of financial bid and issuing letter of award within the next 7 (seven) days' time); and
3. in case the L1 bidder does not respond within 7 (seven) days, then 15 (fifteen) days' time will be given to RO for re-inviting the bids/quotes with 15 (fifteen) days' notice again to the empanelled agencies for submitting their bids.

Finally, the circular also specifies the manner in which the cost of the works done by such replacement/third party contractor is to be recovered from the original contractor/concessionaire. The same is as follows:

1. EPC contract: Issuance of 15 (fifteen) days' demand notice to the EPC contractor directing the EPC contractor to deposit the amounts pertaining to the costs incurred in carrying out the works from a third party agency. The demand notice will be issued within 3 (three) days of the cost computation. If the EPC contractor fails to deposit the risk and cost amount, then the NHAI will take the following steps: (a) firstly, recover the amounts against the bills payable to the EPC contractor; (b) if bills are insufficient to recover the risk and cost amounts, then encash and appropriate the performance security, additional performance security (if any) and retention money; (c) in case there is still some outstanding risk and cost amount, legal action will be initiated for recovery against the EPC contractor.
2. BOT concession and HAM concession: Issuance of 15 (fifteen) days' demand notice to the concessionaire directing the concessionaire to deposit the amounts pertaining to the costs incurred in carrying out the works from a third party agency. The demand notice will be issued within 3 (three) days of the cost computation. For the risk and cost works done prior to the appointed date, the said cost as determined by independent engineer will be recovered from the bid security or the performance security. In the event of non-payment, for the risk and cost works executed during construction period, Operations and Maintenance (“O&M”) period and post termination up to 120 (one hundred and twenty) days, the escrow bank will be directed to make payment from the escrow account and debit the same under the head of O&M expenses as per the water fall mechanism.
3. TOT contract: Issuance of 7 (seven) days' demand notice to the concessionaire directing the concessionaire to deposit the amounts pertaining to the costs incurred in carrying out the works from a third party agency. The demand notice will be issued within 3 (three) days of the cost computation. In the event of non-payment, for the risk and cost works executed during the concession period and post termination up to 60 (sixty) days, the Escrow Bank will be directed to make payment from the escrow account and debit the same under the head of O&M expenses as per the water fall mechanism.

Source:  NHAI Policy Circular dated July 8, 2024

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