02 July 2009

Procedural Norms for Financial Prudence

There are certain procedural norms laid down for financial prudence. In India, a common practice is to seek quotations from at least three different firms. The purpose is to ensure that while buying with public money one ought to survey the market and go for the lowest. One has to be careful with public money.

In practice, three quotations are a formality. Some collect it from three firms whereas some others ask one firm to provide quotation from three different firms. There are many instances when the prices quoted in all the three would be much more than the normal price prevailing in the market (not necessarily the maximum retail price).

If you bargained hard and purchased at a price which is much lower than the prevailing market price but got only one quotation then you are in for trouble. On the contrary, if you purchased at a price which is much higher than the prevailing market price but this is the lowest from three quotations then you have followed the procedural norms for financial prudence.

In one occasion while coordinating a field survey for which there was provision to hire locally available vehicles. My employer suggested that I survey the market and bargain for a reasonable price but should not forget to get three quotations. The latter is required because the auditor who will come sometime in the future (it could be in the next one to five years or even more) will have no idea of the prevailing market or even if aware there are no documents to support that contention and if the person goes by personal knowledge of the market then it will be like being party to not following procedural norms.

The other problem is that if there is a prevailing market rate then how can one get three quotations in which one is the lowest. It is only possible if one asks two providers to give a slightly higher quotation.

A major problem is to ensure quality. If one is going for the lowest price then the quality of the final product will also be poor. One way out for this is to specify the quotation/bid to two parts. One technical and another financial. Ensure quality at the technical bid stage. One should have a minimum of two who qualify for the financial bid and then choose the one with the lowest price. This sounds good, but there is still a possibility that the one who looses out on the financial bid will have much lower quality.

The suggestion for this is to be very strict at the technical bid. If you fail to get two then call the bid again and if you still did not get two then call for a third time and this time you can cross the technical bid stage even if only one qualifies. But, then precious time is lost in the process. It leaves one wondering, whether these procedural norms are for financial prudence or otherwise...

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