How to Use Guarantees in Supplier Relations and What Buyers Should Watch Out For

In the context of implementing projects co-financed by the EU, the stipulation of guarantees during the bidding phase, execution of contracts with suppliers, and during the warranty period after the handover are particularly sensitive issues related to procurement rules defined by the Public Procurement Act or the Procurement Rules for non-mandatory subjects of the Public Procurement Act. The contracting authority must adhere to all stipulated conditions, including those related to guarantees, during the evaluation and assessment of bids, contract conclusion, and execution of procurement contracts.

Deviation from the stipulated conditions in favor of the selected supplier or the stipulation of disproportionate and discriminatory conditions may result in financial corrections, i.e., a reduction in the approved amount of co-financing for the project cost that is the subject of that procurement. Guarantees can be categorized by purpose and form. By purpose, we distinguish several types of guarantees: bid security, performance guarantee (or framework agreement), advance payment guarantee, and defect liability guarantee during the warranty period.

In the case of withdrawal

The primary purpose of the bid security guarantee is to ensure that the bidder does not withdraw from their bid during its validity period, meaning that after the completion of the procedure, the contracting authority can count on concluding a contract under the terms of the bid and procurement procedure. The Public Procurement Act in Article 215 stipulates that the bid security guarantee may be set at a maximum of three percent of the estimated value of the procurement subject, and the same practice regarding proportionality applies to non-mandatory subjects of the Public Procurement Act. This does not mean that the contracting authority automatically acts incorrectly if it stipulates a maximum of three percent, and during the procedure receives bids with prices lower than the estimated value, as it could not influence market movements.

However, some ambiguities exist in procurement procedures for non-mandatory subjects of the Public Procurement Act where the estimated value of the procurement does not have to be published – in these cases, the estimated value is known only to the contracting authority and the control body to which the contracting authority submitted the procurement plan. Therefore, for some time, there has been a question in professional circles about whether the three percent limit should apply to the amount of the bid itself in such cases.

However, such an interpretation in practice would not allow for equal treatment and comparability of bids, as bidders with different prices would have different amounts of guarantees and thus different costs of bid preparation. Furthermore, the contracting authority, in accordance with Article 215 of the Public Procurement Act, stipulates the value of the bid security guarantee in absolute terms and therefore cannot leave the determination of the guarantee amount to the bidders to calculate as a proportional part of the bid price.

If you do not fulfill the agreement

The performance guarantee (or framework agreement) is the most important and most commonly used instrument for securing the execution of procurement contracts. However, the mere fact that the contracting authority has stipulated it does not mean that the collection of such a guarantee is a simple process. It is necessary to carefully define in the contract what constitutes improper fulfillment of contractual obligations that may be grounds for the collection of the guarantee, i.e., clearly specify the steps that the contracting authority takes before activating such a guarantee. In this way, the contracting authority can protect itself from potential legal challenges after the collection of the guarantee that the supplier could potentially initiate by claiming unjust enrichment.

When stipulating the performance guarantee, it is also necessary to ensure that the validity period of the guarantee is set for a period longer than the deadline for fulfilling contractual obligations to leave enough time for activating (protesting) the guarantee when improper execution of the contract is established. This is referred to as a grace period, which usually lasts thirty days after the deadline for fulfilling contractual obligations. It is also advisable to stipulate in the procurement documentation and in the contract that the validity of the guarantee must be proportionally extended in the case of contract extension to ensure in advance that in such a case, the selected bidder will agree to extend the guarantee, thereby reducing risks for the contracting authority.

Advance payment and delivery deadline

The advance payment guarantee protects the contracting authority who intends to pay part of the contracted price to the supplier as an advance, in case of misuse of the advance payment, and is usually linked to the agreed delivery deadline of the procurement subject. When determining the amount of this guarantee, it is necessary to ensure that it does not exceed the value of the advance payment in any case. Such conduct could be interpreted as disproportionate and in the process of determining irregularities could potentially result in a financial correction.

Also, for the complete protection of the contracting authority, it is advisable to include in the requested amount of the guarantee all planned payments that are not related to the final delivery, e.g., to include not only the first payment after signing the contract but also the payment installment upon delivery announcement, which is also treated as an advance in case there is also an installment for the final payment upon delivery.

