Short answer: A Performance Bank Guarantee (PBG), called performance security in government rules, is the guarantee the winning bidder gives the buyer after award so that the buyer can recover money if the contract is not performed. Under Rule 171 of the General Financial Rules (GFR) 2017, as amended on 29 December 2023, it is 3% to 5% of the contract value for goods and services and 3% to 10% for works, as stated in the tender. It is usually due 14 to 28 days after award and must stay valid until 60 days after the warranty or defect liability period ends. It can be a bank guarantee (including e-BG), insurance surety bond, demand draft, FDR or online payment.
What is a performance bank guarantee in a tender?
When you win a government contract, the buyer wants an assurance that you will deliver as promised. The performance security is that assurance: an amount the buyer can encash if you breach the contract. The most common form is a bank guarantee, which is why bidders call it a PBG, but government rules allow several forms. Some tenders also call it security deposit (SD), contract performance guarantee (CPG) or performance bond.
A bank guarantee is your bank's promise to pay the buyer up to a stated amount on demand. Under an unconditional guarantee the bank pays on a valid claim without judging the dispute, then recovers the money from you. That makes the PBG a real risk, not a formality.
What is the PBG percentage under GFR 2017?
The rule has changed several times since 2020, so older tenders and blog posts often quote figures that no longer apply.
| Period | Central rule (GFR Rule 171 and DoE OMs) |
|---|---|
| Before November 2020 | 5% to 10% of contract value |
| 12 Nov 2020 to 31 Mar 2023 | Temporary reduction to 3% for existing contracts and for tenders issued or contracts concluded in that period (originally until 31 Dec 2021, later extended to 31 Mar 2023) |
| From April 2023 | 3% to 10% (OM dated 3 April 2023) |
| From 29 Dec 2023 (current) | Goods, consultancy and non-consultancy services: 3% to 5%. Works: 3% to 10% (performance security plus security deposit or retention money) |
A few points to remember:
- The tender sets the actual figure. The rule is a band. Read the NIT and the special conditions for the exact percentage.
- Contracts signed during the 3% period stay at 3%. The 2020 OM said the reduced percentage continues for the whole contract and is not raised later.
- Ceilings are allowed. The Manual for Procurement of Goods (2024) lets buyers cap the amount in large tenders, and the Works Manual (2025) suggests a lower percentage within the band for high-value tenders (say above ₹50 crore) to encourage competition.
- Small goods tenders may not need it. The Goods Manual says performance security is not necessary for goods tenders up to ₹50 lakh, and government bodies bidding as suppliers can be exempted. Check the tender.
- States, PSUs and other buyers have their own rules. GFR binds central ministries and departments; CPSEs follow DPE instructions and their own manuals, and states follow their own financial rules. Many mirror the central position, but never assume.
When must the PBG be submitted, and how long is it valid?
Both the Goods Manual (2024) and the Works Manual (2025) say performance security is to be furnished by a date stated in the tender, generally 14 to 28 days after notification of award, depending on the amount. It must remain valid for 60 days beyond completion of all contractual obligations, including the warranty or defect liability period (DLP), unless the tender states a different period.
If you do not submit it in time, the manuals treat this as a failure to sign or perform: the buyer can forfeit your EMD (or act under your bid securing declaration), cancel the award and take punitive action such as debarment. On GeM, failing to furnish the PBG in time is a listed ground for action against the seller under GeM's terms.
What forms of performance security are accepted?
Under Rule 171 as amended, central buyers accept:
- Bank guarantee, including an electronic bank guarantee (e-BG) issued through the banks' electronic platform. e-BG was formally recognised by a DoE OM of 5 August 2022. The Works Manual says the guarantee must be issued or confirmed by a scheduled bank; a guarantee merely "advised" is not enough.
- Insurance surety bond (ISB), added by a DoE OM of 2 February 2022. It is a premium-based insurance product issued by an insurer, and unlike a bank guarantee it does not require the contractor to deposit collateral.
- Account payee demand draft.
- Fixed deposit receipt (FDR) from a commercial bank, pledged to the buyer.
- Online payment in a form the buyer accepts.
Corporate guarantees and indemnity bonds are not accepted in place of performance security. The buyer will verify a bank guarantee directly with the issuing bank before accepting it, so the guarantee must follow the tender's format exactly.
What is ePBG on GeM?
On the Government e-Marketplace (gem.gov.in), the buyer chooses whether a bid needs performance security and at what percentage when creating the bid, and that figure appears in the bid document. The successful seller then furnishes the guarantee, commonly as an ePBG (electronic PBG) in GeM's format, within the time set in the bid and GeM's terms. Payment to the seller becomes due only after the buyer receives and verifies the guarantee. The percentage, deadline and any alternative forms (some buyers also accept a demand draft or online transfer) differ from bid to bid, so read the bid document and the additional terms, not only the summary. Our GeM bidding guide walks through the rest of the process.
How do you get a bank guarantee, and what does it cost?
- Check your limits before bidding. Banks issue guarantees against a non-fund-based limit sanctioned to your business. If you have no limit, setting one up takes time and paperwork.
- Expect margin and security. The bank usually asks for a cash margin (often held as a fixed deposit) and may ask for collateral or count it against existing security. The margin percentage depends on your relationship and credit profile.
- Pay commission. Banks charge a commission on the guarantee amount for its validity period, plus processing and stamp duty costs. Rates are negotiated and vary widely, so ask your bank for a quote in writing.
- Give the bank the exact format. Share the tender's PBG format, beneficiary name, amount, validity and claim period. Ask for e-BG if the buyer accepts it; it is faster to verify.
