Guarantees in public bidding
Types of Warranties
1. Provisional guarantee
2. Definitive guarantee
2.1 Supplemental warranty
3. Return of Warranty
4. Payment guarantees
01
Guarantees in public bidding
In Public Procurement, guarantees are regulated and applied with the main objective that the Administration ensures that the entrepreneurs/awardees, either in the bidding phase or in the Award, comply with the requirements and the offer.
That is to say, the guarantees insure the Administration against the risk that the successful bidders fail to comply with any of the obligations they assume when submitting their bid in a public bidding process.
Guarantees and their specifications are regulated in Articles 106 to 114 of the Law on Public Sector Contracts (LCSP) – Law 9/2017, of November 8, on Public Sector Contracts, transposing into Spanish law the Directives of the European Parliament and of the Council 2014/23/EU and 2014/24/EU, of February 26, 2014.
02
Types of guarantees
Depending on the time at which such payment guarantees are required, we basically distinguish between two types:
- Provisional guarantee: In this first case the entrepreneur is still a bidder, i.e. this guarantee is required as payment while the bidding process itself is being held.
- Definitive guarantee: In this case the contract has already been executed, so the constitution of this guarantee is carried out to ensure that the execution of the contract is made in accordance with the commitments acquired.
Both guarantees must be presented following the guidelines and options established in the first point of Article 108 (LCSP), which establishes that they may be provided:
- Cash or securities
- Through aval
- By insurance and surety contract
Let’s take a closer look at each type of warranty in more detail.
03
Provisional guarantee
Established for bidders to respond from the maintenance of their bids until the award and, if applicable, formalization of the contract.
The Provisional Guarantee is regulated in Article 106 (LCSP). Requirement and regime of the provisional guarantee, which in its second point adds:
In those cases in which the contracting body has agreed to require a provisional guarantee, the specific administrative clauses shall determine the amount thereof, which may not exceed 3 percent of the base bidding budget of the contract, excluding value added tax, and the system for its return.
Thus, we find ourselves with a limitation of its amount to a maximum of 3% of the base bidding budget of the contract and in the event that there are lots, this will be set according to the amount of the lots for which the bidder submits a bid.
How is the provisional guarantee deposited in a public bidding process?
- At the Caja General de Depósitos or at its branches located at the Economy and Finance Delegations, or at the equivalent public institution of the Autonomous Communities or local contracting Entities before which they are to take effect in the case of cash guarantees.
- Before the contracting authority, in the case of certificates of immobilization of book-entry securities, guarantees or surety insurance certificates.
As a general rule, a provisional guarantee shall not be required in the contracting procedure, except when, exceptionally, the contracting body, for reasons of public interest, deems it necessary and justifies it in the file.
In cases where a Provisional Guarantee is required, bidders must accredit its correct constitution at the same time they submit their bid for the tender, in accordance with the terms and conditions established in the Bidding Documents. It may also be constituted by electronic means.
04
Definitive guarantee
Established to the successful bidders (bidders who have already “won” the bidding process), to ensure the correct execution of the service. The term of this guarantee must coincide with the effective term of execution of the contract.
The successful bidder is responsible with this definitive guarantee for the fulfillment of the commitments offered, as well as for the observance of all the contractual obligations derived from the Contract Specifications and from the formalization of the contract.
The definitive guarantee is regulated in Article 107 (LCSP), which in its first point defines:
“…the bidders submitting the best offers in accordance with the provisions of Article 145 shall provide the contracting body with a guarantee of 5% of the final price offered by them, excluding Value Added Tax”.
We can see how, unlike the 3% established for the Provisional Guarantee, in the case of the Definitive Guarantee, the limit of this amount increases to 5%.
The definitive guarantee is required in the vast majority of contracts, except in those that specifically state the exemption, being adequately justified in the particular administrative clauses.
05
Supplementary guarantees
Exceptionally, in special cases, the contracting body may establish in the particular administrative clauses that, in addition to the guarantee referred to in the previous section, an additional guarantee of up to 5% of the final price offered by the bidder who submitted the best offer in accordance with the provisions of Article 145, excluding Value Added Tax, may be provided, and the total guarantee may reach 10% of the aforementioned price (Article 107. Point 2 of the LCSP).
In addition to the terms already mentioned with respect to presenting the definitive guarantee in cash or securities, guarantee or insurance and surety contract, the definitive guarantee, if so established in the Particular Administrative Conditions Specifications (PCAP), may be constituted by means of a withholding in the price in the form and conditions of the withholding established in said PCAP.
Finally, the accreditation of the constitution of the definitive Guarantee shall be made within ten working days, counting from the day following that in which the request was received, to present the supporting documentation and accreditation of compliance with the previous requirements (solvency, capacity to act, legal personality), in order to proceed with the formalization of the contract.
06
Return of guarantees
For the return of the guarantees we will also differentiate between two types of Guarantees as defined in the previous paragraphs:
- Provisional guarantee: If any, and taking into account that it is constituted solely to ensure that the bidder maintains the conditions offered until its definitive award, it will be automatically extinguished and returned to the bidders immediately after the contract is drawn up. In any case, the provisional guarantee will be returned to the bidder selected as the successful bidder when the definitive guarantee has been constituted, being able to apply the amount of the provisional guarantee to the definitive guarantee or proceed to a new constitution of the latter.
- Definitive guarantee: In the case of the definitive guarantee and as provided in Article 111 (LCSP), this will not be returned or canceled until the expiration of the guarantee period and satisfactory performance of the contract in question, or until the termination of the contract is declared without fault of the contractor. Point 4 of this same Article 111 establishes a maximum period of 1 year, once the term of said definitive guarantee has expired, for it to be returned or cancelled if there are no liabilities or penalties to be settled.
07
Payment guarantees
Just as the procuring entity has a guarantee to ensure the performance of the contract by the winning bidder, the latter also has tools to guarantee payment for its services.
As we know, the winner of a bidding process signs a contract with the Administration, in which the obligations of the parties are stipulated; the obligation of the company is to execute the works (works, services or supplies) and the counterpart is the payment for such works, which is assumed by the Administration in the manner and conditions established in the contract. Therefore, the payment guarantee available to the successful bidder is the contract itself, which in its articles will detail how and when payment is to be made. In the event of any non-payment by the Administration, which is a very uncommon situation, it is possible for the company to file a contentious-administrative appeal.
The Public Sector Contracts Law obliges the Administration to request guarantees, and bidders to present them. This is definitely an efficient system that helps to meet the deadlines for the formalization and execution of contracts, and above all tries to ensure the correct fulfillment of the contract and the commitments assumed.
This article has been written together with our partners of licitaciones.es , leaders in public bid searches.
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