Road and transport ministry‘s decision to scrap the 3% cap on additional performance security (APS) for road construction projects may impact aggressive bidders and put them under financial pressure, experts suggest.
The revised framework came into effect immediately on April 30 and applies to all central government road works, aiming to ensure better quality and timely completion of National Highways projects.
Experts believe the new framework will increase financial pressure on contractors
The government has now made APS applicable to bids that are even 10% lower than the estimated cost and has removed the earlier 3% cap.
The new rules will likely increase financial pressure on contractors, Sandeep Aggarwal, Associate Director at CareEdge Ratings explained. “With the recent changes, working capital requirements for contractors are expected to increase due to higher cash margins on additional APS and the need for extra collateral mortgaged with banks and financial institutions. This may adversely affect the bidding capacity of contractors, leading to lower order book growth in FY26 and weakening debt coverage metrics due to higher finance cost,” he said.
Puneet Kansal, Director at CareEdge Ratings, noted that the changes will mostly affect companies that rely heavily on aggressive bidding strategies.
“The impact may primarily be concentrated on contractors who bid aggressively with limited sanctioned bank guarantee limits in central government road construction projects. Nevertheless, the revised APS framework will discourage abnormally low bids in central government road projects, potentially reducing competition while ensuring higher quality and more effective completion,” he noted.
Competition for low bids led to construction delays or poor-quality work
The government had to come up with new rules because relaxed bidding rules had led to a surge in competition, especially for projects in tough terrain. New companies entering the sector made very low bids to win contracts. While this reduced project costs, it caused delays and sometimes poor-quality construction.
According to the Ministry of Statistics and Programme Implementation (MoSPI), by March 2024, around 440 out of 1,873 infrastructure projects (each worth at least ₹150 crore) had gone over budget. The total cost overrun was ₹5.01 lakh crore—an 18.65% increase from original estimates. Nearly 42% of projects are running late, with average delays of over three years. Many issues, such as bad planning, delayed clearances, and land acquisition problems, were behind these delays.
What’s New in the APS Rules
Earlier, APS was applied to bids that were 20% lower than the estimated project cost, and it was capped at 3% of the bid amount. Under the new rules, APS will be applied to bids that are even 10% lower than the estimated cost. There is no cap now—the APS amount can go beyond 3%, depending on how low the bid is.
If a bid is between 10% and 20% below the estimated cost, APS will be charged at 0.1% for every 1% of deviation. If the bid is more than 20% below the estimate, the rate increases to 0.2% for every 1% drop.