This article aims to provide nuanced understanding of different types of procurement that happens in public departments. While it is very difficult to provide standardized definition of each of the different type of Contract but this article is an attempt to provide fundamental distinction between different types of Contracts handled by government agencies. Let us first understand the major characteristics of each type of Contract:

Works Contract: ‘Works’ contract is the most fundamental contract used in creation of public infrastructure like roads, railways, buildings, airport etc. In fact, it will not be incorrect to say that story of a developing country like India is a story of works contract. Works Contracts have been most comprehensively defined under Section 2(119) of the CGST Act, 2017.It defines works contract as :

“A contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract.”

The essential characteristics incorporated in above definition is that ‘Works Contract‘ include:

1)It is a composite supply of goods and services.

2)It is done on immovable property

3)It includes transfer of ownership

The above characteristics are pretty comprehensive and can give a fair idea what should classify as a works contract. The other two types of contracts, Supply and services are relatively easier to understand.

Supply Contract: ‘Supply Contract’ can be termed broadly as purchase of goods. However, a more characteristic definition of Supply contract includes the following:

1)It happens only on movable property

2)It includes transfer of ownership

Supply contracts cover huge amount of public procurement like chairs , furniture, IT equipment’s, ancillary parts etc and thus, are regular feature in government departments. In fact, they are regular feature in equipment intensive sector like power , railways , road transportation etc. Now, lets move to understand what can be termed as Service contract.

Service Contract: Service Contract like name suggests is more of providing labour oriented services like housekeeping, AMC, operators where there is negligible supply of goods involved but majority is labour component. However, this is very different from ‘Works Contract’ as defined above.The characteristics that define ‘Services Contract‘ are:

1)It can happen on both movable and immovably property

2)No transfer of ownership takes place

Thus, Supply, works and services contracts can be fundamentally distinguished on the basis of transfer of ownership, nature of property and the distribution of goods and services in the contract. The nature of contract also influences various features a contract has and therefore, it is important to distinguish the key clauses that operate in such contract. Let us discuss them one by one.

Eligibility Criteria: Eligibility criteria in works contract and service contract is majorly based on financial turnover and technical expertise. However, weightage given to each can largely differ as Works are more defined by their completion whereas services are more defined by their period. Therefore, while ‘completion value ‘ of previous work is important for qualifying as works contract, the ‘period value‘ of previous service rendered play a crucial role in determining the eligibility of the bidder.

Quantity Variation Clause: All the three Contracts generally have a variation clause although the underlying reason for variation in a ‘works contract’ is very different from variation operated in a supply or services contract. Quantity variation is operated in a supply contract to increase or decrease the quantity as the case may be in case certain circumstances demand so. Similarly, period of a service contract can be increased or decreased depending on the requirement of the organization. These variations are however, capped by certain percentage. However, in Works contract , the main objective is to complete the project and thus, any amount of variation can be exercised till work is complete. This may sound a bit unreasonable but when one imagines a work like a construction of road, one will realize that a road cannot be simply left incomplete because tender quantity is falling short and thus, works contract should allow unlimited variation to complete the work. However, large variation should invariably demand higher scrutiny and reasoning.

Price variation Clause: Price variation clause can be part of all the three contracts. It helps in indexed variation of labour or commodity component providing hedge against future price fluctuations which are difficult to anticipate at the time of signing the agreement. Though the organization may decide whether such a clause is suitable to them or not but it is certainly a good practice as it provides coverage for essential fluctuations of price which may threaten successful execution of the contract.

Splitting Clause: Splitting clause is a natural ally of Supply contract. In case of Supply contracts where the goods have to be supplied, splitting clause can be of critical value. The splitting of quantities among different bidders ensures continuity of supply especially when supply of such items are targeted within a deadline.Thus, Splitting the quantity in goods supply gives a natural advantage to procurement agency to ensure that items are supplied in time. On the other hand, works and services contracts do not have splitting clause. Infact, splitting work and services is very difficult to do and even more difficult to operate. In fact, it can result in more nuisance. Thus, such contracts do not have such clause and in case the work or service is terminated before completion, a new contract is initiated to complete the remaining work but splitting is not an option in such case.

The Contracts have a lot of practical variation but above must only be taken as tentative guide that determines difference between broad categories of contracts. However, one thing which can be confidently said is that above categories are either mixed in proportion or magnified in proportion with additional compliances to make them handle more complicated projects but essential components remain driven from these categories only.

Disclaimer: The information above is based on experience and information available. Readers are requested to leave their knowledgeable comments which can give more insights into Contracts