Definition and legal significance of bid security
Die Bid security is a central element in procurement law and construction contract law, serving as a means of security, particularly in public tenders and procurement procedures. It is a financial or formal security to be provided by the bidder that demonstrates the seriousness of the bidder during the procurement process and secures the contracting authority’s potential claims for damages in case the bidder does not uphold their offer or refuses after the contract is awarded. Thus, bid security protects the contracting authority from economic disadvantages due to unserious or uncommitted bidders.
Legal basis of bid security
Procurement law regulations
Within the framework of public procurement law, bid security is regularly regulated in statutes, ordinances, and the respective tender documents. Key provisions include:
- Procurement Ordinance (VgV)
- Construction Contract Procedures (VOB/A)
- Sector Regulation (SektVO)
- Regulation on Sub-Threshold Procurement (UVgO)
These regulations define under what conditions, to what extent, and in what form a bid security may be required. As a rule, the demand for bid security is optional and may only be demanded if there is a legitimate interest in security on the part of the contracting authority.
National and European requirements
The requirement and structure of bid security must comply with the principles of equal treatment, of competition and proportionality . In the context of European-wide procurement procedures, European Union requirements must also be observed, particularly the EU Procurement Directives.
Provisions in tender documents
The specific structure of the bid security, especially the amount and form (for example, bank guarantee, insurance, cash deposit), is determined in the tender documents. The bidder must strictly comply with these requirements, or risk exclusion from the procedure.
Functions and objectives of bid security
Bid security serves several functions:
- Protection of the contracting authority against possible damages if bidders withdraw their offer before the expiry of the commitment period or refuse the contract after award.
- Increasing the seriousness of offers, by providing a financial incentive to submit only realistic offers.
- Avoidance of tactical or speculative offers, which could complicate the conduct of procurement procedures.
Forms of bid security
Bank guarantee
The most frequently used form is the absolute bank guarantee. Here, a financial institution undertakes to pay a certain amount to the contracting authority in the event of default.
Cash security
Alternatively, a cash security, i.e., depositing a specific amount in a trust account, may also be required.
Insurance guarantee
In some cases, insurance guarantees are also accepted, in which an insurance company assumes liability in the event of default.
Other possible collateral
Savings accounts or other liquid funds are less commonly accepted as bid securities, and their acceptance must be clearly regulated in the tender documents.
Legal consequences and return of bid security
Retention and realization of bid security
If the contract is awarded and the selected bidder refuses to sign the contract, the contracting authority may access the bid security and, if necessary, assert claims for damages. The same applies if the bidder withdraws their offer before the expiry of the commitment period.
Return of bid security
After completion of the procurement procedure and fulfillment of all contractual obligations, the bid security must be returned immediately and without a special request, provided there are no outstanding claims by the contracting authority. Usually, the return is made without delay to the bidder.
Determining the amount of bid security
The amount of the bid security should generally be based on the legitimate security interest of the contracting authority and must be proportionate. The relevant regulations often set maximum limits, for example, a maximum of 5 percent of the offer sum. Excessive bid securities can impair equal treatment of bidders and competition and are therefore not permitted.
Exclusion from the procurement procedure for insufficient bid security
Failure to comply with requirements for bid security may result in exclusion from the procurement procedure. This is particularly the case if the required form is not observed, the security is not provided in due time, or the required amount is not reached.
Distinction from other securities
Bid security must be distinguished from other securities, such as performance guarantees or warranty guarantees. While the bid security is specifically related to the offer or tender phase, the aforementioned guarantees secure contract performance or the warranty phase.
Significance for commercial transactions
Bid security has a significant impact on the behavior of bidders and the integrity of procurement procedures. It helps minimize risks for contracting authorities, enhance procedural security, and ensure effective competition.
Literature and further guidance
- Procurement Ordinance (VgV)
- Construction Contract Procedures (VOB/A)
- Sector Regulation (SektVO)
- Regulation on Sub-Threshold Procurement (UVgO)
- EU Procurement Directives
This article provides a comprehensive definition and overview of all relevant legal aspects regarding bid security. For use in procurement procedures, always observe the current legal requirements and the specific provisions of the individual tender.
