Simplifying Bids – 2: Financial Instruments (TDF, EMD, PBG) Explained in layman’s terms

Sometime back, one of my colleagues from the marketing department was assigned a new role in Sales and she was introduced to RFXs for the first time. She came to me and asked about the complete Bid Management process.

While explaining the complete process, I tried to simplify the concepts of EMD-Earnest Money Deposit and PBG-Performance Bank Guarantee by giving the aforementioned example.

Mr. Surana has to relocate to Mumbai from a small town in Rajasthan and hence starts searching for a flat in Mumbai. He is new to flat renting procedure followed in Mumbai and hence approaches a property dealer, Mr. Swain. Swain shows Surana few good flats and Surana finalizes the best among them which belongs to Ms. Leena. Surana agrees to pay Monthly Rent of Rs. 10,000/-, SECURITY Deposit equaling to 10months rent amount i.e. 1Lac and a non-refundable BROKERAGE fee amount of Rs.8,000/-. Sooner, Swain asks to pay a TOKEN amount of Rs.10,000/- to Leena. Surana asks what is the purpose of the TOKEN amount. Swain says TOKEN amount is to secure the deal between them(two parties) BEFORE SIGNING THE AGREEMENT and the amount will not get refunded if Surana cancels the deal.

Surana follows all formalities and gets ready for signing the Rent Agreement with flat owner, Leena. Surana pays Swain Rs. 8,000/- as his BROKERAGE fee since deal gets finalized. While agreement signing, Leena asks Surana to pay an amount of Rs. 90,000/- towards SECURITY Deposit and she also informs that the TOKEN amount of Rs. 10,000/- will be added to Rs. 90,000 to make the total Security deposit to 1lac. Surana asks what is the purpose of SECURITY Deposit in the deal. She says this is to secure the deal between them DURING THE AGREEMENT PERIOD. She also informs Surana that if he does any damages to flat, the amount required for repair work will get deducted from SECURITY Deposit and if all goes well, it will get FULLY REFUNDED at the time of agreement completion which is 11months.

By now, you must have understood the concepts of BROKERAGE, TOKEN amount, and SECURITY Deposit. These are basically to cover the unforeseen risks during deal finalization and during the contract period between two contracting parties.

Similarly, in Public Procurement, the Customers usually(not mandatory) ask to deposit a non-refundable TDF-Tender Document Fee/Cost, TPF-Tender Processing Fee, EMD(=Bid Security=Bid Bond)-Earnest Money Deposit and PBG-Performance Bank Guarantee/Performance Security Deposit to secure them from any unforeseen risks. I tried to brief on these abbreviations below

TDF:

The fee paid by Seller(Bidder) to buy a Tender Document

TPF:

TPF is similar to non-refundable BROKERAGE fee received by Swain to connect Surana and Leena.

This fee is paid by the bidder towards the processing of Procurement process. TPF generally applies for e-Tendering processes and paid to the Vendor/mediator who manages the e-Tender Portal.

EMD:

This is similar to refundable TOKEN Amount initially paid by Surana to Leena

EMD covers the risks during bidding phase and applicable/valid till finalization of winning bidder.

EMD is asked to submit at the time of bid submission. This amount is refunded when bidders fairly participate in the procurement and lose the bid. EMD can be forfeited when bidders fails to stick to RFX Ts&Cs or try to mis-sell/mis-represent etc. If you win the bid, EMD can be refunded or may be adjusted in PBG. As per Ts&Cs of RFX, the winning bidder has to sign an agreement and start work as per the agreed plan. When you win the bid and do not accept to sign the agreement or start the work, the buyer has full rights to forfeit the EMD.

PBG:

This is similar to the refundable SECURITY Deposit deposited by Surana.

PBG is to cover risks during (throughout) contract execution usually valid for 6months (may vary from Buyer to Buyer) post end of the contract period. PBG is usually asked to submit within a week or 15 days post issuing Purchase Order to Seller. Buyer has full rights to deduct any amount in the form of Penalties from PBG if Seller fails to execute the agreed plan.

This is written on a lighter note to make the things simplified for budding Bids & Proposal guys, entrepreneurs, Sales & BD guys, and others who wish to understand the basic concepts. Other experts, thought leaders, and critics are most welcome to add their views. - Venu Manohar

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