Pursuant to the basic principle that no government funds may be disbursed except in pursuance of an appropriation made by law, ordinance or resolution, no government contracts may be entered into without a covering appropriation for the purpose. Accordingly, government contracts need to be supported with certification of proper officials as to availability of funds.

Contracts entered into without the necessary funds are considered null and void.

Applicable Laws, Rules and Regulations

Section 85, PD 1445 - Appropriation to Support Contract

(1) No contract involving the expenditure of public funds shall be entered into unless there is an appropriation therefor, the unexpended balance of which, free of other obligations, is sufficient to cover the proposed expenditure

(2) Notwithstanding this provision, contracts for the procurement of supplies and materials to be carried in stock may be entered into under regulations of the Commission provided that when issued, the supplies and materials shall be charged to the proper appropriation account.

Section 86, PD 1445 - Appropriation to Cover Proposed Contract

Except in the case of a contract for personal service, for supplies for current consumption or to be carried in stock not exceeding the estimated consumption for three months, or banking transactions of government-owned or controlled banks, no contract involving the expenditure of public funds by any government agency shall be entered into or authorized unless the proper accounting official of the agency concerned shall have certified to the officer entering into the obligation that funds have been duly appropriated for the purpose and the amount necessary to cover the proposed contract for the current fiscal year is available for expenditure on account thereof, subject to verification by the auditor concerned. The certificate, signed by the proper accounting official and the auditor who verified it, shall be attached to and become an integral part of the proposed contract, and the sum so certified shall not thereafter be available for expenditure for any other purpose until the obligation of the government agency concerned under the contract is fully extinguished.

Section 40, Book VI, RAC - Liability Under Void/Illegal Contract

No funds shall be disbursed, and no expenditures or obligations chargeable against any authorized allotment shall be incurred or authorized in any Department, Office or agency without first securing the certification of its Chief Accountant or head of accounting unit as to the availability of funds and the allotment to which the expenditures or obligation may be properly charged.

No obligation shall be certified to accounts payable unless the obligation is founded on a valid claim that is properly supported by sufficient evidence and unless there is proper authority for its incurrence. Any certification for a non-existent or fictitious obligation and/or creditor shall be considered void.

Section 87, PD 1445 - Liability under Void Contract

Void contract and liability of officer - Any contract entered into contrary to the requirements of the two immediately preceding sections shall be void, and the officer or officers entering into the contract shall be liable to the government or other contracting party for any consequent damage to the same extent as if the transaction had been wholly between private parties.

Section 41, Book VI, RAC - Prohibition Against/Liability For The Incurrence Of Overdraft

Heads of Departments, bureaus, offices and agencies shall not incur nor authorize the incurrence of expenditures or obligations in excess of allotments released by the Secretary for their respective departments, offices and agencies. Parties responsible for the incurrence of overdrafts shall be held personally liable therefor.

Section 336, RA 7160 - Use of Appropriated Funds and Savings in Local Governments

Funds shall be available exclusively for the specific purpose for which they have been appropriated. No ordinance shall be passed authorizing any transfer of appropriations from one item to another. However, the local chief executive or the presiding officer of the sanggunian concerned may, by ordinance, be authorized to augment any item in the approved annual budget for their respective offices from savings in other items within the same expense class of their respective appropriations.

Section 344, RA 7160 - Certification on, and Approval of, Vouchers in Local Governments

No money shall be disbursed unless the local budget officer certifies to the existence of appropriation that has been legally made for the purpose, the local accountant has obligated said appropriation, and the local treasurer certifies to the availability of funds for the purpose.

Section 360, RA 7160 - Certification by the Local Budget Officer, Accountant, and Treasurer

Every requisition must be accompanied by a certificate signed by the local budget officer, the local accountant, and the local treasurer showing that an appropriation therefor exists, the estimated amount of such expenditure has been obligated, and the funds are available for the purpose, respectively.

