Tightened APS Norms To Ease Competitive Pressure In Road Project Bids: ICRA

New Delhi, May 15 (KNN) Tightened bidding norms through additional performance security (APS) requirements will alleviate competitive pressure in central government road projects, according to a report released Wednesday by rating agency ICRA.

The APS requirement mandates that contractors who bid significantly below the estimated project cost must provide extra security deposits, a measure designed to discourage aggressive and potentially unviable bids.

Previous relaxed bidding norms had led to intensified competition for central government road projects, with most contracts being awarded at substantial discounts—a median of approximately 25 per cent—between January 2024 and March 2025, ICRA noted.

The rating agency cautioned that in the near term, these stricter regulations may strain the credit profiles of small and mid-sized contractors, particularly those with limited bank guarantee (BG) capacity.

The Ministry of Road Transport & Highways (MoRTH) had initially imposed APS for projects awarded substantially below the base price in August 2022, but had capped it at 3 per cent of the overall project cost. The latest circular has removed this 3 per cent cap, significantly increasing potential security requirements.

"The hike in performance security requirement is a positive step towards execution discipline, which will deter speculative bidding and promote realistic pricing," said Ashish Modani, Group Head of Corporate Ratings, ICRA.

He added, "In the near term, the policy is expected to put some strain on the credit profiles of small and mid-sized contractors, particularly those with limited BG limits."

The requirement for cash margins to secure additional bank guarantees will increase working capital needs, potentially impacting bidding capacity, revenue growth, and coverage metrics due to higher finance costs.

However, Modani emphasised, “In the medium term the policy eventually will encourage serious, well-capitalised bidders to participate, to get the desired output in terms of the quality of road construction."

MoRTH's revised framework for APS aims to deter abnormally low bids for national highway projects. Under the new structure, bid security remains at 3 per cent if the bid price equals the estimated project cost, with no change in performance security for bids up to 10 per cent below the estimated cost.

For bids falling below this threshold, performance security increases by 0.1 per cent for each percentage point below 10 per cent, reaching 4 per cent when bids are 20 per cent below project cost.

Beyond the 20 per cent threshold, security requirements increase at double the rate—0.2 per cent for each additional percentage point—reaching 5 per cent at 25 per cent below cost, 6 per cent at 30 per cent below, and as high as 10 per cent when bids are 50 per cent below the estimated project cost.

(KNN Bureau)