Tendering is a process where Government, municipalities and most corporations issue a procurement notice through various media such as newspapers, official government publications for purchasing goods or availing services.
In India the tender process is same as conducted in other parts of the world. For participating in tender, we come across with various documentary requirements which run into pages that include bid opening/ closing date, price, payment terms, bonds, confidentiality, validity, general requirement, technical requirement etc. Normally instead of reading such bulky documents of requirement either we delegate power by executing Power of Attorney (Authority Letter) in favour of agent or channel partner and assess the same in detail only after winning the Tender (Award). Therefore for companies who frequently participates in tenders it becomes monotones work to check for known key words or key clauses as mentioned above.
We consider that effecting “Bid Security” for tender participation and executing “Performance Security” post award of tender is one of the requirements which are mandatory and don’t pay much heed to it. For this reason let’s understand the significance of “Bid Security” and “Performance Security” under Tenders.
Bid Security is an amount of money that is generally calculated as a percentage of the total Bid price i.e. Contract value. It differs from one bidder (one who participates in Tender is known as “Bidder”) to another as it is calculated on the basket of products with corresponding prices (offered services with service charges) selected for bid participation by each of the bidder. Bid Security is used as a protection against bidders withdrawing their bids prior to the end of their bid validity period, or for refusing to execute the Agreement.
In short as name suggests, the Bid Security is intended to prevent bidders from withdrawing their bids post participation in the bid. The simple reason behind taking Bid Security is to honor the promises. In other words post award of tender if the bidder is chosen on the warranties provided and refuses to execute the agreement the Contracting Authority (one who invites tender is hereinafter referred as “Contracting Authority”) will not be able to enforce the requirements already promised. Bid Bond gives the Contracting Authority some assertion that the selected bidder will execute the Agreement. Although uncommon for tenders in relation to the procurement of consultancy services, it could be applied if stipulated in the bid requirements.
A Bid Security is usually acceptable in any of the following forms:
(i) Unconditional Bank Guarantee
(ii) Irrevocable letter of credit,
(iii) Demand Draft, or
Bid Security gets forfeited if the selected bidder: (i) withdraws the bid before the end of the bid validity period, (ii) fails to execute the agreement after the announcement of award, or (iii) fails to furnish a Performance Security.
Failure of the successful bidder to comply with the requirement may lead to passing off an award to the next-lowest evaluated bid submitted by a qualified bidder.
The Bid Security of the successful bidder will be returned:
(i) on execution of agreement between the Selected Bidder and Contracting Authority and
(ii) furnishing Performance Security of requisite amount.
The Contracting Authority promptly notifies each unsuccessful bidder and discharges their Bid Security.
Bidder whose bid has been determined to be technically qualified and cost-wise lowest evaluated bid is determined to be qualified to execute the Agreement. Therefore promptly after notification the successful bidder is required to execute the agreement on the terms and conditions as stipulated under Bid submission documents.
Performance Security is an amount of money that is generally calculated as a percentage of the award price i.e. Contract value as may be provided under the bid document. It is a written guarantee which is required to be provided by the bidder who gets an award. Performance Security has to be provided to Contracting Authorities within time specified in the tender documents in the absence of which the Contracting Authority shall have right to call for another bid or to award tender to next-lowest evaluated bid.
Performance Security replaces the Bid Security on award of the tender. It is linked to a detailed description of the essential technical and general performance characteristics of the goods ! services to be provided during the term of the agreement. In short as name suggests, the Performance Security is intended to compel supplier ! service provider to provide quality product! services as agreed under the Agreement for specified period! project.
In some cases the percentage of Performance Security to be provided by selected bidder goes up to 100% of the total agreement value so that the Contracting Authority can ensure that there shall not be any deviation in supplies of the products! services. Therefore in case of subsidised quality product or deficiency in services the Contracting Authority can enforce its rights to deduct proportionate amount of liquidated damages agreed under the agreement.
Conclusion: Therefore before participating in Tender, as the profit margin has to be kept minimal; one has to identify the obligations which carve out general and technical requirements including term, delivery schedule, quality requirements, supply obligations, penalty, liquidated damages etc. and significance of Bid Security and Performance Security.
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Disclaimer: The views and opinions expressed in this article are those of the authors. The legal information is not advice and should not be treated as such.