Risk Purchase

Risk Purchase is a contract remedy available to the government buyer when a supplier who has been awarded a contract fails to supply the ordered goods within the stipulated delivery period and the failure persists after notice. The buyer's right to risk purchase means that it can procure the undelivered goods from an alternative source, through limited tender, rate contract, GeM, or open tender, and recover the extra cost (the difference between the alternative source's price and the defaulting supplier's contracted price) from the defaulting supplier, typically by invoking the bank guarantee or adjusting against pending payments.

What is Risk Purchase in government procurement?

Risk purchase is a standard remedy written into most government supply contracts, purchase orders, and GeM supply terms. It operates in this sequence: the supplier fails to deliver within the contracted delivery period; the buyer issues a formal notice of default specifying a cure period (typically 7-15 days); if the supplier does not supply within the cure period and does not provide a satisfactory explanation, the buyer cancels the defaulted portion of the order and initiates risk purchase; the buyer procures the goods from an alternative source at the best available price; and the difference between the alternative price and the original contracted price is recovered from the defaulting supplier.

The legal basis for risk purchase is the contract clause itself, supported by the Indian Contract Act, 1872 (Section 74, liquidated damages for breach of contract). The government does not need a court order to invoke risk purchase, it is a contractual right exercised unilaterally by the buyer upon documented default.

Risk purchase procedures typically require the buyer to: document the default formally (showing delivery period, notice issued, failure to supply); obtain approval from the competent authority before initiating risk purchase (since this involves additional expenditure); and document the alternative procurement with competitive quotations or GeM price to establish that the alternative price was reasonable (the excess being recovered from the defaulter must be the actual market price, not an inflated price that the buyer chose for other reasons).

The risk purchase cost recovery is in addition to any LD (Liquidated Damages) already levied for the delay period, they are not mutually exclusive. However, if the total recovery (LD + risk purchase excess) exceeds the bank guarantee amount and there are no other pending payments to adjust, recovery may require civil litigation, which can be time-consuming and uncertain.

Why it matters for bidders

For suppliers, the risk purchase remedy is a significant commercial risk. If you win a government tender, accept the order, and then fail to supply (due to material shortages, manufacturing problems, financial difficulties, or changed market prices), the government will not simply wait, it will buy from someone else and charge you the price difference. In a rising market, this can mean paying the government the entire increase in market price on the undelivered quantity.

Bidders must therefore price their bids carefully, considering:

• Whether they can actually source or manufacture the required quantity within the delivery period at the quoted price.
• Whether market prices for key inputs (steel, copper, petroleum products) are likely to rise between quote and delivery.
• Whether their bank guarantee amount is sufficient relative to the risk exposure.

Suppliers who find themselves unable to deliver should proactively communicate with the buyer, seek extension of the delivery date (which the buyer may grant if the need for the goods is not immediate), and explore partial supply options, rather than waiting for the default notice that triggers risk purchase.

Example

A government hospital places a purchase order for 1,000 surgical gowns at Rs 450 per unit (total Rs 4.5 lakh) with a delivery period of 30 days. The supplier fails to deliver within 30 days; a 15-day notice is issued; the supplier still cannot supply due to raw material shortage. The hospital cancels the order and purchases 1,000 surgical gowns from a GeM seller at Rs 520 per unit (the best price available on GeM at that time). The excess cost, Rs 70 per unit × 1,000 units = Rs 70,000, plus applicable LD for the delay period, is recovered by adjusting against the supplier's pending EMD (which was Rs 9,000) and invoicing the supplier for the balance Rs 61,000. The supplier's name is recorded in the hospital's defaulter list for future reference.

Key rules / thresholds

• Risk purchase is a contractual remedy, the right must be explicitly written in the purchase order or contract; it cannot be implied.
• Competent authority approval is required before initiating risk purchase, the same or higher authority as the original order.
• Alternative procurement for risk purchase must itself be at a reasonable market price, documented by competitive quotations or GeM price evidence.
• The total of LD plus risk purchase recovery cannot exceed the damages actually suffered, punitive recovery exceeding actual loss is legally questionable.