Highway EPC rules cut security deposits for top-rated builders

The Centre has revised national highway engineering, procurement and construction (EPC) contract rules to let higher-rated contractors furnish lower performance-security deposits. The Economic Times reported on October 20 that the revised model concession agreement replaces the uniform 5% requirement with three rating-linked slabs, alongside new penalties for fatal highway accidents.

Contractors rated above 80% will have to provide security equal to 3% of project value. Those rated between 70% and 80% will face a 4% requirement, while contractors below 70% will continue to furnish 5%.

An unnamed government official cited in the report said the financial incentive was intended to reward highly rated contractors and prioritise construction quality. The last major revision to the EPC agreement was in 2022.

Lower deposits paired with tighter safeguards

The changes go beyond performance security. The revised framework introduces a contractor penalty provision for every fatal accident on a highway, a formula-based compensation mechanism subject to a cap, higher land-acquisition standards and price adjustments for key construction materials.

The report does not specify the accident-penalty amount or the conditions used to determine contractor liability. It also does not detail the compensation cap or the revised land-acquisition requirements.

The package is intended to make EPC contracts more attractive and address existing contractual difficulties as more bids are invited this year and next. However, additional-security retention could weigh on cash flow for lower-rated contractors.

Financing benefits, but limits on claims

Jagannarayan Padmanabhan, senior director and global head of consulting at Crisil Intelligence, described the revised framework as combining support for contractors with protections for the contracting authority.

In his assessment, differentiated security requirements and a formula for prolongation costs could improve bid financing and make compensation entitlements more predictable. He also cautioned that restrictions on contractual arbitration for large disputes, together with limits in compensation and price-escalation mechanisms, could constrain contractors' ability to recover claims.

EPC leads the identified award pipeline

The National Highways Authority of India has identified 26 projects for award through EPC, compared with 21 through the hybrid annuity model and seven through build-operate-transfer, according to the report.

EPC therefore accounts for the largest number of projects among the three identified categories for the current financial year. These are projects identified for award, not completed awards or delivered highways.