Tightened bidding norms will ease competitive pressure in central govt road projects: ICRA | Mint

The tightening of bidding norms by the ministry of road transport & highways (MoRTH) via the additional performance security (APS) requirement will ease competitive pressure in central government road projects, rating agency ICRA said in a report on Wednesday.

The APS requirement necessitates that bidders who quote significantly below the estimated project cost provide an extra security deposit. It aims to discourage aggressive and potentially unviable bids, thereby reducing intense competition for central government road projects.

Also read: InvITs becoming prime vehicle for forging M&A activity in roads and highways

The previous relaxed bidding norms had intensified competition for such projects, with most being awarded at significant discounts – a median of around 25% – between January 2024 and March 2025, ICRA said. In the near term, the tighter rules may strain the credit profiles of small and mid-sized contractors, particularly those with modest bank guarantee (BG) limits, the rating agency added.

3% cap removed

In August 2022, the ministry had imposed APS for projects awarded substantially below the base price. However, it was capped at 3% of the overall project cost. With the latest circular, the 3% cap has been removed.

Ashish Modani, group head, corporate ratings, ICRA, said, “The hike in performance security requirement is a positive step towards execution discipline, which will deter speculative bidding and promote realistic pricing. In the near term, the policy is expected to put some strain on the credit profiles of small and mid-sized contractors, particularly those with limited BG limits.”

He added, “The requirement for cash margins to secure additional BGs will increase working-capital needs, potentially impacting bidding capacity, revenue growth, and coverage metrics due to higher finance costs. However, in the medium term the policy eventually will encourage serious, well-capitalised bidders to participate, to get the desired output in terms of the quality of road construction.”

Revised APS framework

The ministry has introduced a revised framework for APS, aimed at deterring abnormally low bids for national highway projects. Under the revised framework, the bid security as been retained at 3% if the bid price equals the estimated project cost. There is no change in the performance security charge for bid up to 10% below the estimated project cost. Once the bid price falls below this, 0.1% is added to performance security for each percentage point below 10%. With this formula, performance security will rise to 4% if the bid price is 20% below the project cost. 

Below 20%, the performance security will rise at double the rate or by 0.2% for each percentage point below the 20% level. This means the performance security with rise to 5% if the bid is 25% below the project cost, and to 6% if it is 30% below. The security will rise to 10% if the bid is 50% below the estimated project cost.