Performance Security in Tenders: Amount, Format & Release Rules

Performance security (PS) is a financial guarantee that the winning bidder must deposit before signing the contract. Typically 5–10% of contract value, it protects the government against contractor default during contract execution. Managing performance security is a critical part of your cash flow and compliance strategy.

Key Facts

• Amount — 5–10% of contract value (specified in the tender document). GFR 2017 Rule 170 specifies the range.
• Deposit deadline — typically within 15–30 days of receiving the Letter of Intent (LOI)
• Validity — contract completion date plus 60–90 days (defect liability period)
• Forms accepted — bank guarantee (most common), fixed deposit receipt, demand draft, or government securities
• Failure to deposit — EMD is forfeited and the award may be cancelled. Contract offered to L2 at L1's rate.

Performance Security vs EMD

• EMD (Bid Security) — deposited at bid stage. 2–5% of estimated value. Released when PS is deposited. Protects against bid withdrawal.
• Performance Security — deposited at contract stage. 5–10% of contract value. Released after contract completion. Protects against execution default.
• Key difference — EMD is pre-award and smaller. PS is post-award and larger. EMD exemption (for MSEs) does not mean PS exemption.

When PS Can Be Encashed

• Contractor fails to perform within the contract period
• Contractor abandons the work midway
• Quality of deliverables is below specified standards and contractor doesn't rectify
• Contractor becomes insolvent or goes into liquidation
• Defects found during the defect liability period that the contractor fails to repair

Getting PS Released

• Apply for release — after the defect liability period ends, submit a formal request for PS release to the procuring department
• Completion certificate — obtain the completion certificate or satisfactory performance certificate from the department
• No pending claims — PS won't be released if there are pending disputes, LD claims, or defect rectification issues
• Timeline — departments should release PS within 60 days of the defect liability period ending, but delays are common. Follow up actively.
• Partial release — for long contracts, some departments allow partial PS release as work milestones are completed

Tips for Managing PS Costs

• Use bank guarantee instead of FDR to avoid locking cash
• Negotiate PS validity aligned with realistic completion timelines — overestimating contract duration increases BG costs
• Track PS release dates actively — unreleased PS blocks your BG limit for future tenders
• For MSMEs, CGTMSE guarantees can reduce the cash margin needed for PS bank guarantees