Additional performance security to be levied in cases of abnormally low bids for making highways

The Road Transport Ministry has directed highway builders to furnish an additional performance security in an attempt to rein in errant bidders that bid abnormally low. This directive has been issued to National Highways Authority of India (NHAI), National Highways and Infrastructure Development Corporation (NHIDCL), Border Roads Organisation (BRO), and all state governments.
In November 2020, the Finance Ministry had issued guidelines that removed the additional performance security to be taken from bidders the contracts in the business-as-usual scenario. This was done to support highway developers during the COVID-19 pandemic.

A performance security or bank guarantee is a upfront amount paid by winning bidders which is subject to be forfeited if the project commitments are not honored.

The performance security in roads projects was also reduced from 5-10% in pre-pandemic instances to 3% of the value of the contract, till March 31, 2023.

This led to instances of many bidders quoting very aggressive prices to bag tenders.

“In view of the trend of quoting very low bid price by the bidder, it has been decided to maintain a uniform approach in dealing with the situation of seeking additional performance security that in the compelling circumstances where the quote of selected bidder is lower than 20% of the estimated project cost put to tender,” the transport ministry order said.

“The higher performance security can ensure that non-serious players who are interested only in building their order book will be dissuaded. This has been the case in 9 out to 10 bids with some 35-40 bidders contesting in each project,” said Rajeshwar Burla, group head, corporate ratings, ICRA.

Sector watchers said that the trend in the last five to six quarters is of aggressive bidding being observed in national highway EPC projects with the winning bid price closing 30 to 40 per cent lower than the estimated project cost.

“While the new performance guarantee is lower than the pre-pandemic period when it used to extend to 10 per cent of the winning bid amount, it will still be a deterrent to errant bidders” Burla added.