The Centre has introduced a rating-linked performance security system for national highway engineering, procurement and construction (EPC) contracts, lowering deposits for higher-rated contractors while retaining stricter financial requirements for weaker performers. The revised framework also imposes penalties for fatal accidents and changes how land acquisition, compensation and raw-material price adjustments are handled.
Under the new model concession agreement, contractors rated above 80% will have to furnish performance security equal to 3% of the project value. Contractors with ratings between 70% and 80% will provide 4%, while those rated below 70% will continue to face a 5% requirement. Until now, a standard 5% performance security applied to all EPC projects.
The change is intended to create a financial incentive for contractors with stronger performance records as the government expands national highway construction. A government official cited by Economic Times said quality of highway construction was the priority behind the differentiated security structure. The lower deposit requirement could reduce the amount of capital locked into project guarantees for highly rated contractors, while additional security requirements may increase cash-flow pressure on lower-rated firms.
The revised framework also introduces a penal provision for contractors for every fatal accident occurring on a highway project. It includes a formula-based compensation mechanism with a cap, higher standards for land acquisition and a mechanism for adjusting prices of key raw materials. These provisions are aimed at addressing concerns that have affected the attractiveness and financial viability of EPC contracts.
The land acquisition and compensation changes are significant because delays in securing project land can disrupt construction schedules, increase costs and complicate contractual claims. The new formula-based approach is intended to provide greater certainty over prolongation-related costs, although the report does not specify the compensation formula or its cap.
The last major revision to the EPC concession agreement took place in 2022. The latest changes come after a two-year slowdown in national highway project awards and as the Centre seeks to accelerate new awards in the current financial year and the next. The National Highways Authority of India has identified 26 projects under the EPC model, 21 under the hybrid annuity model and seven under the build-operate-transfer model for award.
Jagannarayan Padmanabhan, senior director and global head of consulting at Crisil Intelligence, described the revised framework as containing both contractor-supportive and authority-protective provisions. He said differentiated performance security and a formula for prolongation costs could improve bid financing and certainty over contractual entitlements. At the same time, he noted that restrictions on contractual arbitration for large disputes and limits in compensation and escalation mechanisms could constrain contractors’ ability to recover claims.
The framework therefore changes more than the upfront financial burden on road builders. It links contractor assessment, project safety, public compensation and cost escalation within the contract structure, while leaving the implementation of the new rating and penalty mechanisms central to its effectiveness. The immediate operational milestone will be the award of the identified EPC, hybrid annuity and build-operate-transfer projects under the revised provisions.
