Rule 171 of The General Financial Rules 2017 Performance Security
Original Rule Text
Visual Summary
Ensures due contract performance.
3-5% of contract value for goods/services.
60 days beyond all contractual obligations.
Executive Summary
Rule 171 of The General Financial Rules, 2017, mandates the collection of Performance Security from successful bidders to ensure contract fulfillment. This security, typically 3-5% of the contract value for goods and services, must remain valid for 60 days beyond all contractual obligations, including warranty. It can be provided in various forms like bank guarantees or fixed deposits. Importantly, the Bid Security of the successful bidder is refunded upon receipt of this Performance Security.
In-Depth Analysis of the Rule
Introduction: Performance Security is a critical financial safeguard in government procurement, designed to protect the purchaser’s interests by ensuring that the awarded contractor fulfills all terms and conditions of the contract. Rule 171 outlines the requirements for this security, distinguishing it from Bid Security.
Breakdown of the Rule:
- Purpose: The primary objective is to guarantee the due performance of the contract by the successful bidder. This is particularly relevant for contracts involving goods, where market conditions and commercial practices dictate the necessity and form of such security.
- Amount: For procurement of goods, consultancy services, or non-consultancy services, the Performance Security typically ranges from three to five percent (3-5%) of the total contract value. This percentage is specified in the bidding documents.
- Forms of Security: Acceptable forms include Insurance Surety Bonds, Account Payee Demand Drafts, Fixed Deposit Receipts from commercial banks, Bank Guarantees (including e-Bank Guarantees) from commercial banks, or online payments. The chosen form must adequately safeguard the purchaser’s interests.
- Validity Period: The Performance Security must remain valid for a period of sixty days beyond the date when all contractual obligations of the supplier, including any warranty obligations, are completed. This extended validity ensures coverage for post-delivery issues.
- Relationship with Bid Security: Upon the successful bidder furnishing the required Performance Security, their initial Bid Security (Earnest Money) is to be promptly refunded.
Practical Example: Imagine a government department awards a contract for the supply of specialized medical equipment worth ₹10 crore. As per Rule 171, the successful bidder would be required to furnish a Performance Security, say 4% of the contract value, amounting to ₹40 lakh. This could be in the form of a Bank Guarantee. This guarantee would need to be valid for 60 days beyond the equipment’s installation, testing, and the agreed-upon warranty period. Once this Performance Security is submitted, the initial Bid Security submitted by the bidder during the tendering process would be returned.
Related Provisions
Understanding Performance Security is enhanced by examining related rules within the General Financial Rules, 2017:
- Rule 170 of The General Financial Rules 2017 Bid Security: This rule details the requirements for Bid Security (Earnest Money), which is distinct from Performance Security and is refunded upon the successful bidder furnishing the latter.
- Rule 144 of The General Financial Rules 2017 Fundamental Principles of Public Buying: This rule lays down the overarching principles of efficiency, economy, and transparency that govern all public procurement, including the use of performance security.
- Rule 172 of The General Financial Rules 2017 Advance Payment to Supplier: This rule outlines conditions for advance payments, which may sometimes be linked to the existence of adequate performance security.
Learning Aids
Mnemonics:
- P-S-V: Performance Security Validity – Helps remember the core aspects: Purpose, Security forms, and Validity.
- 3-5-60 Rule: 3-5% of contract value, 60 days beyond obligations.
Process Flowchart:
Multiple Choice Questions (MCQs)
1. According to Rule 171 of The General Financial Rules, 2017, what is the primary purpose of Performance Security?
- A) To ensure the bidder participates in the tender process.
- B) To guarantee the due performance of the contract by the successful bidder.
- C) To cover advance payments made to the supplier.
- D) To compensate for delays in project completion.
Show Answer
Correct Answer: B) To guarantee the due performance of the contract by the successful bidder.
2. What is the typical range for Performance Security as a percentage of the contract value for goods/services under Rule 171 of The General Financial Rules, 2017?
- A) 1-2%
- B) 3-5%
- C) 5-10%
- D) 10-15%
Show Answer
Correct Answer: B) 3-5%
3. How long should Performance Security remain valid according to Rule 171 of The General Financial Rules, 2017?
- A) Until the goods are delivered.
- B) Until the final payment is made.
- C) Sixty days beyond the completion of all contractual obligations, including warranty.
- D) One year from the date of contract signing.
Show Answer
Correct Answer: C) Sixty days beyond the completion of all contractual obligations, including warranty.
4. Which of the following is NOT an acceptable form of Performance Security under Rule 171 of The General Financial Rules, 2017?
- A) Account Payee Demand Draft
- B) Fixed Deposit Receipt
- C) Personal Cheque
- D) Bank Guarantee
Show Answer
Correct Answer: C) Personal Cheque
5. What happens to the Bid Security of a successful bidder upon receipt of Performance Security, as per Rule 171 of The General Financial Rules, 2017?
- A) It is forfeited.
- B) It is converted into Performance Security.
- C) It is refunded.
- D) It is held until the warranty period expires.
Show Answer
Correct Answer: C) It is refunded.
Frequently Asked Questions
Q1: What is the difference between Bid Security and Performance Security under the General Financial Rules, 2017?
A1: Bid Security (Rule 170) is submitted by bidders to ensure their participation and commitment during the tender process. Performance Security (Rule 171) is submitted by the successful bidder after contract award to guarantee the fulfillment of contractual obligations. The Bid Security is refunded once the Performance Security is furnished.
Q2: Can the percentage of Performance Security be varied from the 3-5% range?
A2: Rule 171 specifies a range of 3-5% for goods/consultancy/non-consultancy services. Any deviation from this would typically need to be explicitly stated in the bidding documents and justified based on market conditions and commercial practice for the specific type of goods or services, as the rule states the need depends on these factors.
Q3: What happens if the Performance Security expires before all warranty obligations are met?
A3: Rule 171 (ii) explicitly states that Performance Security should remain valid for sixty days beyond the date of completion of all contractual obligations, including warranty obligations. If it expires prematurely, it would be a breach of contract terms, and the procuring entity should ensure its extension or take appropriate action as per the contract.
Key Takeaways
- Performance Security is mandatory for successful bidders to ensure contract performance.
- It is typically 3-5% of the contract value for goods and services.
- The security must remain valid for 60 days beyond all contractual and warranty obligations.
- Various forms like Bank Guarantees, Fixed Deposits, or online payments are acceptable.
- Bid Security is refunded upon the submission of Performance Security.
Conclusion
Rule 171 of The General Financial Rules, 2017, establishes a robust framework for Performance Security, a cornerstone of sound financial management in government procurement. By clearly defining its purpose, amount, acceptable forms, and validity period, the rule ensures that public funds are safeguarded and that contractors are held accountable for their commitments, thereby fostering trust and efficiency in public spending.