Earnest money and performance security lock up contractor capital for months. How to price that cost into your tender margin instead of absorbing it silently.
Every government and most large private tenders require Earnest Money Deposit at bid stage and Performance Security (commonly a bank guarantee) on contract award. Both are treated by most contractors as a fixed procedural cost of participating — necessary paperwork rather than a real cost. In practice, both lock up capital or bank guarantee capacity for extended periods, and that lock-up carries a genuine cost that belongs in tender pricing, not as an unbudgeted drag on project margin.
Earnest Money Deposit, typically 1-2% of the estimated contract value, must be submitted with the bid and is refunded to unsuccessful bidders, or converted (often topped up) into performance security for the successful bidder. For a contractor bidding multiple tenders simultaneously — a normal part of running a tendering pipeline — the aggregate EMD tied up across several live bids at once can represent a meaningful, if temporary, working capital commitment, particularly around periods when several tender results are pending concurrently.
On contract award, performance security (commonly 5-10% of contract value, usually as a bank guarantee) is required, and it typically remains valid for the full contract execution period, often extending into the defect liability period after physical completion. This means performance security on a project with, say, an 18-month execution period plus a 12-month DLP can have a bank guarantee outstanding for close to 30 months — tying up that portion of the contractor's bank guarantee limit for the better part of three years on a single project.
Banks charge a commission on the guaranteed amount for the period the guarantee remains outstanding — commonly in the range of 1-3% per annum depending on the bank, the contractor's facility terms, and whether the guarantee is fully cash-margined or partially secured against other collateral. On a large contract with performance security outstanding for two to three years, this commission accumulates into a real, calculable cost — and it is a cost incurred regardless of whether the guarantee is ever actually invoked.
The practical fix is straightforward: estimate the bank guarantee commission cost (guarantee amount × annual commission rate × expected outstanding period) alongside any EMD working-capital drag, and include that figure explicitly as a cost line in the tender pricing calculation, rather than treating tender margin as covering only material, labour, and overhead. Contractors who price government and private tenders similarly, without this adjustment, are typically under-pricing the real cost-of-capital difference between the two, since government tenders often carry longer guarantee-outstanding periods and stricter EMD/security terms than comparable private work.
Contractors with disciplined tender pricing calculate bank guarantee commission cost and EMD working-capital drag as a specific line item for every tender before submission, rather than assuming it is covered within a general overhead percentage — and they compare this figure explicitly against private-tender terms to confirm the government-vs-private margin difference reflects the actual cost-of-capital gap, not just a competitive-pricing assumption.
