Para 6.1.2 - Performance Security | KartavyaDesk
Original Rule Text
6.1.2 Performance Security (Rule 171 of GFR 2017) 1. To ensure due performance of the contract, performance security (or Performance Bank Guarantee (PBG) or Security Deposit (SD)) is to be obtained from the successful bidder awarded the contract. Unlike contracts of Works and Plants, in the case of contracts for goods, the need for Performance Security depends on the market conditions and commercial practice for the particular kind of goods. 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 documents99. The procuring Entity may stipulate an upper ceiling for the Performance Security amount. For an illustrative example, the ceiling can be Rs 75 Lakhs for tenders upto Rs 50 Crores and Rs 3 Crore for tenders above Rs 50 Cr but below Rs 300 Cr. For tenders of higher value than this, the Procuring Entity may decide the amount of Performance Security (but not less than Rs 3 Cr mentioned above). However, Procuring Entities are free to decide their own upper limits for performance security, with the approval of Competent authority and finance concurrence, based on their perception of performance risks vis-a vis need for competition. Performance security may be furnished in the form of an Insurance Surety Bond100, account payee demand draft from a commercial bank, bank guarantee (including e-bank guarantee101) issued/confirmed from any of the commercial banks in India, or online payment in an acceptable form, safeguarding the purchaser's interest in all respects. In the case of GTE tenders, the performance security should be in the same currency as the contract and must conform to the Uniform Rules for Demand Guarantees (URDG 758) – an international convention regulating international securities102. Unlike the procurement of Works, in the procurement of Goods, the concept of taking part of the Performance Guarantee as money retained from the first or progressive bills of the supplier is not acceptable.
What This Means
Para 6.1.2 of the Manual for Procurement of Goods, 2017, focuses on Performance Security. Think of it as a guarantee that the supplier will fulfill their contract properly. After a supplier wins a bid, the government asks them to provide this security, which can be in the form of a bank guarantee, demand draft, or insurance surety bond. This security protects the government if the supplier fails to deliver the goods as agreed upon. The amount of the security is usually between 3% and 5% of the contract value, but there can be upper limits depending on the tender amount.
Unlike construction projects, where money can be held back from payments, this isn't allowed for goods procurement. The entire performance security must be provided upfront. For global tenders (GTE), the security must be in the same currency as the contract and follow international rules. The specific amount and type of security required will be detailed in the tender documents. Procuring entities have the freedom to decide their own upper limits for performance security, with the approval of competent authority and finance concurrence, based on their perception of performance risks vis-a vis need for competition.
This rule affects both government departments making purchases and the suppliers bidding on those contracts. It ensures that suppliers are serious about fulfilling their obligations and provides a safety net for the government in case of default.
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.
Key Points
- •Performance Security (or PBG/SD) is required from successful bidders to ensure contract performance.
- •The amount is typically 3-5% of the contract value, as specified in the tender documents.
- •Acceptable forms of security include bank guarantees, demand drafts, insurance surety bonds, and online payments.
- •Retaining money from supplier bills as part of the Performance Guarantee is not allowed for goods procurement.
- •For GTE tenders, the security must be in the same currency as the contract and conform to URDG 758.
Practical Example
The Ministry of Textiles issues a tender for the supply of 10,000 cotton bales, valued at ₹20 Crores. M/s. Cotton King wins the bid. The tender document specifies a Performance Security of 5% of the contract value. Therefore, M/s. Cotton King needs to provide a Performance Security of ₹1 Crore. They decide to submit a bank guarantee from a nationalized bank for this amount.
Later, M/s. Cotton King fails to deliver 2,000 cotton bales as per the agreed schedule. The Ministry of Textiles, after giving them due notice and opportunity to rectify the breach, invokes the bank guarantee to recover the losses incurred due to the non-delivery. This ensures that the Ministry is compensated for the supplier's failure to meet their contractual obligations.
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.
Frequently Asked Questions
What happens if the supplier fails to provide the Performance Security?▼
Can the Performance Security be returned to the supplier?▼
Is Performance Security mandatory for all procurement of goods?▼
What is URDG 758, and why is it important for GTE tenders?▼
Can the procuring entity increase the Performance Security amount beyond 5%?▼
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.
Test Your Knowledge
Question 1 of 3
According to Para 6.1.2 of the Manual for Procurement of Goods, 2017, what is the typical range for the amount of Performance Security required for contracts related to goods?
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