Defence contracts: how startups win L1 bids, iDEX and Make-II

L1 means the first-lowest bid. Government buyers rank bidders by price after checking that each one meets the technical and commercial conditions. The lowest compliant price is L1, the next is L2, and so on. In a plain price-based tender, L1 is the bidder the buyer negotiates with first.

Being L1 is not the same as winning. Reports on defence buying describe a sequence in which technical and staff evaluation come first, then the commercial offers are opened, and a negotiating committee talks price with the L1 bidder. The contract is signed only after those steps and the approvals that follow.

A live case is AstraYAN, a deeptech startup that said it emerged as L1 for work on propulsion integration on corvettes being built by the shipbuilder GRSE, with price talks still ahead.

Defence buying in India follows the Defence Acquisition Procedure 2020 (DAP 2020), issued by the Ministry of Defence, which sets out how the forces acquire equipment and how industry takes part. It sits alongside the General Financial Rules 2017, which govern all government purchases, and the Public Procurement (Preference to Make in India) Order 2017, which gives preference to local suppliers.

Buyers include the Army, Navy and Air Force, ordnance and defence public sector companies, and shipyards such as GRSE. A startup may sell directly to a service or, as in the corvette case, as a supplier to a shipyard that holds the main contract. The DAP has been amended since 2020 and further revisions have been discussed, so a bidder should read the current version.

iDEX stands for Innovations for Defence Excellence. It is a Ministry of Defence initiative run through the Defence Innovation Organisation to bring startups, small firms and innovators into defence supply. Startups answer problem statements posted by the forces and defence companies, and selected ones get grant support to build prototypes.

DAP 2020 recognises projects of startups and small firms with low capital needs and high innovation under the iDEX category. The reported gain for a startup is a route from a prototype to an order without having to win a large, conventional tender first. Sources also mention that the Defence Acquisition Council has approved buying items from iDEX startups, which signals that orders can follow prototypes.

The Make procedure under DAP lets Indian industry develop equipment. Make-I is government-funded. Make-II is industry-funded: the firm bears the design and development cost, and the buyer commits to considering the product once it passes trials. The Ministry's description sets separate eligibility criteria for startups, other industry and small firms.

Startups get relaxations in this route, such as lighter eligibility and less paperwork, and proposals can come from industry on its own initiative rather than only in reply to a tender. The risk is that the startup spends its own money before any order is certain. A bidder should read the current Make procedure for trial and order terms.

Government tenders reward preparation. Typical documents and steps are listed below, though each tender sets its own.

• Registration on the government e-marketplace (GeM) or the relevant tender portal, plus company and tax documents.
• Proof of turnover, experience and technical capability, where startups are often given relaxations by the buyer.
• A technical offer that meets each stated requirement, since a bid that misses one can be rejected before price is opened.
• A sealed price offer, opened only for the technically accepted bidders.
• A bid security or earnest money deposit, which some tenders waive for startups.
• Field trials, factory checks or a demonstration, depending on the item.

L1 selection protects public money, but defence is about reliability as well as cost. That is why technical evaluation comes before price opens, and why trials come before bulk orders. A bidder who cuts price below cost to become L1 can face delivery risk and penalties.

Reports on later DAP changes say that in some large programmes the order may be split among technically compliant bidders who agree to match the lowest bid. Such rules apply to specific programmes, so one should not assume them for every tender.

Timelines are long. The government has talked of cutting the period from approval of a need to contract signing to about 22 weeks from around two years, but real cases vary and price negotiation on a complex system can take months.

Payment in defence contracts usually follows milestones such as delivery, acceptance after inspection and, for some items, a warranty period. A startup with a small balance sheet has to plan its cash carefully, since the gap between spending on parts and receiving payment can be long. Some buyers offer advance or stage payments against a bank guarantee, which the startup must be able to arrange.

Other risks include changes in specifications, repeated trials, delays in approvals and the difficulty of selling a product to only one buyer. Intellectual property terms matter too: a startup should read who owns the design and whether the buyer can ask other firms to build it. Many founders reduce these risks by teaming up with an established prime contractor, as an integration or component supplier.

Several details separate a signed order from a good first step. Is the company L1 or has it signed a contract? Is it supplying to the forces or to a shipyard? Has price negotiation finished? Is the order for a prototype, a trial lot or full production? What approvals remain?

Defence firms also face security conditions that ordinary startups do not. Staff may need clearance, facilities may be inspected and some work cannot be discussed in public, so a company may say little even after a win. Silence in the press is not a sign of trouble in this sector, and a lack of detail on price or timing is common until the contract is signed.

Being named L1 is a strong early sign, but the contract value and timing can still change. Treat reported order sizes as estimates until a signed contract or a formal announcement. This guide is general information, not legal or tender advice, so a company preparing a bid should check with a procurement professional.