Earnest money is a monetary deposit paid by bidders to show their sincerity and good faith in a project. It aims to prevent bidders from withdrawing their bids before the validity period ends. Standard earnest money amounts are 2% of the estimated project cost for works costing up to Rs. 10 crores, and 1% of estimated cost plus Rs. 20 lakhs for higher value projects. Earnest money is refunded once the contract is awarded, or forfeited if the bidder withdraws during the validity period. The document discusses earnest money definitions, forms, amounts, refund processes, and treatments under different scenarios.

1. EARNEST MONEY
Dr K M Soni, ADG(Retd.), CPWD,
New Delhi

2. DEFINITION
• EARNEST MONEY IS THE AMOUNT PAID BY A BIDDER IN REQUIRED
FORM AS A SECURITY FOR NOT BACKING OUT FROM HIS/HER
TENDER BEFORE ITS ACCEPTANCE OR REFUSING TO EXECUTE THE
WORK AFTER IT HAS BEEN AWARDED TO HIM/HER.
• EARNEST MONEY IS A DEPOSIT MADE BY THE PROMISOR THAT
REPRESENTS HIS FAITH TO ABIDE BY HIS PROMISE.
• EARNEST MONEY IS THE DEPOSIT MADE BY THE APPLICANT TO
SHOW HIS SERIOUSNESS AND WILLING TO DEMONSTRATE AN
EARNEST OF GOOD FAITH OF COMPLETING THE TRANSACTION.
• MONEY PAID TO CONFIRM A CONTRACT.
• EARNEST MONEY IS A MONETARY GUARANTEE INTENDED TO
DISSUADE BIDDERS FROM WITHDRAWING THEIR BIDS BEFORE
THE END OF THE BID VALIDITY PERIOD BECAUSE THEY WOULD
OTHERWISE FORFEIT THE BID SECURITY AMOUNT TO THE
PROCURING ENTITY.

3. DEFINITION
• EARNEST MONEY IS A MONETARY
GUARANTEE PAID BY THE TENDERER/BIDDER
INTENDED TO SHOW HIS SERIOUSNESS AND
WILLINGNESS TO DEMONSTRATE AN
EARNEST OF GOOD FAITH OF COMPLETING
HIS PROMISE WITHIN PRESCRIBED PERIOD.

4. EARNEST MONEY
• EARNEST MONEY IS ALSO KNOWN AS BID
SECURITY OR EARNEST PAYMENT

5. AMOUNT
• GENERALLY 2% OF THE ESTIMATED COST OF
WORK
• IN LARGE PROJECTS, IT MAY EVEN BE 1% OF
THE ESTIMATED COST OR LESS
• IN LARGER PROJECTS, THERE MAY BE A CAP
OF MAXIMUM AMOUNT

6. HOW DOES IT AFFECT
• FOR SMALL WORKS, IF AMOUNT OF EARNEST MONEY IS
LOW, BIDDER’S SERIOUSNESS WILL NOT BE THERE HENCE
OBJECTIVE OF EARNEST MONEY WILL BE LOST. HENCE,
FOR SMALLER WORKS, RATE OF EARNEST MONEY IS
HIGHER
• FOR LARGE WORKS, AMOUNT OF EARNEST MONEY GETS
BLOCKED FOR LONGER PERIOD AND THE CONTRACTOR
ULTIMATELY LOADS IT IN THE CONTRACT HENCE IT IS NOT
ADVISABLE TO BLOCK THE FINANCIAL RESOURCES HENCE
SMALLER RATE IS PRESCRIBED IN CASE OF LARGE WORKS
• CPWD SPECIFIES 2% EARNEST MONEY FOR THE WORKS
COSTING RS 10 CRORES AND 20 LAKHS + 1% OF
ESTIMATED COST FOR WORKS COSTING ABOVE 10 CRORES

7. FORMS OF EARNEST MONEY
• CASH
• BANK DRAFT/BANKER’S CHEQUE
• CHEQUE
• DEPOSIT AT CALL RECEIPT
• TERM DEPOSIT/FIXED DEPOSIT
• BANK GUARANTEE

8. FORMS OF EARNEST MONEY
• EARNEST MONEY HAS TO BE IN THE NAME OF
AUTHORITY PRESCRIBED BY TENDER INVITING
AUTHORITY SUCH AS EMPLOYER, ENGINEER IN
CHARGE
• ALL INSTRUMENTS INCLUDING BANK
GUARANTEE MUST BE VALID, ENFORCEABLE,
AND OF REQUIRED AMOUNT HAVING VALIDITY
TILL REQUIRED PERIOD
• THE INSTRUMENTS SHOULD BE GOT VERIFIED
FROM THE CONCERNED BANK

9. REFUND OF EARNEST MONEY
• SHOULD BE MADE AS EARLY AS POSSIBLE
• AS IN GOVERNMENT, ONLY LOWEST BID CAN
BE ACCEPTED, EARNEST MONEY OF BIDDERS
OTHER THAN THE LOWEST BIDDER SHOULD
BE REFUNDED ON THE SAME DAY WHEN BIDS
ARE OPENED. BLOCKADE OF MONEY IS NOT
IN THE INTEREST OF WORK OR ECONOMY.

