Construction guarantees
Your client, called the employer in most standard contracts, wants proof you will finish the job. A performance guarantee is that proof, in writing, from an insurer. If you do not deliver the work as agreed, your client can claim up to the guaranteed amount under the guarantee, on the terms of the guarantee wording, rather than having to recover it from you first. If the guarantee is called, you remain liable to reimburse the insurer under your indemnity. Guarantees are issued by the , an insurer, not by CivilSure, and every application goes through underwriting.
Still tendering? . Awarded, no yet? Facility application. Facility already in place? Guarantee application.
What it is
A performance guarantee covers the risk that a contractor does not finish the job. If you do not complete the work, or you break the contract, the guarantor responds up to the guaranteed amount, on the terms of the guarantee, so your client can pay for the delay, the redo work, or a new contractor.
It is normal on South African building and civil jobs. Most standard contracts say you must hand the guarantee in within a set number of days of winning the job, and it stays in place for as long as the job runs.
The guarantee responds up to the guaranteed amount, on the terms set out in the guarantee wording, and only for the duties it lists. It is not cover for your own losses, and it does not remove your liability. If the guarantee is called, you remain liable to reimburse the insurer under your indemnity.
Percentages are of the contract sum or the guaranteed amount, as applicable. Actual figures come from your contract data and your underwriting outcome. is security held by the insurer, and it is cash you cannot use while any guarantee under your facility is in force. It is refundable once your obligations under the facility are discharged and any amounts owing to the insurer have been settled, on the basis set out in your facility agreement. If a guarantee is called, those funds may be applied to the insurer's loss and you remain liable to reimburse the insurer under your indemnity. A guarantee premium is payable in addition to the collateral and is not refundable.
Where to start
Three different forms, three different moments. Pick the one that matches where you are on the contract. The facility is the one time set up. After that, every guarantee draws off it.
At tender stage, before contract award.
A letter of intent indicates to your client that a guarantee is likely to be available, subject to underwriting and the insurer's final terms. It also gives you room to raise the guarantee wording before you are stuck with it. See the wording section below.
Get a letter of intentOnce, to open your guarantee facility.
This is the paperwork heavy part, and it is done once. Facility setup runs about 10 to 14 working days including checks and signing the , and longer if the insurer adds conditions. Typically only your annual financial statements are needed again at renewal.
Apply for a facilityPer project, once your facility is open.
With a facility in place, each new guarantee draws on information already held, so there is far less to submit. Send the contract details and the guarantee wording your client wants. Whether it is issued depends on how much of your limit is left, and on underwriting.
Apply for a guaranteeHow much of the contract sum
The Principal Building Agreement, the standard building contract most South African jobs use, offers two types of construction guarantee. Your contract says which one applies. People assume the fixed option is cheaper because the headline number is smaller. In total security terms it usually is not, because your client also holds money back out of your payments. Premium and collateral, though, follow the guaranteed amount, so the two options differ on cost as well as on cash flow. Compare both against your own contract.
| Stage of the job | Fixed guarantee | Variable guarantee |
|---|---|---|
| Start of the job | 5% plus payment reductions | 10% |
| Once more than half the contract value is signed off | 5% plus payment reductions building to 10% in total | 6% |
| Practical completion | 3% | 4% |
| Final completion | 1% | 2% |
| Final payment certificate | Nil | Nil |
Percentages of the contract sum, per the JBCC Principal Building Agreement (clause 14.0 in edition 5.0, clause 11.0 in edition 6.1). Source: SAIA Practice Notes, JBCC Principal Building Agreements No.1, Security: Construction Guarantees and Retentions, 12 July 2016. Confirm against the edition your own contract uses, because your contract data governs. Not every job runs on a JBCC contract. Other standard contracts, and one off contracts written for a single job, set their own percentages and their own points where the amount steps down.
The bit that decides everything
Two guarantees can look the same and behave completely differently when someone claims against them. The wording is what separates them, and it gets settled before you sign, not after. Whether it can be negotiated depends on your client, and on government contracts it often cannot.
Your client can demand payment just by saying you are in breach. They generally do not have to prove it first. The guarantor checks the demand against the guarantee wording, and if the demand fits, it pays.
The argument about whether you actually breached gets sorted out afterwards. The money moves first.
The guarantor only owes what you actually owe under the building contract. Your client has to prove a real claim before any money is paid.
Many contractors ask for conditional wording at tender stage. A letter of intent gives you room to raise it before the contract is signed, and whether your client accepts it is their decision.
