NPM 025-2005

Requesting Entity: Cluster IV-Visayas Local Government Sector - Commission on Audit

Issues Concern: Submission of Affidavit of Commitment in lieu of Warranty



1. How can the procuring entity require their contractors to put up a surety bond to cover the 15-year warranty period if no insurance company issues a surety bond for said duration?

The difficulty in searching for an insurance company willing to issue a surety bond to cover the warranty period provided for under the law is recognized. It is in this light that we suggest, for practical reasons that a warranty security be posted in full for the first year and renewable every year thereafter, subject to depreciation after the first year on a straight line basis. Thus, a project with a fifteen-year required warranty security will have a full amount of the warranty for its first year; 14/15 of the full amount for the second year; 13/15 of the full amount for the third year; 12/15 for the fourth year; and so on. Following this formula, a permanent structure amounting to P100 million, with a warranty security in the form of a bank guarantee will amount to P10 million for the first year; P9,333,333.00 for the second year; P8,666,666.00 for the third year; P8 million for the fourth year; and so on.

In the event, therefore, that no insurance company or bank issues bonds or bank guarantees, contractors are not left without recourse since other forms of warranty security are acceptable, such as cash deposit, cash bond or letter of credit. Moreover, contractors are not precluded from posting a warranty security in any or a combination of the forms provided in the schedule provided under Section 62.2.

2. Would an affidavit of commitment for the fifteen (15) year warranty period issued by the contractor be acceptable in addition to the surety bond of one year?

With reference however to the affidavit of commitment issued by the bidder, it is quite apparent that the evil sought to be avoided under the law is not cured by the mere issuance of the aforecited document. Although the affidavit issued by the contractor contains a provision that the contractor shall be held responsible for structural defects and/or failure of the completed project during the effectivity of the warranty period, this alone will not suffice nor will an affidavit of commitment for the fifteen (15) year warranty period issued by the contractor in addition to the surety bond for a period of only one year be acceptable, in lieu of the stringent requirements provided for under the law.

The warranty security is for the protection of the interest of the government. The undertaking of the security is primarily to identify or compensate the government for any damage or loss due to faulty or defective completion of projects, in the case of infrastructure. The issuance of such requirement is sought so that the government may be assured of compliance by the contractor of contractual terms and in consequence is enabled to seek redress or remedy. To this purpose, an affidavit of commitment is of no moment. It is not sufficient compliance of the requirement.