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BID BONDS AND PERFORMANCE BONDS

Primary comparison of the guarantee systems used in public procurement in France, Germany, Spain, Portugal, Belgium, Bulgaria, Denmark, Netherlands,Poland, Romania, Austria and Czech Republic

The following information was obtained from a survey involving, respectively, colleagues at FNTP - FédérationNationale des Travaux Publics, HDB - Hauptverband der DeutschenBauindustrie, CNC - ConfederaciónNacional de la Construcción, Aecops - Associação de Empresas de Construção e ObrasPublicas e Serviços, Confédération Construction/ConfederatieBouw, BCC - Bulgarian Construction Chamber, Dansk Byggeri, BNL - Bouwend Nederland, ARACO - Romanian Association of Building Contractors and Svazpodnikatelůvestavebnictví v ČR (CZ). The information on Austrian systems were provided by Mr. Ghella, those on Polish systems were provided by Mr. Ghella and by FIEC.

BID BONDS

In France, publicprocurement law doesn't regulate the bid bond type of guarantee.

German legislation has no provisions regarding bid bonds.

Portuguese legislation has no provisions regarding bid bonds.

In Spain, public procurement law provides for bid bonds ("garantía provisional"). The guarantee is designed to ensure that the tender submitted is maintained until the award of the contract. The amount of the guarantee may not exceed 3% of the contract value, excluding VAT.

The guarantee is voided after the contract is awarded, when a definitive guarantee is obtained ("garantíadefinitiva"). The successful bidder of the contract can use the amount of the "garantía provisional" to obtain the "garantíadefinitiva” or it can obtain an entirely new "garantíadefinitiva”.

In the Netherlands, the use of bid bonds israre and is limited to particularly complex contracts, such as those relating to PPP [public-private partnerships].

Regarding bid bonds inPoland, contractors invited to submit tenders arerequired to pay a deposit.

In the Czech Republic, the contracting authoritymay request a bid bond (financial security) for the duration of the bid evaluation period, for 2% of the hypothetical price (or for 5% of the hypothetical price in case of electronic auction) to guarantee the maintenance of the bid.

In Austria, a bid bond (bid guarantee) of €25m is requested, regardless of the value of the contract (in the example quoted – BBT – the amount quoted was equal to 1.8% of the value of the auction).

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PERFORMANCE BONDS

InFrance, there are provisions for holdbacks ("retenue de garantie") to ensure the proper execution of works.

The holdback can be replaced, if the business so desires, by an on-demand bond or, if the contracting authority and the business agree, a joint-and-several guarantee.

This is to cover any work necessary to satisfy the clients' reservations at the end of works, as well as those to ensure a satisfactory conclusion of the works during the one-year warranty period after testing ("réception des travaux").

The amount of the guarantee, as well as that of the holdback, cannotexceed 5% of the original contract amount, also calculated including the amount of any additional clauses.

The third-party institution providing the guarantee must be authorised by theFrench banking and insurance regulatory authority [ACPR] mentioned at Article 612-1 of the French Financial and Monetary Code.

This can be a credit institution or insurance company (including those within the European Economic Area that are free to practice or have the right of establishment). They are therefore subject to European prudential requirements.

The FNTP has produced a guide on the management of guarantees in private and public procurement:

German legislation provides for financial guarantees - which are not called Performance Bonds but are described as Financial Securities– that may be required:

  • to ensure performance of the contract; in this case, the guarantee cannot exceed5% of the awarded contract value;

later, a guarantee of this kind can be required to protect the client against hidden defects, discovered after the work has been accepted; in this case, the financial guarantees may not exceed 3% of the amount invoiced.

In addition, financial guarantees provided for under German law cannot be required:

for work contracts worth less than or equal to €250,000;

  • in restricted or negotiated procedures and competitive dialogues.

Financial guarantees covering the performance of the contract and - later - the risk of hidden defects after the work has been accepted can be provided by a bank or insurance company that is:

  • officially registered and authorised to operate in the European Economic Area (EEA)
  • based in a country that adheres to the Government Procurement Agreement within the WTO framework.