10. REFUND/ADJUSTMENT OF EM
• EARNEST MONEY IS ONLY FOR EARNESTNESS
OF TENDER HENCE TO BE REFUNDED ONCE
CONTRACT IS FORMED
• FEW ORGANISATIONS REFUND IT ON
GETTING PERFORMANCE GUARANTEE
• FEW ORGANISATIONS GET IT ADJUSTED
AGAINST SECURITY DEPOSIT OR
PERFORMANCE GUARANTEE i.e. AGAINST
OTHER SECURITIES

11. EARNEST MONEY NOT PART OF CONTRACT
• PLEASE REMEMBER, EARNEST MONEY IS NOT
PART OF CONTRACT HENCE NOT PART OF
CONDITIONS OF CONTRACT
• ONCE CONTRACT IS FORMED AND
AGREEMENT COMES INTO FORCE, PURPOSE
OF EARNEST MONEY GETS COMPLETED

12. TREATMENT OF EM UNDER CERTAIN
CONDITIONS
1. IF A BIDDER WITHDRAWS OR MODIFIES THE
BID BEFORE ACCEPTANCE BUT WITHIN
VALIDITY PERIOD: LIABLE FOR FORFEITURE OF
50% EM PROVIDED SUCH CONDITION
AVAILABLE IN BID DOCUMENTS
2. IF A BIDDER WITHDRAWS OR MODIFIES THE
BID AFTER ACCEPTANCE OF HIS BID BUT
WITHIN VALIDITY PERIOD: LIABLE FOR
FORFEITURE OF 100% EM PROVIDED SUCH
CONDITION AVAILABLE IN BID DOCUMENTS

13. ACCEPTANCE OF BID/TENDER
• ACCEPTANCE OF BID/TENDER MEANS WHEN
THE EMPLOYER/TENDER INVITING
AUTHORITY/ENGINEER IN CHARGE MAKES
WRITTEN COMMUNICATION OF ACCEPTANCE
TO THE BIDDER AND i.e. PUTS INTO THE
POST.

14. TREATMENT OF EM
• BIDDER WITHDRAWS THE BID BEFORE LETTER OF
ACCEPTANCE IS RECEIVED BY HIM AND ACCEPTANCE IS
WITHIN VAILIDITY PERIOD : FORFEITURE OF 100% EM
• BIDDER WITHDRAWS THE BID AFTER BID VALIDITY PERIOD
HAS BEEN EXTENDED: CASES WILL BE DEALT AS
DISCUSSED EARLIER CONSIDERING REVISED VALIDITY
PERIOD AS VALIDITY PERIOD MENTIONED IN EARLIER
EXAMPLES
• BIDDER DOES NOT EXTEND VALIDITY PERIOD BUT HIS BID
IS ACCEPTED AFTER BID VALIDITY PERIOD IS OVER:
ACCEPTING AUTHORITY HAS NO RIGHT TO FORFEIT
EARNEST MONEY AS BID DOES NOT REMAIN VALID AFTER
BID VALIDITY PERIOD IS OVER

15. TREATMENT OF EM
• BIDDER WITHDRAWS THE BID BEFORE LETTER OF
ACCEPTANCE IS RECEIVED BY HIM AND ACCEPTANCE IS
WITHIN VAILIDITY PERIOD : FORFEITURE OF 100% EM
• BIDDER WITHDRAWS THE BID AFTER BID VALIDITY PERIOD
HAS BEEN EXTENDED: CASES WILL BE DEALT AS
DISCUSSED EARLIER CONSIDERING REVISED VALIDITY
PERIOD AS VALIDITY PERIOD MENTIONED IN EARLIER
EXAMPLES
• BIDDER DOES NOT EXTEND VALIDITY PERIOD BUT HIS BID
IS ACCEPTED AFTER BID VALIDITY PERIOD IS OVER:
ACCEPTING AUTHORITY HAS NO RIGHT TO FORFEIT
EARNEST MONEY AS BID DOES NOT REMAIN VALID AFTER
BID VALIDITY PERIOD IS OVER

16. Thanks for attending
Dr K M Soni, ADG (Retd.), CPWD, New Delhi
Also available on Youtube: KRISHNA MURARI Soni at
https://www.youtube.com/channel/UC_pPYxk0jI1ayqA5rO6fBOw