Aggressive underbidding has emerged as one of the biggest risks to India's highway construction programme. While intense competition has helped lower project costs on paper, contractors quoting steep discounts have often struggled to execute projects, leading to delays, cost overruns, contract disputes and arbitration.
To address the problem, the Union road transport and highways ministry has proposed significantly tougher financial safeguards for contractors submitting abnormally low bids.
The move aims to improve bidding discipline without reducing competition and ensure that only financially capable firms take up large public infrastructure projects.
Mint explains.
What has the highway ministry proposed?
The ministry of road transport and highways (MoRTH) has proposed a stricter additional performance security (APS) framework for contractors quoting exceptionally low prices in highway tenders.
Under the draft framework, bidders quoting more than 30% below the authority's estimated project cost will have to furnish a substantially higher performance guarantee before the contract is awarded.
Why is the government tightening bidding norms now?
The proposal made last month follows a review by the ministry, which found that abnormally low bids have increasingly become a major cause of project execution problems.
Many contractors have won highway contracts by offering steep discounts to the estimated project cost but later faced financial stress because of rising construction costs, liquidity constraints and inadequate pricing assumptions. This has often resulted in requests for contract modifications, extensions of timelines, arbitration and, in some cases, stalled projects.
The government believes that while aggressive bidding may initially appear to reduce project costs, it ultimately delays execution and increases risks for both contractors and the public authority.
The latest proposal builds on the ministry's earlier revision of the additional performance security framework in April 2025 but goes much further in discouraging speculative bidding.
How will the new performance security framework work?
Under the existing system, contractors already have to furnish additional performance security if their bids fall substantially below the estimated project cost.
Currently, bids more than 10% below the estimated cost attract additional security of 0.1% for every percentage point below 10%, while bids more than 20% below the estimate require an additional 0.2% security for every percentage point below 20%.
The proposed framework introduces a much steeper requirement once the bid discount crosses 30%.
Contractors will have to provide additional performance security of 0.5% for every percentage point beyond the 30% discount, over and above the standard performance guarantee of 3% of the bid price.
According to ICRA, the financial impact will be significant. A contractor quoting 40% below the authority's estimate currently has to furnish total performance security of around 8%, but under the proposed rules this will increase to 11%. For an extremely aggressive 60% discounted bid, the total performance security requirement will rise to 21%, compared with only 12% under the existing norms.
Why has aggressive bidding become such a concern in highway projects?
Competition for highway contracts has intensified even as the pace of project awards has moderated.
ICRA estimates that about 71% of NHAI and MoRTH EPC projects awarded over the past three years were awarded at discounts exceeding 20%.
The trend has also spread to HAM projects, where average bid discounts increased to 16% in 2024-25 and further to 21% during the first 10 months of 2025-26.
The ratings agency says the median bid discount in central government road projects has exceeded 30% over the past two years, suggesting aggressive pricing has become the norm rather than the exception.
What does this mean for contractors?
The proposal will affect contractors differently depending on their financial strength.
The additional performance security will remain locked for a substantial period and will be released only in stages linked to project performance.
Twenty-five percent will be released after the Commercial Operation Date (COD), provided the highway is completed on schedule. Another 25% will be released a year later if pavement quality and riding standards meet contractual benchmarks. The remaining 50% will be released only after the successful completion of the defect liability period.
The ministry has also proposed penalties if independent inspections find pavement quality below prescribed standards.
While the new framework is expected to improve execution discipline, it will also increase working capital requirements and bank guarantee costs, particularly for smaller contractors. Larger, better-capitalized companies are expected to adapt more easily.
Will the proposal reduce competition or improve project execution?
Industry experts believe the proposal is aimed at improving project quality rather than discouraging competition.
Kushal Kumar Singh, partner at Deloitte India, says similar provisions already exist in some HAM contracts and extending them across contracting formats should bring greater discipline and rationality to highway bidding. He believes the move will also encourage lenders and credit rating agencies to scrutinise project viability and contractor risk more closely.
ICRA's Suprio Banerjee says the proposal should discourage irrational pricing and reduce execution gaps caused by financially stretched contractors. However, he cautions that higher bank guarantee requirements could initially increase financing costs for smaller companies before eventually encouraging participation by stronger and better-capitalised players.
Sanjay Kumar Sinha, founder and managing director of Chaitanya Projects Consultancy Pvt. Ltd., says excessively low bids have frequently resulted in financial stress, delays, contractual disputes and compromised project quality. Requiring higher performance guarantees, he argues, strikes a balance between preserving competition and ensuring projects are awarded to contractors with the financial capacity to complete them successfully.
Overall, the proposal reflects a broader shift in India's highway contracting strategy—from awarding projects to the lowest bidder at any cost to prioritising financially sustainable bids that improve execution quality and timely completion.