Performance Security & Bank Guarantee in Government Tenders: Full Guide

Winning a tender is a huge milestone — but it comes with a catch. Before the contract is signed, you must usually furnish Performance Security, almost always in the form of a Bank Guarantee (BG). Here's exactly how it works and how much it will cost you.

What Is Performance Security?

Performance Security (also called Performance Bank Guarantee, PBG, or Security Deposit) is money secured from the winning bidder to guarantee they will complete the contract as agreed. It protects the buyer if you:

• Fail to deliver on time
• Deliver sub-standard goods or work
• Abandon the contract midway
• Violate the terms of the agreement

EMD vs Performance Security — Know the Difference

Typical Performance Security Amounts

The exact percentage is set in the tender document, but common benchmarks are:

• Goods / supplies: 3–5% of contract value
• Works / construction: 5–10% of contract value
• MSMEs: reduced to 3% in many central tenders
• Long-term AMC contracts: sometimes a fixed rupee amount

How to Provide Performance Security

You don't pay this in cash (though cash and FD are accepted). The most common and preferred method is a Bank Guarantee:

1. Receive the LOA (Letter of Acceptance) after winning
2. Apply to your bank for a Bank Guarantee for the specified amount
3. Bank issues the BG in the department's name, valid for the contract period + retention period
4. Submit the BG to the department within the deadline (usually within 15–30 days of LOA)
5. Contract is signed after BG is accepted

Bank Guarantee Costs

A BG is a credit facility, not cash. You pay the bank a:

• Annual commission: typically 0.2% to 1% per year of the BG value
• Margin money: often 10–25% of the BG kept as collateral (cash or FD)
• Charges may reduce if you pledge an FD or property

Example: For a ₹50 lakh contract, a 5% PBG = ₹2.5 lakh. Your bank may ask for a 15% margin (₹37,500) plus 0.5% annual commission (₹12,500/year).

MSME Relaxations

Registered MSMEs often enjoy:

• Reduced performance security (3% instead of 5–10%)
• Lower or zero margin on bank guarantees in some schemes
• Under the Public Procurement Policy for MSEs, relaxed security requirements in many tenders

Declare your Udyam Registration Number to claim these benefits, just as you do for EMD exemption.

What Happens If You Don't Furnish Performance Security?

If the winning bidder fails to provide Performance Security within the deadline, the department can:

• Forfeit the EMD
• Cancel the award and go to L2
• Blacklist the firm from future tenders (in serious cases)

This is why you must plan your BG before you bid, not after you win.

When Is Performance Security Refunded?

• On successful completion of the contract, including the defect liability / warranty period
• Often after the Retention Money (a portion of payments withheld) is released
• Deficiencies, delays, or disputes can delay the release

Retention Money vs Performance Security

Don't confuse them:

• Retention money: a percentage (usually 5–10%) deducted from each payment and held until completion
• Performance security: a lump sum secured upfront before the contract starts
• Some contracts use one, some use both

Official Government Resources

Conclusion

Performance Security is the financial guarantee that converts a won bid into a signed contract. Budget for it, understand your bank's margin and commission, and leverage MSME relaxations to reduce the burden. Plan your BG financing at the bidding stage — not after award — so you never lose a tender you've already won. Use Bid Bharat to track tenders and map their security requirements before you bid.