Performance guarantee in Spanish public contracts

In short.

• The successful bidder for a contract with a Spanish public authority must lodge a performance guarantee of 5% of the final tendered price, excluding VAT (LCSP, art. 107(1)); the tender specifications may require a top-up of up to a further 5% and, in works, supply, services and certain service concessions, allow it to be provided by way of retention from the price (art. 108(2)).
• It is not a passive deposit: it answers for five closed heads (art. 110) — formalisation of the contract, penalties, proper performance, forfeiture on termination and, in works, services and supply contracts, defects arising during the guarantee period — and, if it is called, it must be reinstated within 15 days, failing which the contract may be terminated (art. 109(2)).
• It is released once the guarantee period has expired and the contract has been performed; if acceptance stalls through no fault of the contractor, it is released in any event one year after completion — six months for smaller contracts or SMEs — once the guarantee period has expired and any liabilities have been settled (art. 111(5)).

The performance guarantee under the LCSP is required before the contract is awarded: the highest-ranked bidder has ten working days to provide it (art. 150(2) of Law 9/2017 on Public Sector Contracts — Ley de Contratos del Sector Público, LCSP). Failing that, the bid is deemed withdrawn and a penalty of 3% of the base tender budget is imposed.

In other words, the amount and the instrument of the guarantee are decided when the bid is prepared, not after it is won. For companies that tender on a continuous basis, it is a matter of cash flow and of facility capacity.

What is the performance guarantee and who must provide it?

It is the guarantee that article 107(1) of the LCSP requires from the bidder submitting the best offer — as determined under article 145 — in contracts awarded by public authorities, and which is held at the disposal of the contracting authority. In Spanish it is known as the garantía definitiva, and colloquially as the fianza definitiva.

The deadline to evidence it is ten working days from the request (art. 150(2)), or seven in the simplified open procedure (art. 159(4)). Without it there is no award (art. 109(1)): the bid is deemed withdrawn, a penalty of 3% of the base tender budget, excluding VAT, is imposed, and the contracting authority moves on to the next-ranked bidder. If, once the contract has been awarded, the contractor fails to formalise it, that 3% is recovered from the performance guarantee (art. 153(4)).

When it is not required

The contracting authority may waive it, provided it justifies the waiver in the tender specifications (art. 107(1)). The Act cites supplies of consumable goods delivered before payment, social services or services for social or labour inclusion, and certain private contracts under article 25(1)(a), points 1 and 2. The waiver is not available for works contracts or works concessions.

Nor is it required in the abridged simplified open procedure (art. 159(6)(f)): works with an estimated value below €80,000 and supply and services contracts with an estimated value below €60,000, save for intellectual services, to which this procedure does not apply (art. 159(6)).

Public sector entities that are not public authorities

Where the contracting party is a public sector entity without the status of a public authority, the guarantee is optional (art. 114): the contracting body decides whether to require it, its amount — subject to the caps in articles 106(2) and 107(2) — and its release, and it need not be lodged with the General Deposit Fund (Caja General de Depósitos) (art. 114(2)).

To place this instrument among the other covers imposed by law, see guarantees required by law.

How is the performance guarantee calculated?

The general rule: 5% of the final tendered price, excluding VAT (art. 107(1)).

Illustrative example, with invented figures: a bid of €2,400,000 plus VAT requires a performance guarantee of €120,000.

The base changes in two cases:

• Provisional prices (art. 102(7)): it is calculated on the maximum price set.
• Unit prices (art. 107(3)): it is calculated on the base tender budget, excluding VAT.

Top-up guarantee

In special cases, the tender specifications may also require a top-up guarantee (garantía complementaria) of up to a further 5%, for a maximum total of 10% (art. 107(2)). The typical case is a bid that was initially presumed to be abnormally low.

Framework agreements and dynamic purchasing systems

The tender specifications may set an overall estimated guarantee, increased if the call-off contracts exceed what was anticipated, or one guarantee per call-off contract (art. 107(5)).

Adjustment following a contract modification

If a modification alters the price, the guarantee must be adjusted within 15 days of notification (art. 109(3)). A price review does not require it to be adjusted.

How it may be provided: cash, bank guarantee, surety insurance or price retention

Article 108(1) allows three forms, which may be combined: cash or government debt securities, a guarantee issued by a credit institution or a mutual guarantee society, and surety insurance — governed by article 68 of Law 50/1980 on Insurance Contracts (Ley de Contrato de Seguro) — placed with an authorised insurer. They are lodged with the General Deposit Fund or the equivalent regional or local fund, and may be evidenced electronically (art. 108(3)). This regime does not apply to private works: there, the contract decides which guarantees are required and on what terms, as we explain in performance bonds in private construction contracts.

