An earnest money deposit (EMD) is a payment made by a buyer to a seller, or by a bidder to a client, to demonstrate commitment and seriousness in a transaction. In construction, an EMD is typically a sum of money that a bidder or contractor puts down as a guarantee that it will fulfil its obligations under a tender process or contract.
The purpose of an EMD is to protect the interests of the seller or client by showing that the bidder or contractor is financially committed and has the resources to complete the project. If the bidder or contractor fails to fulfil its obligations, for example by withdrawing its tender or refusing to enter into the contract once its tender is accepted, the seller or client may be entitled to keep the EMD as compensation for the losses it incurs.
EMDs are usually set as a percentage of the estimated contract value and are paid either with the tender or when the contract is signed, depending on the rules of the process. Deposits from unsuccessful bidders are normally returned once the contract has been awarded. The exact amount of the EMD varies with the size and complexity of the project and the requirements of the tender or contract.
EMDs are common in public procurement in some countries but are rarely used on UK construction projects, where security is more usually provided through performance bonds, parent company guarantees or retention.
