Ministry of Road Transport & Highways’ (MoRTH) revised framework, implemented in April 2025, removes the 3% cap on Additional Performance Security (APS) and introduces stricter penalties for aggressive underbidding.
The policy shift comes after most central government road projects between January 2024 and March 2025 were awarded at steep discounts, with a median bid 25% below estimated costs. The new norms now trigger APS for bids below 10% of project cost, versus 20% earlier and impose a two-tier penalty system: 0.1% APS for every 1% discount between 10-20%, and 0.2% plus a flat 1% for discounts exceeding 20%.
While these changes will promote execution discipline and deter speculative bidding, they’ll immediately increase working capital needs for smaller contractors with limited bank guarantee capacity. Over time, however, the sector may see more participation from well-capitalized players, improving project quality.
Giving more insights, Ashish Modani, Group Head, Corporate Ratings at ICRA, said, “The hike in performance security requirement is a positive step towards execution discipline, which will deter speculative bidding and promote realistic pricing. The policy, though, in the near term, is expected to put some strain on the credit profiles of small and mid-sized contractors, particularly those with limited-sized BG limits. The requirement for cash margins to secure additional BGs will increase working capital needs, potentially impacting bidding capacity, revenue growth, and coverage metrics due to higher finance costs. However, in the medium term the policy eventually will encourage serious well-capitalised bidders for participation, to get desired output of performance in terms of quality of road construction.”
He that while the policy addresses the issue of unsustainable underbidding, it could temporarily constrain the order pipeline for smaller firms and potentially accelerate industry consolidation. The removal of the APS cap means contractors submitting deeply discounted bids could now face performance security requirements exceeding 5% of project value.
MoRTH’s move aligns with its broader efforts to ensure timely and quality execution of national highway projects under flagship programs like Bharatmala Pariyojana. Contractors may need to revisit bidding strategies and strengthen their financial planning to adapt to the new regime.
