Construction guarantees
Advance Payment Guarantee
Some contracts pay you before work starts, to mobilise, buy materials or get crews on site. An advance payment guarantee is the employer’s security for that money until the work catches up with it. It is commonly required on civil and public works projects, often as a condition before any funds are released, and all applications are subject to underwriting.
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- Who issues it
- The guarantor, an insurer
- Who it protects
- The employer
- What it secures
- The advance payment
- How it ends
- As the advance is worked off
- Who applies and pays
- You
What it is
Security for money paid up front
An advance payment guarantee, or APG, protects the employer when a payment is made to you before work begins. If you do not deliver, whether through default, sustained delay or insolvency, it covers the repayment of the advance up to the guaranteed amount, on the terms of the guarantee wording.
The employer is what contracts call your client: the party that awarded you the work, not your own boss. The guarantee protects the employer, not you. If the guarantor pays out, you remain liable to reimburse it under your indemnity.
The guarantee is normally issued for the value of the advance payment stated in the contract. As the project progresses and the advance is repaid through deductions from interim payments, the guaranteed amount usually reduces, and once the advance has been fully worked off the guarantee falls away.
CivilSure arranges advance payment guarantees for contractors across the civil and construction industry, from owner-run businesses to large national companies. Guarantees are issued by the guarantor, an insurer, not by CivilSure.
How it works
Paid early, secured properly
The advance is money for work not yet done, so the employer wants security before releasing it. That is the whole job of this guarantee.
Before work starts
The advance is released
The upfront payment helps cover early costs: materials, subcontractors, getting plant on site. The employer asks for the guarantee first as a condition of releasing it.
During the works
The advance is worked off
As you complete work, the advance is recovered in stages through deductions from interim payments. The guaranteed amount can reduce along the way as it is repaid.
If you do not deliver
The employer can claim
If you default, the employer can call on the guarantee to recover the advance, up to the guaranteed amount and on the terms of the wording.
At the end
The guarantee falls away
Once the work covered by the advance is fully done and the advance is repaid, the guarantee expires.
The trade-off
Who benefits, and what it costs you
Worth being clear-eyed about, because it runs both ways.
You
Where the contract provides for an advance and the employer accepts the guarantee, you receive a portion of the contract money before work begins, which can go towards mobilisation, materials and subcontractors at the point where cash flow is usually tightest.
The employer
Instead of handing over money and hoping, they hold security. If you do not follow through, they can claim back the unused portion of the advance.
The catch
The advance is not free money. It is recovered from your interim payments, and if the guarantee is called you remain liable to reimburse the insurer under your indemnity.
The advance behaves like a loan against your own future payments, not extra budget. It is recovered as the work is done, the guarantee secures it until then, and if it is called the money moves first and you repay the insurer afterwards.
Claims
What could trigger a call
These are common situations in which an employer may call on an advance payment guarantee. Whether a demand is valid depends on the wording of the guarantee issued.
The money is not used as agreed
Where the advance is not spent on the materials, subcontractors or equipment the contract says it is for.
Refusal to perform
Where the contractor expressly refuses to perform its obligations under the contract, which can give the employer the right to terminate and call on the guarantee.
Liquidation
Where the contractor is liquidated and the advance has not been worked off, the employer may call on the guarantee to recover it, subject to the guarantee wording and to what the contract provides.
Sustained delay or default
Where the works are not progressing and the advance remains unrecovered, on the terms the contract and the guarantee set out.
Common questions
Why do employers require them?
Because they are paying you before the work is done. The guarantee gives them security that the money can be recovered if you do not perform.
Is one always required?
No. They are used mainly where the employer makes a significant upfront payment, for mobilisation, plant or imported materials. Many South African public sector contracts require them.
How much is it issued for?
Normally the value of the advance payment stated in the contract. As the advance is repaid through deductions from interim payments, the guaranteed amount usually reduces in step, on the terms of the wording.
How is it different from a performance guarantee?
A performance guarantee secures your completion of the works overall. An advance payment guarantee secures one specific thing: the employer’s advance, until it is worked off or repaid. Both can run on the same contract at the same time, covering different risks. See Performance Guarantee.
What happens if I am liquidated?
If you default or are liquidated and fail to honour your obligations, the employer may call on the guarantee to recover funds paid in advance. The insurer pays up to the guaranteed amount on the terms of the guarantee. The insurer will then hold you liable under your indemnity and expect reimbursement of the amount paid.
What does it cost?
Two main amounts, and they work differently. The premium is the price of the guarantee and is not refundable. is security held by the rather than a fee: it stays your money and is refundable once the guarantee has expired or been returned and anything owed has been settled, under the terms of your agreement. If a guarantee is called, the guarantor recovers against the securities on your facility. Both amounts are set on underwriting and shown on your facility quotation before you commit, along with any other charges that apply. Whether collateral earns interest, and on what basis, is set out in that agreement.
What do I need to apply?
- Company profile, two years of financials, three months of bank statements
- Company registration, letterhead, directors’ IDs and tax numbers
- Tax clearance and CIDB certificates
- The contract information and the wording the employer requires
It is gathered once when the facility is opened, and a guarantee request after that draws on what is already held. The full list, and what the guarantor assesses, are on Guarantees Explained.
Sort the guarantee the advance depends on.
Send us the contract and the advance payment terms, and we will tell you what guarantee it asks for and what it would cost once underwriting is complete. No obligation either way.