- Track expiry. If the contract or DLP is extended, extend the guarantee before it expires, or the buyer may encash it.
An insurance surety bond is an alternative when bank limits are tight: it is priced as a premium, without collateral, though the insurer still assesses your finances.
When is a PBG invoked or released?
The buyer can forfeit (encash) the performance security if you breach the contract, for example by failing to deliver, abandoning the work or not fixing defects in the warranty period. The manuals say full performance security may be forfeited even if the work was partly executed.
It should be refunded without interest after you complete all obligations, and not later than 60 days after completion of the warranty or DLP (or another period stated in the tender). For multi-year goods contracts such as rate contracts, the Goods Manual lets buyers reduce the security in proportion to the remaining contract period. If release is delayed, write to the buyer with the completion and warranty dates; the manuals ask senior officers to monitor returns.
What is the difference between PBG, EMD, security deposit and retention?
| Item | When | Typical amount (central rules) | Purpose | Returned |
|---|---|---|---|---|
| EMD / bid security | With the bid | 2% to 5% of estimated value (goods), or a bid securing declaration | Stops you withdrawing or refusing the contract | Unsuccessful bidders: after award; winner: after PBG is received |
| Performance security / PBG | After award, before or with the contract | 3% to 5% (goods, services), 3% to 10% (works) | Covers non-performance during contract and warranty | 60 days after warranty or DLP ends |
| Security deposit / retention money | Deducted from running bills (works) | Usually 5% of each running bill, per the Works Manual | Extra cover until final acceptance | Half on taking-over, half after DLP, under typical terms |
In works, performance security plus retention stays within 3% to 10% under the December 2023 OM, and retention can be replaced by a bank guarantee or surety bond at stated stages. MSE status exempts you from EMD, not from PBG. See our EMD guide and MSME benefits.
Hypothetical example (illustrative)
Suppose you win a building repair works contract worth ₹2 crore with an 18-month completion period and a 12-month DLP. The tender asks for performance security of 5% and deducts 5% retention from each running bill.
- PBG amount: 5% of ₹2 crore = ₹10 lakh.
- Validity needed: 18 months + 12 months DLP + 60 days, so roughly 32 months from award, longer if the work is delayed.
- If your bank asks for, say, a 25% cash margin (your bank's terms will differ), ₹2.5 lakh sits in a fixed deposit for that period, plus commission for about three years.
- Retention: by the last bill, 5% of ₹2 crore, ₹10 lakh, has been withheld from your payments, unless you replace it with a guarantee.
So a ₹2 crore contract can tie up about ₹20 lakh of guarantee capacity or cash for nearly three years. That is why PBG size belongs in your Go/No-Go decision and your BOQ pricing, not only in the post-award paperwork.
What are the common PBG mistakes?
- Quoting an old percentage. Many templates still say 10% or 3% flat; use the tender's figure.
- Wrong format, beneficiary or validity. The buyer verifies with the bank, and validity must cover the warranty or DLP plus the claim period.
- No bank limit arranged. Missing the 14 to 28-day window can cost you the EMD and the contract.
How Grovia Tender does this
When you upload a tender or it arrives through a feed, Grovia Tender extracts the PBG percentage, validity and forms accepted along with EMD, liquidated damages and payment terms, and puts them in a risk register with plain-English notes such as "PBG 5% of ₹2 Cr for about 32 months". Eligibility is checked against your Company DNA and Document Vault with evidence per criterion, and the PBG load sits next to your Win Potential in the Go/No-Go view, alongside price context from how similar contracts went. Get bid-ready lists the proofs you are missing, ranked by how many tenders each would unlock.
AI drafts are traceable to your own documents. Grovia Tender never submits, signs or prices on its own: you approve the price and submit on the portal, and arranging the guarantee stays with you and your bank. Plans: Free ₹0, Pro ₹3,999/month, Business ₹14,999/month, pay-per-bid from ₹1,999 (GST extra). See features, how it works and pricing.
Frequently asked questions
What is a performance bank guarantee in a tender? It is a guarantee, usually issued by a bank, that the winning bidder gives the buyer after award. If the contractor fails to perform, the buyer can encash it. Government rules call it performance security, and it can also be given as a demand draft, fixed deposit receipt, insurance surety bond or online payment.
What is the PBG percentage under GFR 2017? Since the Department of Expenditure OM of 29 December 2023, Rule 171 sets performance security at 3% to 5% of contract value for goods, consultancy and non-consultancy services, and 3% to 10% for works. Each tender states its own figure within that band, so read the tender's clause.
How long must a PBG remain valid? Under the central procurement manuals, it must stay valid for 60 days beyond completion of all contractual obligations, including the warranty or defect liability period, unless the tender states another period. If the contract is extended, you must extend the guarantee too.
Can I give an insurance surety bond instead of a bank guarantee? Yes, in central government procurement. Insurance surety bonds were added as an accepted form of bid and performance security by a Department of Expenditure OM of 2 February 2022. State governments, PSUs and other buyers set their own rules, so confirm that the tender accepts them.
Are MSEs exempt from performance bank guarantee? No. Registered Micro and Small Enterprises are exempt from EMD in central procurement, but the manuals do not exempt them from performance security. Budget for the PBG even if you bid without EMD.
See the PBG, EMD and payment risks before you commit: create a free Grovia Tender account and upload your next tender.
Frequently asked questions
Sources
- Department of Expenditure: procurement manuals (doe.gov.in)
- Department of Expenditure, Ministry of Finance (doe.gov.in)
- Government e-Marketplace (gem.gov.in)
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