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Basic about 'Basic Rate'

Very recently, in Aug2020, a client's senior procurement executive mentioned to me that Basic Rates prices in the tender should be close to the current market rate. I provided him rationale behind providing Basic Rates in the tender document, and our meeting ended up in 'dropping the matter.'

Circa 1995, I was attending my first sizeable tender meeting. We were Project Managers for upcoming project development for a very well known developer. I was to lead the bidders' conference to respond to queries from prospective bidders. I was very upbeat about this responsibility and was confident that I had led the bid document's efforts.

I confidently responded to several questions and comments. My Managing Director also supported me in completing a few responses. My confidence increased as I continued responding. Usually, the answers were short and were easily understood by many, but there was one question that I took several minutes and illustrations to make the bidders understand.

Sam: 'What is this Basic Rate, and why is this provided.'

Response: 'Basic rate is the material rate bidders will consider for arriving at their price of an item where this material is consumed.'

Sam: 'Please elaborate more on this concept.'

Response: 'When all bidders consider the same prices for materials that have frequent market fluctuations, it will provide the right comparisons of submitted bids.'

Sam: 'When we buy this material at different prices for the project, we will lose.'

Response: 'When this material is available in the market at a higher price, you will be compensated for the price you have bought the material. On the other hand, when this material is available for a lesser price, you will have to return the monies.'

Sunil: 'Are there any more advantages to this concept.'

Response: 'For a long duration project, market price fluctuation will affect the project value. To be fair and mitigate the risks for both parties, this is the method that we have devised.'

Sunil: 'This will lead to additional documentation and oversight on prices.'

Response: 'Risk mitigation has its downsides. In this case, it is only the documentation. You will have to submit us the proof of purchase at every instance of material arrival at the project'.

Sunil: 'Why this price has been specified only for certain items.'

Response: 'This criterion is for items that are of high value, have frequent market price fluctuations, and are bought throughout the project in a long duration project. If any one or all of the said criteria are true, then such items shall have Basic Rates'.

Salim: 'Please illustrate compensation methodology.'

Response: 'When the Basic Rate specified is 100, that item when bought at 112, the vendor is eligible for a claim of 12 for the quantum of that purchase. When purchased is at 106, the value of the claim shall be (-)6 on the quantum of purchase. Proof of purchase for this material shall be submitted for all claims'.

Sam: 'What if we are unable to provide proof of purchase.'

Response: 'When an item cannot be executed without these essential materials, such works shall be deemed not done when proof of purchases are not submitted.'

Salim: 'What happens to the wastage of materials? How do the calculations work out?'

Response: 'Debit and Credit using Basic Rates shall apply for materials only to the extent of wastage specified in the tender. Excess wastage shall not be considered for calculations using basic rates.'

Fast-forwarding several years from this conference, it is excruciating that managers and procurement professionals have used this concept rampantly without event understanding its basis. Projects of 15 days duration, workforce, materials like door hinges for ten doors, and several small items/materials have Basic Rates specified in the tender.

It was natural for this concept to have evolved over the years. We had several situations on wastage, pilferage, reworks, damages, left over stocks and transfers, and several others. For over 25 years, I had extensively worked on this Basic Rate concept in several projects. This concept gained popularity and usage very quickly. Our organization had provided a great concept to the construction community for its benefit.

Risk management is a crucial part of the project. Experience and caution are to be applied. The overuse of specifications in a tender document to bring in more clarity have created more confusion. Copy and paste mechanism in MS office tools has made specification writers out of style.

It is essential to identify the right risks, apply a suitable method to mitigate them and consider vendors as partners/service providers.

The construction industry has evolved in the last three decades, but procurement has not gone beyond just negotiations. Procurement professionals can bring several innovations to their work. Other than moving to an online platform, there is a lot to be done in this domain.

Photo Courtesy Scott Grahm on Unsplash

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