What is a tender security deposit?

Security deposit in tender refers to the amount of money that has to be deposited by the contractor whose tender has been accepted by the buyer organisation, in order to make himself liable to the buyer. It is an assurance demanded by the tender issuing organisation that the contractual obligations will be met by the bid winner.

How is Tender Security Deposit different from EMD?

EMD or Earnest Money Deposit is a sum of money deposited paid by a vendor to the tender issuing authority as a token of their serious intention to contend for a project while submitting their bid. Usually, EMD amounts to 2-5% of the total value of the contract. The EMD is refunded to all the unsuccessful bidders, alongside the winner of the bid once they sign the contract and pay the performance guarantee.

Tender Security Deposit, on the other hand, is the deposit paid by the winner of the bid to the tender issuing authority, after the bidding process is over, and before the work begins. Usually security deposit in tender amounts to 10% of the total value of the contract. It is also a refundable amount which is returned once the tender contract is completed and in some cases, when the defects liability period gets over. It is not refunded if the conditions of the contract are not met.

Who determines the tender security deposit amount and why?

Security deposit in tender is a tool used by the tender issuing authority to protect their risk in the contract. The tender security deposit amount or percentage is determined by the tender issuing authority. In case the contractor’s work involves some re-work, corrections or leftover jobs, the tender security deposit amount serves as a guarantee. In worst cases, the issuing authority may utilise the whole or part of the tender security deposit to complete the rectification work on behalf of the contractor.

Key Features of a Tender Security Deposit

  1. There is a deadline for the payment of a tender security deposit once the winner of the contract is announced. If the bid winner fails to do so within the stipulated time, the issuing authority will be entitled to cancel the contract.
  2. The amount acts as a guarantee for completion of the work on time under the set rules and regulations.
  3. It is fully refundable only if all the conditions are met within the deadline period.
  4. Any additional wastage or expenditure from the contractor’s end is deducted from the tender security deposit.
  5. The security deposit in tender is submitted as a DD or a cheque directly to the tender issuing authority.
  6. If the security deposit in tender is not paid by a contractor, it is recorded by the tender issuing authority and also gets highlighted when the vendor applies for a project in future. It is considered a red flag for future bids by this vendor.

Let’s look at an example:

A tender was floated by S N Bose National Centre for Basic Sciences, Kolkata, for a work on a small stretch of the Water Bound Macadam Road and its carpeting work. Along with the scope of work and other necessary specifications, conditions on the security deposit, performance guarantee and refund of security deposit were clearly mentioned in the tender document. An excerpt from http://oldweb.bose.res.in/tender/tc.pdf on this tender is as follows:

  • Security Deposit: The Security Deposit shall be collected by deduction from each Running Bill of the contractor @5 % of the Gross Amount of the bill, till the sum along with sum already deposited as earnest money amounts to security deposit @5 % of tender amount of work.
  • Performance guarantee: The successful tenderer shall deposit an amount equal to 5 % of tendered and accepted value of the work as performance guarantee as Demand Draft/ Banker’s Cheque from a scheduled bank in favour of ‘S N Bose National Centre for Basic Sciences’, payable at Kolkata, which shall be refunded after defect liability period (one year) after satisfactory completion of work. 
  • Refund of Security Deposit: The Security Deposit in tender may be refunded after the expiry of the defect liability period (One year) after satisfactory completion of work provided the Contractor has satisfactory carried out all work and attended to all defects in accordance with the terms, conditions, specification and items of the work.

As a contractor/vendor/bidder, one must look for such clarity in the tender documents to invest in projects that will work well for their business. Having set business goals, resources and challenges, and having transparency in project operations work best for the success of any business undertaking.

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For any enquiry on security deposit in tender and their refund related queries, contact us on BidAssist support