Businesses providing services on multi-year contract to the government are to get some relief. The Finance Ministry has said that Central Ministries/Departments may proportionately keep reducing Performance Security (PS) in proportion to the balance service period.

PS (includes the terms Security Deposit, Performance Bond, Performance Bank Guarantee) means a monetary guarantee to be furnished by the successful Consultant or Contractor in the form prescribed for the due performance of the contract. The value is specified in Request for Proposal and if not, then it could be up to 10 per cent of the value.

The Ministry quoted one section of Government Financial Rules (GFRs) which say: “To ensure due performance of the contract, Performance Security is to be obtained from the successful bidder awarded the contract. Unlike contracts of Works and Plants, in case of contracts for goods, the need for the Performance Security depends on the market conditions and commercial practice for the particular kind of goods.”

The Ministry stated that the General Financial Rules (GFRs) offer adequate flexibility to design the Procurement Strategy (PS) for service procurement, taking into account market conditions and commercial practices specific to the service. Additionally, procuring entities are advised to gradually decrease performance security in proportion to the remaining service period, if feasible.

Wherever, “it is decided to take lower or proportionally reducing PS, tender conditions may be suitably modified for the future cases,” the Ministry advised.

Cash flow hit

Businesses say fixed performance security, as a percentage of total contract value for multi-year deal, may impact cash flow of businesses. The Finance Ministry said it has received representation from the industry regarding amount of PS amount being sought by procuring entities in case of service contracts spanning over multiple number of the years. ln such cases, PS is retained by the procuring entities over the complete contract period, which may be of 5-7 years or may be more.

Moreover, the Ministry emphasised the importance of striking a balance while determining the appropriate level of performance security. This balance must consider safeguarding the interests of the procuring entity in the event of performance failure, while also avoiding potential drawbacks such as increased tender prices and reduced competition. The Ministry explained that if the security requirement is too low, the procuring entity may suffer adverse consequences in case of default. Conversely, if the security requirement is excessively high, bidders will factor in the additional financial burden when submitting their prices, potentially leading to increased costs.