The fourth route is retention from the price (art. 108(2)): only if the tender specifications provide for it, and only in works, supply and services contracts and in service concessions whose fees are paid by the public authority. It does not use up facility capacity, but it has a cash-flow cost: less is collected on each progress certificate until the amount is complete.

The comparison between the two main options is set out in bank guarantee vs surety insurance; how a bank guarantee works and the full range of guarantees and bonds that can be replaced by a policy are covered in their own guides.

If surety insurance is chosen, the certificate must meet formal requirements:

• An insurer authorised in the surety class, a certificate conforming to annex VI of the General Regulation implementing the former Public Administration Contracts Act (RGLCAP), and payment on first demand (Royal Decree 1098/2001, art. 57).
• The signatory's powers must be legally verified (bastanteados) (RGLCAP, art. 58).
• The substantive rules of article 112(3) LCSP: the policyholder is the contractor and the insured is the public authority; non-payment of the premium does not release the insurer, and the insurer may not raise against the authority the defences it has against the policyholder.

Issuance depends on the insurer's solvency assessment: neither acceptance nor cost is guaranteed.

Surety insurance on contracts of more than five years

On contracts lasting more than five years, a surety policy with a shorter term is accepted, but it must be renewed or extended, with evidence provided two months before it expires; otherwise it is forfeited (art. 109(4)). The 2001 Regulation (art. 57(2)) refers to more than ten years, but the later Act prevails.

Do you tender continuously and carry a number of live guarantees? Request a review of your surety facility.

Provisional guarantee (bid bond): when it is required and how it is recovered

The provisional guarantee (garantía provisional), the Spanish equivalent of a bid bond, secures the bid until the contract is concluded. It is exceptional and must be justified in the contract file (art. 106(1)), with a maximum of 3% of the base tender budget, excluding VAT (art. 106(2)). Three points to note:

• Lots: it is calculated only on the lots being bid for.
• Framework agreements and dynamic purchasing systems: a lump sum not exceeding 3% of the estimated value.
• Simplified open procedure: it does not apply (art. 159(4)(b)).

It may be provided in the same forms as the performance guarantee (art. 106(2)), but the bank guarantee or surety certificate is lodged with the contracting authority itself; only cash goes to the General Deposit Fund or its equivalent (art. 106(3)). It is returned to the other bidders once the contract has been concluded; the successful bidder may apply it to the performance guarantee or have it cancelled when the latter is provided (art. 106(4)). And if the highest-ranked bidder fails to provide the performance guarantee in time, the 3% penalty under article 150(2) is recovered first from the provisional guarantee.

What does the guarantee answer for and when is it forfeited?

Under article 110, the performance guarantee answers solely for:

1. Formalisation of the contract within the deadline.
2. Penalties imposed on the contractor.
3. Proper performance of the services or works, the costs of delay and the damage caused to the public authority by performance or non-performance, where termination is not appropriate.
4. Forfeiture ordered upon termination.
5. In works, services and supply contracts, defects in what was built, supplied or provided during the guarantee period (art. 110(e)).

It is a guarantee in favour of the public authority, not of third parties: damage to other persons is channelled through the contractor's liability towards the public authority and its liability policy.

If the contract is terminated for culpable breach, the guarantee is forfeited and the contractor must compensate any damage exceeding its amount (art. 213(3)); the termination decision must rule on the guarantee (art. 213(5)). If the public authority calls the guarantee to recover penalties without terminating the contract, the contractor must reinstate it within 15 days, failing which the contract may be terminated (art. 109(2)).

The public authority has priority over any other creditor and may pursue the shortfall through administrative enforcement proceedings (vía de apremio) (art. 113). The guarantor or insurer does not enjoy the benefit of excussion (beneficio de excusión) and is an interested party in the proceedings (art. 112). How the insurer pays and how it seeks recovery from the policyholder is explained in calling a surety bond.

Before you bid, we review the guarantee model required by the tender specifications. Let us discuss your next tender.

Release of the performance guarantee, step by step

It is released once the guarantee period has expired and the contract has been performed, or when the contract is terminated through no fault of the contractor (art. 111(1)). The guarantee period is set by the contract (art. 210(3)); for works, it may not be less than one year save in special cases, with a report from the works director fifteen days before it expires (art. 243(3)).