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 while its disputes with Hitachi over performance at Medupi were still live. The Supreme Court of Appeal held that because the guarantees were on demand, they could be called without prior notice to the contractor, and the dispute under the building contract did not stop the call. The guarantee wording is the first thing anyone looks at, and any restriction on your client's right to call on the guarantee has to be written into the guarantee itself. A court will not read one in.
Minister of Transport and Public Works, Western Cape and Another v Zanbuild Construction (Pty) Ltd and Another (68/2010) [2011] ZASCA 10, 2011 (5) SA 528 (SCA), 11 March 2011
The same kind of guarantee, worded differently, gave the opposite result. The wording tied what the bank owed to what the contractor actually owed under the building contract, so the court treated it as surety style rather than on demand. The bank was entitled to refuse payment where the client had not proved what it was owed.
What could trigger a claim
These are common situations in which your client may call on a performance guarantee. Whether a demand is valid depends on the wording of the guarantee issued.
A common reason a guarantee is called. Liquidation, when a company is wound up and its assets are sold to pay creditors, is normally a default event under the contract. Your client still needs the job finished, which means a new contractor, delay and extra cost.
If the contractor flatly refuses to do what the contract says, the client generally has the right to cancel the contract and claim against the guarantee.
A serious or ongoing breach, such as sustained delay, can be grounds for a demand. This is what Eskom relied on in the Hitachi case above.
If the contractor walks off site and does not come back to finish the work, the client can claim against the guarantee to pay for finishing it.
Before you apply
For a facility application. Every application is checked to work out how risky you are to back: how your finances look, and whether you have the people and equipment to do the job. Having these ready up front is the main thing that keeps an application moving.
This is what is typically required. The insurer may ask for more, depending on your application.
It depends entirely on the wording. Where the guarantee is on demand, your client can demand payment by saying you are in breach, without proving it first, and the courts have upheld that position. Guarantors do check demands against the guarantee wording and can reject a demand that does not fit it. Where the wording ties what the guarantor owes to what you actually owe under the building contract, the guarantor can push back on a demand with no proven claim behind it. That is the difference the Zanbuild judgment turned on, which is why the difference in wording matters at tender stage.
If you break the contract, or do not do what you agreed, your client can claim against the guarantee so the job can be finished. The guarantor pays your client up to the guaranteed amount, on the terms of the guarantee, and your client can bring in a new contractor. The guarantor then has a right of recovery against you. In most cases it will come after you for whatever it paid out. The guarantee protects your client, not you.
Sometimes, and only where the contract and your client allow it. On some jobs the client will take a guarantee instead of holding cash back out of your progress payments, which helps your cash flow. Whether that swap is on the table comes down to your contract and your client agreeing to it, not to the guarantee itself. Where your client wants security specifically for fixing faults after the job is done, that is usually a retention guarantee, which is a different guarantee covering different duties.
Performance guarantees are issued on contract award and stay in force for the contract period. Most standard contracts say the guarantee must be handed in within a set number of days of winning the job, and not providing it can itself be a breach of contract. That is the reason to talk to us at tender stage rather than after award. Facility setup alone runs about 10 to 14 working days, and longer if the insurer attaches conditions.
Every application is checked to work out how risky you are to back: how your finances look, and whether you have the people and equipment to finish the job. For bigger companies the focus falls on the finances, who owns the company and how it is structured, the contract details, the guarantee wording needed, and what security you can put up.
Generally only your client, subject to the guarantee wording. The guarantor may also be able to send your client a cancellation notice, depending on the terms. It is not something you can cancel on your own once it has been handed in.
Usually two documents. A deed of indemnity lets the guarantor claim back from you anything it pays out. A deed of suretyship is signed by the shareholders or someone else, which is generally required unless you are a listed company. Security can be cash paid into a named account, or a bank guarantee in the guarantor's favour. You can also sign over, as security, investment policies, call accounts (money you can draw on immediately) or notice accounts, or fixed property (land or buildings) in a town or city, with a valuation and title deed.
No. It depends on the contract and your client. It is common on government work and on larger private jobs, and the standard contracts allow for it, but plenty of smaller jobs do not ask for one. Your contract or tender documents will say.
Send us the tender or the contract and the guarantee wording your client wants. We will tell you what is doable, point out the wording worth pushing back on, and quote you the full cost. Guarantees are issued by the guarantor, an insurer, and all applications are subject to underwriting. No obligation.