Frequently asked questions
What legal requirements apply to securing bid security?
The legal requirements for securing bid security in Germany arise primarily from the Procurement Ordinance (VgV) and the Act against Restraints of Competition (GWB), especially § 48 VgV. Public contracting authorities may only require bid security if this is necessary to cover risks directly related to the procurement procedure. Bid securities must also be non-discriminatory, proportionate, and transparent. Securities may be provided as guarantees, sureties, or cash payments; their specific structure must be clearly set out in the tender documents. Furthermore, the bid security must be returned immediately after expiry of the commitment period, provided no contract has been awarded. Contracting authorities are legally obliged to specify the amount and terms of bid security clearly and comprehensibly, otherwise such demands are inadmissible and may lead to challenges in the procurement procedure.
What are the legal consequences of improperly provided bid security?
If bid security is not provided properly, this can result in the bidder’s mandatory exclusion from the procurement procedure (§ 57 para. 1 no. 2 VgV). “Improperly” means that either the required form (e.g. bank guarantee instead of insurance), the required amount, the timing of deposit, or other conditions expressly stated in the tender documents are not met. In such cases, the awarding body is legally bound and has no discretion with regard to exclusion. Securities already paid can be reclaimed in the event of exclusion. In the event of an unlawful exclusion, it is possible to file a review application with the public procurement tribunals.
What are the regulations regarding the amount of bid security?
The amount of bid security must be established in accordance with the principles of equal treatment and proportionality. This means it may be neither disproportionately high nor too low; typically, it ranges between 1% and 5% of the estimated contract value, although this may vary by sector. The specific amount must be finally determined in the tender documents and is legally binding. If an excessively high security is required, this may be challengeable under procurement law, as it may disadvantage or unduly burden smaller companies. In some procurement regulations, such as VOB/A, maximum limits and further details are explicitly stipulated.
When and how must bid security be legally returned or released?
The repayment or release of bid security is regulated in detail by law: According to § 49 para. 2 VgV, the security is to be released or repaid without delay after expiry of the commitment period or after the contract has been awarded or after the bidder has left the procedure. If this is not done in good time, the bidder may assert claims for damages. In the case of a guarantee, the guarantee document must be returned; for a cash security, the amount is transferred. Delays or unlawful retainment may lead to legal action, which, for public contracting authorities, can be enforced through administrative courts.
Under what legal conditions may a contracting authority retain bid security?
Bid security may only be retained if the tender documents expressly provide for this possibility and only under certain legally permissible conditions. This typically includes circumstances where a bidder improperly withdraws their offer before the expiry of the commitment period, refuses the contract, or breaches obligations arising from the procurement procedure. Retaining the security serves to cover damages incurred by the contracting authority as a result. The legal basis is the relevant provisions of VOB/A, VOL/A, and SektVO, as well as corresponding principles of case law. Unlawful retention may give rise to claims for repayment and possibly damages.
What requirements apply to the form of bid security?
By law, bid security must always be provided in the form specified by the contracting authority in the tender documents. This is often an unlimited, absolute bank guarantee payable on first demand, or an insurance guarantee. In any case, the documents must be presented in original and in due time; copies, fax, or email scans are not legally recognized. Violations of these form requirements regularly lead to the exclusion of the offer. Contracting authorities must furthermore ensure that the specified security forms are legally and economically accessible for all bidders.
What role do deadlines play in the submission and return of bid security?
Compliance with deadlines regarding the submission and return of bid security is a key legal requirement for both bidders and contracting authorities. The security must be submitted no later than the expiry of the offer deadline; otherwise exclusion from the procedure is mandatory (§ 57 para. 1 no. 2 VgV). Late returns by the contracting authority are inadmissible and may give rise to claims for damages. The security must generally be returned without delay after expiry of the commitment period or after contract award, provided there are no reasons for retention. The exact timing should be taken from and documented in the procurement protocol.
