Covers the repayment of the upfront amount if the contractor doesn’t deliver as agreed. If the job falls through or the contractor defaults, the insurer pays back the client – up to the value of the guarantee. You will then have to pay back the insurer as per the policy terms on your agreement.

An APG is used when a contractor is paid some money upfront – usually at the start of a project – before any work is done. This upfront payment helps the contractor cover early costs like buying materials or getting crews on site.

But the employer doesn’t just hand over the cash and hope for the best. They ask for an Advance Payment Guarantee first. This bond acts as a safety net – if the contractor doesn’t deliver, the employer can claim back the unused portion of the advance.

As the project progresses and the contractor completes work, that advance payment is “worked off” in stages. The APG might be reduced along the way, and once the work covered by the advance is fully done, the guarantee falls away.

Both the contractor and the employer do.

For the contractor, the APG makes it possible to get a portion of the contract money upfront – usually before work even begins. That early cash helps cover costs like buying materials, hiring subcontractors, or getting machinery in place.

For the employer, the APG gives peace of mind. Instead of handing over money and crossing fingers, they’ve got a bond in place. If the contractor doesn’t follow through, the employer can claim back the unused portion of the advance.

As the project moves forward and work gets done, the advance is slowly “worked off.” The APG can be reduced over time, and once the advance has been fully earned through completed work, the guarantee falls away.

So in short:
Contractors get the cash flow they need. Employers get the security they want.

Because they are paying you upfront (before work is done), they want financial security that the money will be repaid or recovered if you do not perform.

Not always. They are mainly used in contracts where the employer is asked to make a significant upfront payment (for mobilisation, plant, or imported materials). Many public sector contracts in South Africa require them.

The guarantee is normally issued for the exact value of the advance payment stated in the contract. As the project progresses and the advance is repaid (through deductions from interim payments), the guarantee value reduces.

• Performance Guarantee: Secures the contractor’s overall completion of the project.

• Advance Payment Guarantee: Specifically secures the employer’s advance payment until it is fully worked off or repaid.
  Both may run simultaneously but cover different risks.

If the Contractor defaults, or goes bankrupt and fails to honour their obligations, the Owners/Employers may call on the Advance Payment Guarantees in order to recover funds paid out in advance. The Insurer then pays the Employer the agreed-upon guarantee amount so they can find a new Contractor to complete the project. In most cases, the Insurer will hold the Contractor liable and will expect reimbursement of the amount paid.

• Company profile (including an organogram and copies of the current and previous contracts)
• Two years’ financial statements and three months’ bank statements
• Letter of appointment
• Contract information
• Guarantee wording requirements
• Company registration documentation
• Copies of all members’ identity documents and income tax numbers
• Copy of letterhead
• Tax clearance certificates
• CIDB certificate

• All applications are subject to a thorough analysis to establish the Contractor’s risk profile. This will include an assessment of the Contractors’ financial standing and their resource capabilities to fulfill the Contract obligations.

   

  For Corporate Clients, emphasis is placed on:

  • the financial standing of the Contractor
  • the company structure and shareholding
  • the Contract information
  • the Guarantee wording requirements
  • the securities available

If the contractor does not spend the money on the materials, contractors or equipment as agreed upon in the contract.

Liquidation of the Contractor’s business is one of the most common reasons for a Guarantee to be called up. Liquidation automatically places the Contractor in default of the contract and will thus trigger a claim for the Advance Payment Guarantee.

The Employer needs the project to be completed and will have to arrange for a replacement Contractor. This causes delays and an inevitable increase in costs.

The Contractor expressly refusing to perform his obligations and perform under the contract gives the Employer the right to terminate immediately and call up on the Advance Payment Guarantee.

Example:

Eskom Holdings Soc Ltd v Hitachi Power Africa (Pty) Ltd and Another (139/2013) [2013] ZASCA 101 (12 September 2013)

Eskom presented three performance guarantees for payment – a number of disputes had arisen between the parties concerning the performance by Hitachi of its obligations under the construction contract. Eskom alleged that Hitachi had been guilty of material and ongoing breaches of the construction contract. It complained that Hitachi had delayed the completion of the first operating unit at Medupi. It also claimed that in view of the said material breaches, it was entitled to demand payment under the guarantees.