1. Final account and release decision. Once the final account has been approved and the guarantee period has expired, with no outstanding liabilities, the release decision must be adopted and notified within two months; if that period is exceeded for reasons attributable to the public authority, it must also pay the statutory rate of interest (art. 111(2)).
2. Partial acceptance. This gives the right to a proportional release only if the tender specifications allow it (art. 111(3)).
3. Assignment. The assignor's guarantee is not released until the assignee has provided its own (art. 111(4)).
4. Stalled acceptance. Once one year has passed since completion of the contract and the guarantee period has expired, without formal acceptance and the final account having taken place for reasons not attributable to the contractor, the guarantee is released without further delay once the liabilities under article 110 have been settled. The period is six months if the estimated value is below €1,000,000 for works or €100,000 for other contracts, or if the contractor is an SME not controlled by another company that is not itself an SME (art. 111(5)).

With surety insurance, release means cancelling the certificate, and the policy remains in force until the public authority authorises its cancellation (RGLCAP, art. 57(2)). While the file is not moving, the guarantee continues to take up facility capacity: monitoring the article 111 deadlines frees capacity for new tenders.

Guarantees in works and service concessions

In concessions, the guarantee is not 5%: the tender specifications set its amount according to the nature, size and duration of the concession (art. 107(4)). The Act provides no reference percentage, so each set of specifications must be read. In addition:

• In a works concession, no waiver is possible (art. 107(1)).
• Retention from the price is only available in service concessions whose fees are paid by the public authority (art. 108(2)).
• Given their duration, the shorter-term surety policy with renewal evidenced two months in advance commonly applies (art. 109(4)).

If your company operates in public works and concessions, our page on insurance for construction companies brings together the covers required alongside the guarantees.

The role of an independent broker

As an independent brokerage, we act on the client's mandate, not the insurer's. In public procurement guarantees, that means sizing the surety facility to the live guarantees and the tenders planned, reviewing the model required by the tender specifications before the bid is submitted, placing the certificates in the market and monitoring expiries and cancellations. Acceptance and cost always depend on each insurer's solvency assessment. Contact us to review your guarantee programme, without obligation.

Frequently asked questions

Is the performance guarantee calculated on the price including or excluding VAT? Excluding VAT: it is 5% of the final tendered price (LCSP, art. 107(1)). With unit prices, the base is the base tender budget excluding VAT; with provisional prices, the maximum price.

What happens if I do not provide the performance guarantee in time? You have ten working days, or seven in the simplified open procedure. If you do not provide it, your bid is deemed withdrawn, a penalty of 3% of the base tender budget excluding VAT is imposed — recovered first from the provisional guarantee, if there is one — and the contracting authority moves on to the next bidder (art. 150(2)).

Are there public contracts that do not require a performance guarantee? Yes: where the tender specifications waive it on reasoned grounds, except in works contracts and works concessions (art. 107(1)); in the abridged simplified open procedure, except for intellectual services (art. 159(6)(f)); and for public sector entities that are not public authorities, where it is optional (art. 114).

What happens if my surety policy expires before the contract does? This is only accepted on contracts of more than five years, and you must renew or extend it and provide evidence two months in advance; otherwise the guarantee is forfeited (art. 109(4)).

Do I have to reinstate the guarantee if a penalty is imposed? Yes, within 15 days of the guarantee being called; otherwise, there are grounds for terminating the contract (art. 109(2)).

Sources and legislation

• Law 9/2017 of 8 November on Public Sector Contracts (Ley de Contratos del Sector Público, consolidated text), articles 102(7), 106 to 114, 150(2), 153(4), 159, 210(3), 213 and 243(3).
• Royal Decree 1098/2001, General Regulation implementing the Public Administration Contracts Act (RGLCAP), articles 57 and 58 and annex VI.
• Law 50/1980 on Insurance Contracts (Ley de Contrato de Seguro), article 68 (surety insurance).

The terms of each tender — amount, accepted form, retention, guarantee period — are set by its specific administrative clauses (pliego de cláusulas administrativas particulares); this guide describes the legal framework. Regional and local implementing rules, including the equivalent deposit funds, may differ: please consult the contracting authority. The numerical example is illustrative.

This information is for guidance only and does not constitute legal or binding advice. New Brokers Correduría de Seguros, S.L., registered with the DGSFP under reference J0140.