Para 4.12 - Performance Security | KartavyaDesk
Original Rule Text
iv) On account of the COVID-19 pandemic, that caused slowdown in economy, it is decided to reduce Performance Security from existing five to ten percent to three (3) percent of the value of the contract for all existing contracts till 31.03.2023. However, the benefit of the reduced Performance Security will not be given in the contracts under dispute wherein arbitration/ court proceedings have been already started or are contemplated. All tenders/ contracts issued/ concluded till 31.03.2023 should also have the provision of reduced Performance Security. In all contracts, where Performance Security has been reduced to three percent, the reduced percentage shall continue for the entire duration of the contract and there should be no subsequent increase of Performance Security even beyond 31.03.2023. Similarly, in all contracts entered into with the reduced percentage of Performance Security of three percent, there will be no subsequent increase in Performance Security even beyond 31.03.2023. Where, there is compelling circumstances to ask for Performance Security in excess of three percent as stipulated above, the same should be done only with the approval of the next higher authority to the authority competent to finalise the particular tender, or the Secretary of the Ministry/ Department, whichever is lower. Specific reasons justifying the exception shall be recorded39.
What This Means
Para 4.12 of the Works Manual addresses a temporary reduction in Performance Security due to the economic slowdown caused by the COVID-19 pandemic. Performance Security is a deposit contractors provide to guarantee they'll fulfill their contract obligations. Normally, this security is 5-10% of the contract value. However, to ease the financial burden on contractors during the pandemic, the rule temporarily reduced it to 3% for contracts issued until March 31, 2023. This reduction applied to existing contracts as well, with a crucial exception: contracts already in dispute involving arbitration or court proceedings were not eligible.
This reduced rate of 3% remains in effect for the entire duration of the contract, even if the contract extends beyond March 31, 2023. The rule explicitly states that the Performance Security cannot be increased back to the original 5-10% later on. If, in exceptional circumstances, a higher Performance Security is deemed necessary (above 3%), it requires approval from a higher authority than the one who finalized the tender, or the Secretary of the Ministry/Department, whichever is lower. The specific reasons for needing the higher security must also be documented.
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.
Key Points
- •Performance Security was temporarily reduced to 3% due to the COVID-19 pandemic's economic impact.
- •This reduction applied to contracts issued until March 31, 2023, and remains at 3% for the contract's duration.
- •Contracts already in dispute (arbitration/court) were excluded from this reduction.
- •Any requirement for Performance Security exceeding 3% needs approval from a higher authority and documented justification.
- •The reduced percentage of 3% will continue for the entire duration of the contract, even beyond 31.03.2023.
Practical Example
The Ministry of Road Transport and Highways awarded a road construction contract to ABC Constructions in January 2023 for ₹10 crore. Under Para 4.12, ABC Constructions was required to provide a Performance Security of only 3% (₹30 lakh) instead of the usual 5-10%. This allowed ABC Constructions to free up ₹20-70 lakh of working capital.
However, if a similar contract was awarded to XYZ Enterprises, but a dispute arose and arbitration proceedings began in February 2023 before the Performance Security was finalized, XYZ Enterprises would not be eligible for the reduced 3% Performance Security. They would have to provide the originally stipulated 5-10% security. If the department felt a 5% security was insufficient and wanted 7%, they would need approval from an authority higher than the tender finalization authority, and document the reasons for the higher security.
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.
Frequently Asked Questions
Does this reduced Performance Security apply to all types of government contracts?▼
What happens if a contract was awarded before the rule came into effect, but is still ongoing?▼
If a contract was extended beyond March 31, 2023, does the Performance Security revert back to the original percentage?▼
Who is considered the 'next higher authority' for approving a Performance Security higher than 3%?▼
What kind of reasons would justify asking for Performance Security in excess of 3%?▼
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
As per Para 4.12 of the Works Manual, what was the reduced percentage of Performance Security applicable to contracts issued until 31.03.2023, due to the COVID-19 pandemic?
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