DRDO waives 'performance security' for development contracts as an incentive for the private sector

• The Defence Research and Development Organisation (DRDO) will no longer require ‘performance security’ for any new development contracts.
• The move will further remove the red tape between the industry and the government and hopefully incentivise participation, according to the Ministry of Defence (MoD).
• However, a Performance cum Warranty Bond will still be required from successful development partners to cover DRDO’s interest during the warranty period.

India’s Defence Minister Rajnath Singh approved Defence Research and Development Organisation (DRDO) waiving the requirement of ‘performance security’ for development contracts under its helm as a move to incentivise the private sector’s participation.

The same will also be true for the Indian Navy’s Advanced Vessel Project (ATVP) to design and construct a submarine with Russia. The new submarines will be customised to Indian systems, including the Brahmos missile.

“This provision will be applicable to all RFPs (requests for procurement) issues in respect of develo contracts after the date of issue of this amendment that is 23 September 2020,” said the Ministry of Defence (MoD) in a statement.

All existing development contracts, where the RFP has already been issued, will continue to be regulated as per the provisions outlined in the contract.

What is performance security?
Performance security is one of the requirements for obtaining a Letter of Credit (LC) from the bank — an undertaking given by it on behalf of the buyer to pay the seller. It is one of the banking instruments to facilitate foreign payments, according to the DRDO’s procurement manual.

What is a development contract?
"Developmental contract is concluded for the development of an item as per given design and specifications by DRDO for producing a specified quantity by the selected development partner," outlines DRDO's manual. These contracts may subsequently lead to production contracts with unit production cost worked out based on successful completion of the contract.

Should that be the case, DRDO will then require a Performance cum Warranty Bond. In issuing this, the seller is promising performance of the contract till the warranty period. It usually pegged at 5% to 10% of the total contract value. For Indian partners, the Performance cum Warranty Bond may be accepted in the form of a bank draft, fixed deposit receipt, banker’s cheque or a bank guarantee.

For foreign bidders, it may be accepted in the form of a bank guarantee or 'stand-by' LC.

Chairman DRDO Satheesh Reddy stated that it is another important milestone to support Industry.

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