Elimination of defects

The defect liability guarantee during the warranty period serves the contracting authority to ensure that even after the proper handover of the procurement subject, all defects in the functionalities and quality of the received procurement subject that arise during the warranty period will be duly eliminated by the contracting authority. Some contracting authorities also leave the possibility that before collecting the guarantee, the contractor/supplier who has ignored the call is issued an invoice from a third party they engaged to eliminate the defects, or that the guarantee is activated only in the case of non-payment of such costs.

The guarantee must certainly cover the requested, i.e., offered and contracted warranty period, and any potential shortening of the validity period of the guarantee may be considered an irregularity in terms of favoring the selected bidder, who thus receives more favorable conditions than those published in the procurement procedure. Intermediary bodies in the EU funds management and control system particularly strictly penalize situations where the warranty period is scored, and the contracting authority subsequently allowed it not to be covered by the guarantee for its entire duration. Such a case is considered a substantial change to the contract and an unjustified deviation from the procurement conditions in favor of the supplier, for which the current Rules on Financial Corrections foresee a cost correction of 25% of the contract amount.

Do not confuse with warranty certificates

The defect liability guarantee during the warranty period should be distinguished from warranty certificates and warranty statements from manufacturers or distributors of goods. Such documents are not financial security instruments that can be activated in a financial institution or in enforcement proceedings. They guarantee the repair, servicing, or replacement of items that do not meet the specifications or conditions stated in the warranty statement, or the return of the paid price if that is not possible.

This is a commercial warranty defined in Article 423 of the Obligations Act that manufacturers or sellers provide in addition to legal obligations related to material defects in goods. The contracting authority can in any case request warranty certificates or warranty statements, but should not limit itself to manufacturer warranties, as in some types of goods, warranty certificates are issued by distributors.

Delays in the delivery of guarantees

In the course of implementing EU projects, a rich practice has developed in assessing the impact of deficiencies in contractual guarantees, and the Public Procurement Act itself has recognized the possibility of clarifying/completing the submitted guarantee – in accordance with Article 20, paragraph 8 of the Procurement Documentation and Offer Regulation in public procurement procedures, an unremedied deficiency is considered only the situation when no guarantee has been submitted at all.

Guarantees in the form of bank guarantees, promissory notes/blank promissory notes must in any case be received in original by the deadline for submitting bids, regardless of whether electronic submission of bids is provided. The cash deposit must be paid by the deadline for submitting bids, and proof of this is attached to the bid. Delays in bid security guarantees are unremedied deficiencies that in practice should result in the rejection of the bid.

When is it more flexible and how much

Delays in the delivery of advance payment guarantees, performance guarantees, and defect liability guarantees during the warranty period are observed somewhat more flexibly in practice by control bodies. Thus, for delays of up to eight days, financial corrections do not apply; for delays of nine to twenty days, financial corrections of five percent of the contract amount are determined, and delays longer than 20 days incur a financial correction of 10 percent.

It should be noted that the day of delivery of the guarantee to the contracting authority is counted, not the day of issuance of the guarantee indicated on the document, so the contracting authority should ensure proof of receipt, e.g., a postal stamp or delivery note, handover record, etc. Thus, certain deadlines may seem arbitrary and somewhat unfair as they do not take into account the importance of delays in relation to the duration of the contract. However, they certainly represent progress compared to the situation in the early years of using EU funds when users were left to arbitrary assessment and exposed to inconsistent practices regarding the treatment of guarantee delays.

In any case, the implementation of procurement procedures requires careful creation of non-discriminatory and practically applicable criteria, especially guarantee conditions. The phase of fulfilling contractual obligations, which is often unjustifiably neglected, also requires a high degree of attention and quality satisfaction of procurement conditions, contractual provisions, and deadlines for delivering guarantees. Specialized knowledge is needed, which users of non-repayable funds (especially entrepreneurs) often do not have secured internally. Therefore, the safest and most cost-effective option in the long term is to seek the assistance of experts to minimize the risks of financial corrections.