The retention guarantee covers the contractor’s obligations to remedy defects or outstanding works after completion.

If the contractor fails to return to fix defects identified during the defects liability period, the employer can call on the bond to finance the repairs.

It serves the same function as a retention: a pool of funds to correct structural defects discovered after completion if the contractor fails to rectify it.

Is it used as an alternative to withholding retention money in intrim payments.

There are a few ways this is implemented. Often, the contractor provides a retention guarantee at the start of the project, allowing the client to waive retention on each payment certificate (with no deductions made). In other instances a retention bond may be provided at a later stage – e.g at practical completion,  the contractor may swap a bond in exchange for the accumulated cash retention to be released early. The bond remains in force through the defects liability (maintenance period) once this period ends and final completion is certified, the guarantee expires.

The employer benefits by still having financial security for the defect repairs – the insurer stands in for the retained money, so the client is no worse off in case of contractor default on remedial works.

The contractor greatly benefits from not having a notable sum of money withheld from each payment. This improves contractor’s cash flow and working capital, allowing them to use the money for the project and it not be locked away.

Notably, if the bond is called due to defects, the contractor remains liable to reimburse the insurer – so the contractors are still incentivized to fix the defects.

In practice, retention guarantees are a win-win: the client’s risks is covered and the contractor’s liquidity of cash flow is not unduly restrained.

If the Contractor defaults, or fails to honour his obligations, the Owner/Employer may call on Retention Guarantees in order to correct any structural defects. 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

• Improves cash flow (you receive full progress payments without deductions).

• Shows professionalism and financial strength.

• Still satisfies the employer’s need for protection against defects.

• If the contractor fails to:

  • Correct defects within the agreed period.

  • Honour obligations during the defects liability period.

  • Return to site when requested to fix defective workmanship or materials.

No.

• • A Performance Guarantee secures the overall completion of the project.

  • A Retention Guarantee specifically secures the correction of defects after completion.
    They serve different purposes but often run side by side.

Most retention guarantees are on-demand instruments, meaning the employer can demand payment if they claim you failed to fix defects. Insurers will investigate, but contractors must be aware that employers generally have the stronger hand.

Not always. Some employers prefer cash retention, while others accept retention bonds. Public sector and larger private contracts often specify them.

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 performance 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 its obligations and perform under the contract gives the Employer the right to terminate immediately and call up on the performance guarantee.

Even if defects are minor, if the contractor refuses or delays repairs beyond the contract timeframe, the employer can demand payment under the bond.

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.