Procurement processes, especially those involving high-value contracts, involve financial instruments and fees in order to ensure the integrity and seriousness of the participating bidders. This article will discuss three such key elements — Earnest Money Deposit (EMD), Bank Guarantees (BGs) and Tender Fees. Each of them serves a key purpose, and understanding each terminology and their nuances is crucial for both — the Tender Issuing Authority (TIA) and the potential bidders — in order to make the procurement process smooth, reliable and more accountable.
Tender Fee
It is a non-refundable amount charged by the TIA to cover their administrative costs of managing the tendering process. Tender fee includes the cost of preparing and distribution of tender documents, evaluation of bids and other related tasks. It is paid by each bidder for the privilege of participation and ensures only serious and committed parties take part in the bidding process, as bogus parties would not like to pay the tender fee.
EMD
EMD for tenders is a security deposit from bidders during a tendering process. Paying the EMD is mandatory for all vendors during a bid submission and, unlike tender fees, it is refundable. When a bid gets rejected, the TIA refunds the EMD to the bidder. However, if the bid winner withdraws or makes an amendment to the offer after a project is awarded to them, EMD is not refunded to them, naturally. EMD ensures fair competition, ensures participation by serious competitors only and provides security to the TIA.
Bank Guarantees
Bank guarantees for tenders is a financial instrument provided by a bank to TIA on behalf of a bidder. It is a guarantee to the TIA that if the bidder withdraws the bid during the tender’s validity period, backs out of a project after the contract is awarded, refuses to sign the contract or fails to provide a performance guarantee, a predetermined sum would be paid to the beneficiary. It is applied for larger and more complex undertakings and offers a stronger form of commitment and security, like an irrevocable promise.
Managing EMD in Tenders for SMEs
Managing EMD for tenders can be challenging for Small and Medium-sized Enterprises (SMEs) due to their limited financial resources. Discussed below are some basic strategies for SMEs to approach EMD for tenders effectively:
Strategic Bidding
Understand and evaluate the tenders before investing your time and money. SMEs should ensure that the tender aligns with their core competencies and only bid if they feel that the chances of winning are reasonably higher to avoid locking up funds in EMD repeatedly.
Budgeting
It’s wise for an organisation or business to set aside an amount for EMD payment during bidding as part of their tendering strategy, especially when options like exemption and bank guarantees for tenders aren’t available.
Keep Abreast of Government Notifications
Many government tenders offer EMD exemptions for MSMEs registered under schemes like Udyam. SMEs should keep a look-out for their eligibility for such exemptions and schemes to avoid paying any unnecessary capital and locking them up for no reason. Keep yourself up-to-date with the latest government notifications and policies.
Track All Submitted EMDs
Keep a record of all submitted EMDs along with the tender details. Note the refund dates and keep a track of tender results. Follow up an EMD in case of an unsuccessful bid and be proactive with the TIA for timely refunds.
Explore Other Options
At times, especially during high-value tenders, a TIA may accept bank guarantees in lieu of EMDs. It is a good option for SMEs as bank guarantees for tenders may be easier on their immediate cash flow.
Managing Bank Guarantees for SMEs
SMEs that want to venture into larger contracts must be aware of the key considerations, practical tips and strategies with regard to bank guarantees. Bank guarantees for tenders provide essential security to beneficiaries on the one hand, but can pose significant challenges for SMEs on the other. SMEs need a strategic approach to navigate the intricacies of managing bank guarantees effectively, or else they may impact their cash flow, credit lines and their overall financial health. Some useful strategies to manage bank guarantees for tenders are discussed below:
Find out if bank guarantees for tenders are really necessary.
Sometimes bank guarantees for tenders may not be necessary for a contract and the TIA may accept other forms of security. Do read the tender documents thoroughly and their terms and conditions to find out.
Understand all charges associated with bank guarantees.
There are additional costs like fees and commissions associated with obtaining bank guarantees for tenders. Banks often charge a commission, typically a percentage of the guarantee amount. Factor them in the overall cost of projects.
Try negotiating the terms.
Sometimes you may be in a position to negotiate the amount for bank guarantees for tenders and their validity with the beneficiary, to align with the terms of the contract. You can also try negotiating the duration for which bank guarantees are active.
Maintain good relationships with banks.
Building a strong relationship with banks can facilitate the issuance of bank guarantees for tenders on favourable terms. Maintain a good credit history, provide any collateral promptly if need be, and keep your reputation on a high pedestal.
Understand the types of bank guarantees for tenders.
Bank guarantees are of different types. For example, performance bank guarantee, advance payment and so on. Understand your requirement before choosing a bank guarantee that fits your needs and potentially reduces costs and collateral needs.
Manage collateral needs well.
When collateral is required for bank guarantees, SMEs should use assets that would potentially have the least impact on their working capital and operations.
Request for timely closure.
After fulfilling the contractual requirements, SMEs must request the beneficiary to release the bank guarantee to unlock the credit lines or collateral held by the bank.
Challenges for SMEs with EMD & Bank Guarantees
- Financial Issue: With limited working capital of SMEs, requirement for either EMD or bank guarantees for tenders may strain their financial capabilities.
- Attaining a Bank Guarantee: New SMEs or the ones with limited credit history may find it difficult to obtain bank guarantees for tenders. They may be asked to provide hefty collateral.
- Administrative Hassle: Managing several EMD for tenders and bank guarantees can become cumbersome for smaller teams in SMEs. Hire a team exclusively to look into the financial aspects for smooth functioning of an organisation.
Managing EMD & Bank Guarantees for Tenders with BidAssist
BidAssist simplifies the tendering process for SMEs by reducing financial and administrative burdens. Track EMD for tenders, bank guarantees for tenders and other financial instruments proactively with our experts at BidAssist. We help you understand available exemptions and alternatives, and guide you to build strong banking relationships, aside from helping you navigate the entire tendering process smoothly.