Restoration of deposit provision in highway tendering process
The government has reinstated the earnest money provision (EMD) in the tender process for highway construction and consultancy contracts. He said the effect of the Covid-19 pandemic on the road sector has been neutralized.
The government’s decision also comes amid a growing tendency for bidders to bid abnormally low on construction and consultancy contracts.
“Since there is no EMD deposit, the bidders offer abnormally low prices for the tender. And, after winning the tender, they start looking for a subcontractor”, indicates the Ministry of Road Transport and Highways in a circular.
He added, “This trend will negatively impact the quality and timely completion of major road projects.”
In November 2020, when the first wave caused an acute financial crisis for the infrastructure sector, the government removed the bid bond rule. Indeed, it affected the ability of business entities to execute contracts in a timely manner. This also had a negative impact on tenders.
The government has also reduced the performance bond requirement from the normal 5 to 10 percent of the contract value to 3 percent, according to a finance ministry circular.
According to CIFAR group leader Rajeshwar Burla, the reintroduction of EMD is a step in the right direction. This should lead to a cooling of the aggressiveness in the bidding.
“The average number of bidders has increased over the last six quarters, also due to the flexibilities provided by the National Highways Authority of India (NHAI) in the technical qualification criteria and waiver of EMD requirements.
This has allowed many medium-sized contractors to bid on more projects. It also paved the way for new players to enter the road segment. Many actors, who previously worked as sub-contractors for Tier I and Tier II prime contractors, have started bidding on a stand-alone basis,” Burla said.
In the recent past, the number of qualified bidders has remained at around 40 for some of the EPC (Engineering, Procurement and Construction) projects.
Increased competition has resulted in discounted bids of up to 30-35% of NHAI’s estimated cost for EPC projects, he added.
Bidding discipline remains a key factor for road contractors from a credit perspective, failing which profitability and working capital management could be adversely affected. Those issues could cause projects to stall mid-stream, Burla said.