Highway EPC deposits cut to 3% for top-rated contractors under new rules

The Centre has revised the model concession agreement for national highway engineering, procurement and construction (EPC) projects, tying contractors' performance security to their ratings, The Economic Times reported on 20 October¹.

Contractors rated above 80% will deposit 3% of project value as security. Those rated between 70% and 80% will deposit 4%. Those below 70% will deposit 5%, according to the report¹. Until now, a flat 5% applied to all projects¹.

The change is part of a wider rewrite. It also covers accident penalties, compensation and raw-material costs. It is the first major revision to the EPC concession agreement since 2022¹.

Who pays less, who pays more

The new slabs reward contractors with strong ratings. A government official told the newspaper the intent is to give better-rated builders a financial edge. "The idea is to give financial advantage to highly rated contractors as quality of highway construction is the top priority," the official said¹. The same official said the extra retention can hurt weaker bidders: "However, additional-security retention can affect cash flow for low-rated contractors."¹

The report did not say how the rating is calculated, who computes it, when the new terms take effect, or whether existing contracts will be re-rated¹. Those details decide how much each bidder must set aside.

What else the revision changes

Four other changes appear in the revised framework¹. It adds a penal provision for contractors "for every fatal accident on the highway", and a formula-based compensation mechanism with a cap¹. It also sets higher standards for land acquisition and brings in price adjustment for key raw materials¹.

The report gave no per-accident amount and did not say whether the accident penalty is capped¹. It did not list which materials the price-adjustment clause covers, their base dates or the escalation formula¹.

The pipeline about to be tendered

The government plans to award the highest number of highway projects in EPC mode this financial year¹. NHAI has identified 26 EPC projects, 21 hybrid annuity model projects and seven build-operate-transfer projects, the report said¹. NHAI is a nodal agency of the Ministry of Road Transport and Highways. It manages a network of more than 50,000 km of national highways².

Reaction and cost backdrop

Jagannarayan Padmanabhan is senior director and global head of consulting at Crisil Intelligence. He told the newspaper the revised framework has both contractor-supportive and authority-protective features¹. He said: "Differentiated performance security and a formula for prolongation costs may improve bid financing and entitlement certainty"¹. He added that "restrictions on contractual arbitration for large disputes and limits embedded in compensation and escalation mechanisms can constrain claim recovery"¹. The report did not quote the arbitration clause itself.

Raw material costs are a live issue. Brent crude was $126.55 a barrel on 14 October, up 100.9% from a year earlier³. US producer prices for iron and steel stood at 383.3 in September, up 20.7% on a year earlier and their 52-week high⁴. A price-adjustment clause decides how much of such moves a contractor absorbs and how much the authority pays.

What to watch

Watch for the published text of the revised agreement. Check whether it applies only to new bids, which materials the price-adjustment clause covers, and how ratings are earned and audited. For suppliers, the first signal will be how rated contractors price these terms in the 26 EPC tenders.