Quick answer: Performance security protects contract performance after award. Central rules generally prescribe 3%–5% for goods and services, while performance security plus retention for works may total 3%–10%; the tender sets the exact amount, form, validity and release event.
Winning a tender can immediately create a financing requirement. Performance security may need to be furnished before contract signature or order activation, and works contracts can also retain money from bills. If that cost was not modelled before bidding, the award can strain bank limits and cash flow.
Security is also a document-risk area. An otherwise valid bank guarantee may be rejected for incorrect wording, dates or issuing-bank treatment. Build the instrument from the tender, not from a generic company template.
How performance security differs from bid security
Bid security protects the procurement process before contract formation. Performance security protects the buyer against failure to perform after award. It may be invoked for default under the contract and usually remains in force through delivery plus a specified tail beyond obligations.
Current central rules generally set performance security for goods and services at 3%–5% of contract value. For works, the combined performance security and security deposit or retention may remain within a 3%–10% range. These are framework figures; the live tender controls the exact obligation and can structure securities by milestone.
Forms: BG, e-BG, surety and other instruments
Permitted forms can include insurance surety bond, bank guarantee including electronic bank guarantee, fixed deposit or other instruments listed in the tender and rules. An e-BG can reduce paper movement and verification time, but it does not cure wrong language or validity.
Check the beneficiary’s legal name, amount in figures and words, contract reference, unconditional invocation language, issuing or confirming bank, governing branch, claim period and digital-verification route. The instrument should match the prescribed format without unapproved qualifications.
Retention money and working-capital impact
In works and some service contracts, a percentage may be deducted from running bills as retention or security deposit. Model it separately from performance security: one consumes bank limits and commission; the other delays cash receipt. Both reduce available working capital.
Prepare a month-by-month cash-flow model including mobilisation, material, payroll, GST, invoice certification, retention and payment lag. Consider whether the tender permits substitution, reduction after a milestone or release against another instrument. Do not assume the buyer will release security merely because physical work is complete.
Validity, extension and release
Central rules commonly require performance security to remain valid for a period beyond completion of contractual obligations, often including warranty or defect liability and a further tail. Use the exact tender dates and automatically alert the contract owner well before expiry. An unapproved lapse can be a default.
At completion, assemble delivery, acceptance, no-dues, warranty and defect-rectification evidence and formally request release. Obtain the original instrument or electronic discharge and confirm bank closure. For partial or extended scope, reconcile security value with the amended contract rather than allowing unnecessary collateral to remain blocked.
Practical checklist
- Calculate security and retention before approving the bid price.
- Use the exact prescribed instrument and wording.
- Verify beneficiary, amount, validity and claim period.
- Track bank limit, commission and cash-flow impact.
- Set alerts for extension well before expiry.
- Reconcile security after variations or partial completion.
- Obtain formal discharge and confirm bank closure.
Frequently asked questions
Is performance security always 3%?
No. Central framework ranges and temporary relaxations have changed over time. The current tender and applicable rule determine the amount.
Is retention money the same as a performance bank guarantee?
No. Retention is cash withheld from bills; a bank guarantee is a contingent bank-backed obligation. A works contract may use both within its security structure.
Can an e-bank guarantee be rejected?
Yes. Electronic issuance addresses delivery and verification, not substantive compliance. Wrong wording, value, dates or bank conditions can still make it unacceptable.
Final takeaway
Performance security is both contract protection and financing cost. Price it, govern the wording, monitor validity and drive formal release. The contract is not economically closed while collateral remains blocked.
Related reading
- L1, L2, H1 and QCBS: How Government Bids Are Evaluated
- Technical Bid vs Financial Bid: How to Build Each One Correctly
- Pre-Bid Meetings and Clarifications: Ask Better Questions, Reduce Risk
Official references
- General Financial Rules, 2017 — updated to 31 January 2026
- Manual for Procurement of Goods, Second Edition 2024
- Department of Expenditure — Procurement Manuals
Editorial note: This article is educational, not legal or bid-specific advice. Tender conditions, portal workflows, thresholds and government instructions can change. Always read the latest tender document, corrigenda, applicable office memoranda and portal guidance before acting.