After you win: performance security, retention and the instruments accepted

The two holds a winner meets

This is general information; confirm with the tender document and your adviser.

Winning is the start of a second set of deadlines. Two sums are held after award, and they are different animals. Performance security is furnished once, under GFR Rule 171, before the contract is signed, and it guards the buyer against a supplier or contractor who does not perform. Security deposit or retention money is not furnished at all: on a works contract it is withheld from each running bill as the work is paid for, and it guards the buyer against defects that appear after the bills have gone out.

Where each of the four sums in a bid falls, and when each comes back, is mapped on money in a bid. This page is the post-award depth: the bands, the dates, and the instruments a buyer will take.

How much

Rule 171(i) sets the performance security for everything that is not works: “Performance Security, in respect of procurement only of Goods/ Consultancy Services/ Non-Consultancy Services, should be for an amount of three to five per cent (3-5%) of the value of the contract as specified in the bid documents.”Department of Expenditure, Ministry of FinanceThe Goods Manual repeats it in a single line with the works figure beside it: “Performance security should be for an amount of three (3) to five (5) per cent (3 to 10% for Works) of the value of the contract, as specified in the tender documents.”Department of Expenditure, Ministry of Finance

The works side is counted differently, and the difference is the point. The footnote the Department of Expenditure's amendment of 1 January 2024 added to Rule 171(i) says the “Amount of performance security plus security deposit/ retention money for procurement of works will continue to be 3% to 10%”. Performance security and retention are one band on works, not two. A works contract that holds the higher retention has less room in the performance security, and the tender is where the split is stated.

Older formats print an older figure, and it is not a mistake by the person who wrote them. Before that amendment the rule set a wider band, which the 2019 edition of the Works Manual still carries: “Performance security should be for an amount of five to ten per cent of the value of the contract. In works contract it is usual to take five percent of contract value Performance Security.”Department of Expenditure, Ministry of FinanceWhere a tender issued today prints that band, the tender governs its own bid, and the question belongs at the pre-bid stage.

When it is due, and what missing the date costs

The performance security is due on a date the tender names, not on a date you choose. The Goods Manual: “Performance Security is to be furnished by a specified date (generally 14 (fourteen) to 28 (twenty-eight) days after notification of the award, depending on the amount).”Department of Expenditure, Ministry of FinanceThe 2019 Works Manual gives the works habit as “generally 21 (twenty-one) days after notification of the award”.

Missing that date is expensive in three directions at once. The bid security lodged with the bid is forfeited. Where a bid securing declaration was given instead of money, Rule 170(iii) is explicit that a bidder “awarded the contract” who fails “to submit a performance security before the deadline defined in the request for bids document” is suspended, for the period the tender states, from bidding with that buyer. And a failure that is treated as a breach of the code of integrity can carry debarment, which reaches further than one buyer. What the declaration commits a bidder to is on EMD exemptions and the bid securing declaration.

How long it lasts, and when your earnest money comes back

The performance security does not expire when the work does. Rule 171(ii) runs it past the completion of all contractual obligations including warranty, and on works the same clock runs past the defect liability period as well. The period the rule adds is stated once on this site, on money in a bid, and the instrument furnished has to be valid to that date rather than to the completion date.

Your earnest money comes back on the way in. Rule 171(iii) returns the bid security to the successful bidder on receipt of the performance security, so nothing is refunded to a winner until the new instrument is in the buyer's hands, and the two overlap by design. The timings of that refund, and of every other bidder's, are on money in a bid.

Retention on a works contract

On works a second hold runs through the whole of execution. The 2019 Works Manual describes it: “In addition to Performance Security (usually five percent), Contracts for works usually provide for a percentage (usually five percent) of each running bill (periodic/ interim payment) to be withheld as Security Deposit/ retention money until final acceptance.”Department of Expenditure, Ministry of FinanceTwo things in that sentence are worth reading twice: “usually”, which means the contract decides, and “until final acceptance”, which is a later date than completion.

The same manual allows the retention to be released against a bank guarantee, and allows the earnest money to roll into it rather than come back: “The earnest money instead of being released may form part of the security deposit.” Both are 2019 statements of works practice; the current Works Manual's own post-award paragraphs are not quoted here, and the contract in front of you is what binds.

The instruments the rules accept

A security is not cash unless the tender says so. Rule 171(i), as amended, accepts performance security “in the form of Insurance Surety Bond Account Payee Demand Draft, Fixed Deposit Receipt from a Commercial bank, Bank Guarantee including e-Bank Guarantee from a Commercial bank or online payment in an acceptable form”. The same list serves bid security under Rule 170(i), and the Works Manual repeats it: bid security “may be obtained in the form of insurance surety bonds, account payee demand draft, banker's cheque, or bank guarantee (including e-bank guarantee)”.

Two of those instruments arrived recently, each by its own order. The insurance surety bond was added by the Department of Expenditure's order of 2 February 2022. The electronic bank guarantee was added by its order of 5 August 2022. Both then had to be accepted by somebody in practice, and the National Highways Authority of India is the worked example on the public record: it “has started accepting Electronic Bank Guarantees (E-BGs) and has also digitalized all its existing Bank Guarantees”, using the services of National e-Governance Services Limited, announced on 2 November 2022; and on 10 November 2023 it “accepted Insurance Surety Bond for the monetization program of the upcoming bid of Toll Operate Transfer (TOT) Bundle 14”.

Which of the rule's instruments this buyer takes is the tender document's answer, and what any of them costs to arrange is a question for your bank or insurer. Nothing on this page says which to choose.

GeM's own line, and one deduction that is not a security

This is general information; confirm with the tender document and your adviser.

On the Government e Marketplace the terms are the marketplace's own. Its General Terms and Conditions recommend a figure for performance security and give the buyer a range around it, and set a value below which no performance security is required at all. Those figures are stated once on this site, on selling on GeM.

One last sum is often mistaken for a hold and is not one: a government buyer also deducts tax at source under two Acts before paying a bill. That deduction is not a security, nothing is released when the contract closes, and the rates, thresholds and credits are a question for your accountant rather than for the tender document.