The type of institution providing the guarantee can have no influence on the tender offer. In addition, the client cannot define the institution providing the guarantees.

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InSpain, whoever presents the most economically advantageous tender must provide a guarantee ("garantíadefinitiva") in favour of the contracting authorityfor 5% of the amount awarded, excluding VAT.

The guarantee may take one of the following forms:

  • Cash or debt securities;
  • Guarantee from a credit institution authorised to operate in Spain;
  • Insurance contract with an insurance institution authorised to operate in Spain.

Guarantees are covered in articles 95-104 of the "Real Decreto Legislativo 3/2011, de 14 de noviembre, por el que se aprueba el texto refundido de la Ley de Contratos del Sector Público" (thePublicContractsCode) 1 .

In Portugal,Performance Bonds can consist of a bank guarantee, a cash deposit or a guarantee provided by an insurance agency.

The type of guarantee required is indicated by the contracting authorityin the tender document appendices.

In Belgium, with certain exceptions, a guarantee (bond) of 5% is required for public contracts. However, the contracting authoritymay disregard the normal rate of 5% if the nature of the project - and, therefore, the risk - warrants it. Sometimes, the guarantee amount can be as much as 20%.

The guarantee may consist of:

  • cash;
  • government securities
  • a form of common guarantee (cautionnementcollectif);
  • a bank guarantee;

The common guarantee system (cautionnementcollectif) is interesting because the business doesn't have to lock up the entire sum, but only pay the premium required by the société de cautionnement [guarantee institution], that provides the guarantee in favour of the contracting authority.

InBulgaria, performance guarantees exist and may not exceed, in principle, 5% of the value of the contract awarded. In case of award to specialised businesses or cooperatives of disabled people, the guarantee will not exceed 2% of the contract value. (Article 111 of the Public Procurement (PP) Act, amended in February 2016, effective from April2016 – transposing the new PP Directive).

The guarantee shall be provided in one of the following forms:

  • cash deposit;
  • a bank guarantee;
  • insurance that guarantees the fulfilment of the winning bidder's obligations.

Performance bonds exist inDenmark and must be given to the contracting authoritywithin 8 working days from the conclusion of the contract.

Until the delivery of the works, the bond must be worth 15% of the value of the contract. After delivery, it must be worth 10% of the value of the contract. A year after the

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work is delivered, the bond must be reduced to 2% of the contract value, unless the contracting authorityhas not submitted a claim for damages following the discovery of defects. In that case, the value of the guarantee will be paid when it is used to remedy defects.

In the Netherlands, performance bondsare part of the standard conditions of the contracts that winning bidders must sign. The performance bond is equal to, at most, 5% of the contract.

Regardingperformance bonds in Poland, before signing the contract, the winning bidder must pay collateral for correct execution of the contract. This collateral will be a maximum of 10% of the gross price indicated in the bid.In practice, the percentage varies from 3% to 10% of the gross value of the contract.

"Contract securities" are an established practice in public procurement.

Theguarantee may consist of:

  • cash;
  • a bank guarantee;
  • an insurance guarantee;
  • promissory notes
  • government securities

Sometimes the contracting authoritieswill establish other "performance securities" such as postponed payment of the final invoice.

InRomania, performance bonds are regulated by Government Decision 395/2016, implemented by Law 98/2016 on public procurement (Article 39)

The amount of the performance bond will be decided by the client based on the

complexity of the work and will not exceed 10% of the contract value.

In the Czech Republic, a performance bond can be requested, in the form of a bank guarantee, equal to 10% of the contract value. 5% of the [contract] value is returned to the contractor upon delivery of the work if this is carried out without defects or deficiencies. The remaining 5% is given back over the following 5 years (1% per year) although a longer guarantee period can be established.

In Austria,the performance bond requested by the client is worth 5% of the contract award value (this is the amount required by point 8.7 of ÖNORM B 2118). There is a possibility of waiver. In the reported example – BBT – the contractor was required to provide, in accordance with the notice, a deposit of 2% of the contract's net value. The deposit was provided to cover costs for the failure or incorrect performance of the contract.

27th March 2017