Illustrative Decisions

COA Decision No. 657 dated November 23, 1988 - No claim may be made upon a contract without appropriation

It appearing that the projects in question were undertaken by the Makati Development Corporation without any written agreement or contract with the then Ministry of Public Works and Highways and that there was no budgetary allotment or appropriation and the corresponding certificate as to availability of funds covering the same in violation of Sections 85, 86, and 87 of PD 1445, this Commission believes and so holds that the claim is of doubtful validity. Neither can recovery be made on the basis of quantum meruit in view of COA Resolution No. 86-58 dated November 15, 1986, which allows such recovery where the only defect or irregularity contemplated is the delayed execution of the Certificate as to Availability of Funds.

COA Decision No. 664 dated October 18, 1988 - Absence of appropriation renders a contract void

That public bidding is required under Executive Order No. 298, s. 1940, for entering into contracts for public services cannot be denied. Neither may it be disputed that, as a condition precedent, an appropriation should exist and a certification as to fund availability for the purpose of executing the agreement must be present. Evidently, non-compliance with these specific requirements of law would render the herein agreements void.

Hon. Tomas R. Osmena vs. COA, GR No. 98355 - Funds availability an indispensable prerequisite to the execution of a government contract

Clearly then, the contract entered into by the former Mayor x x x was void from the very beginning since the agreed cost for the project (P8,369,920.00) was beyond the appropriated amount (P5,419,180.00) as certified by the City Treasurer. Hence, the contract was properly declared void and unenforceable in COA's 2nd indorsement, dated September 4, 1986. The COA declared and we agree that: the prohibition contained in Section 85 of PD 1445 (Government Auditing Code) is explicit and mandatory. Funds availability is, as it has always been, an indispensable prerequisite to the execution of any government contract involving the expenditure of public funds by all government agencies at all levels. Such contracts are not to be considered as final and binding unless such a certification as to funds availability is issued. (Letter of Instruction No. 767, S. 1978). Antecedent of advance appropriation is thus essential to government liability on contracts. (Zobel vs. City of Manila, 47 Phil 169). This contract being a violation of the legal requirements aforequoted, the same contravenes Section 85 of PD 1445 and is null and void by virtue of Sec. 87.

COA Decision No. 2449 dated July 27, 1992 - Availability of funds, prerequisite to claim under quantum meruit

Funds should first be made available before COA renders a decision based on the principle of quantum meruit. To rule otherwise would be tantamount to an intrusion into the budgeting function of the Executive Branch and the legislative function of the Legislative Department.

COA Decision No. 2455 (9th Indorsement dated July 30, 1992) - Contract entered into without certificate of availability of funds declared void by law

The school authorities of the Quirino State College, Diffun, Quirino, entered into architectural and consultancy contract with the Fernandez Architectural and Engineering Office and a construction contract with C.T. Gumaru Construction relative to the construction of a new building "to house the administration staff" within the school compound. The Special Audit Team which conducted an audit on the project found several adverse findings foremost of which is the absence of Certificate as to Availability of Funds (CAF).

The CAF is an indispensable requisite in the execution of government contracts pursuant to law. The Constitution provides that "no money shall be paid out of the Treasury except in pursuance of an appropriation made by law." It is stressed that Section 87, P.D. 1445 declares void any contract entered into without the CAF and holds the contracting officer/s liable to the same extent as if the transactions had been wholly between private parties.

COA Decision No. 2456 dated July 30, 1992 - Necessity of sufficiency of funds to cover proposed contract

Lilo-an had a written approval from NEDA Regional Office for a Local Communities Assistance Program Award in the amount of P910,000 for the construction/improvement of its waterworks systems. The initial release of P307,380 was sufficient to cover the expected project expenses for the year. The law (Sec. 86 of PD 1445) requires certification of availability only of the amount necessary to cover the proposed contract for the current year; hence, the issuance of the Municipal Treasurer of the certificate to that effect is in order. Re-alignment of BALGU funds to cover the expenses for the Project is no longer necessary since these were released specifically to finance implementation of similar projects of the Municipality.