Bid Security vs Performance Security: Tender Cash Needed

Bid security (EMD) is a small deposit you give with every bid and get back after the award; performance security is a larger guarantee only the winner gives, and it stays locked until the contract and warranty are over. For central government tenders, GFR 2017 puts bid security at about 2% to 5% of estimated value (with registered Micro and Small Enterprises exempt) and, after a December 2023 amendment, performance security at generally 3% to 5% for goods and services and 3% to 10% for works. The real cash question is the bank guarantee margin your bank will ask for, plus the working capital to execute the order.

All rules below are as of October 2026 and apply to central ministries, departments and CPSEs. State governments, their PSUs and private buyers follow their own rules; the bid document always decides.

Side by side

Accepted forms under GFR include insurance surety bonds, account payee demand drafts, fixed deposit receipts from a commercial bank, bank guarantees (including e-bank guarantees) and online payment. The tender may accept only some of them. On GeM, the bid document shows the EMD and the e-performance bank guarantee (ePBG) percentage and duration for that bid.

Bid Security Declaration

Instead of cash EMD, many tenders ask you to sign a declaration: if you withdraw or change your bid during validity, or do not sign the contract, you are suspended from bidding for a stated period. It costs no cash, but the suspension is real. During the pandemic, a Department of Expenditure order (12 November 2020) asked ministries to use only the declaration for tenders issued until 31 December 2021; after that the tender document governs again.

Worked example: cash plan for a ₹50 lakh supply order

Illustrative. A small manufacturer bids for a ₹50 lakh goods contract with a 12-month warranty.

Stage 1: bidding

• Tender asks for 2% EMD = ₹1,00,000
• The unit has Udyam for the tendered item's NIC code and qualifies as an MSE manufacturer, so it is exempt and uploads its exemption proof. Cash needed: ₹0
• A trader or a medium enterprise bidding the same tender would have to provide ₹1,00,000 or the declaration the tender allows

Stage 2: after award

• Performance security at 5% = ₹2,50,000, valid until warranty ends plus the period the contract states
• The unit asks its bank for a bank guarantee. Suppose (illustratively) the bank asks for 25% cash margin and charges 1.5% a year commission
• Cash margin = 25% × ₹2,50,000 = ₹62,500, usually kept as a fixed deposit under lien
• Commission for about 2 years = 1.5% × ₹2,50,000 × 2 = ₹7,500

Stage 3: executing the order

• Raw material and labour before the first payment: say ₹35,00,000
• Buyer pays within the agreed period after acceptance

Cash to arrange before the first receipt: ₹62,500 margin + ₹7,500 commission + ₹35,00,000 working capital = ₹35,70,000, much of it borrowed. The margin earns FD interest while locked; check what it earns over the guarantee period with the FD calculator. The working capital piece is a cash credit or working capital loan question, not a security question.

The margin, commission and whether a limit is needed at all vary by bank and by your relationship; some banks issue guarantees against an existing sanctioned non-fund limit. Read your sanction letter.

What to ask your bank before you bid

• Do I have a sanctioned bank guarantee (non-fund-based) limit, and how much is free?
• What cash margin and commission apply, and can the margin be an existing FD?
• Can you issue an e-BG, and how many working days does issue take?
• What happens to the margin if the buyer extends the guarantee period?
• Is an insurance surety bond accepted by this buyer, if the bank route is costly?

Documents to keep ready

• Udyam certificate covering the tendered item, plus GeM or e-procurement registration
• Exemption proof (MSE or DPIIT startup) exactly as the bid asks
• Bank guarantee format from the tender, sent to your bank early
• Sanction letter showing the guarantee limit
• Board resolution or authority letter for the signatory
• Tracker of every guarantee: amount, expiry, claim period, return date

Common mistakes

• Assuming Udyam exempts you from performance security. It does not.
• Ignoring the claim period. The guarantee may need to stay valid beyond warranty; budget margin for that whole time.
• Wrong BG wording. A guarantee not in the tender's format can be rejected, delaying the contract.
• Forgetting to recover the guarantee. After the obligations end, ask for the original back and send it to the bank so the margin is released.
• Bidding beyond your limit. Several wins at once can need more guarantees than your bank has sanctioned.

If security is not returned or payment is delayed

Write to the procuring entity citing the contract clause and completion date. Unreturned security is a contract matter; the Ministry of MSME's FAQs say the policy itself has no penalty for it, so escalate within the department and, for central bodies, on pgportal.gov.in. If the buyer delays payment for supplies beyond the MSMED Act limit, file on the MSME ODR portal (odr.msme.gov.in), which handles new delayed-payment cases from 15 October 2025. If your bank delays releasing margin after you return the original guarantee, complain to the bank's grievance officer and, after 30 days, to the RBI Integrated Ombudsman at cms.rbi.org.in. A guarantee fee debit on your MSME loan is a different charge; do not confuse the two.

Key takeaways

• Bid security is small, given by all bidders and returned after award; performance security is larger, given only by the winner and held until warranty ends.
• Central GFR ranges as of October 2026: bid security 2% to 5%; performance security generally 3% to 5% for goods and services and 3% to 10% for works.
• Registered MSEs are exempt from EMD for their registered items, not from performance security.
• The real cash cost is the bank guarantee margin, commission and the working capital to execute the order.
• Track every guarantee's expiry and get it back promptly so the margin is freed.