Construction Guarantees in South Africa

Construction Guarantees are frequently issued in construction agreements to ensure that the employer is safeguarded in the event that the contractor causes a delay, or a disruption, in the completion of the works.

Construction 'Performance' Guarantee covers cost of completion
 
 
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A Construction Guarantee is just like a 'Letter of Credit', or written undertaking.

If you are in the construction business and a big contract is awarded to you, you may be required to provide guarantees to the employer. The Construction Guarantee basically indemnifies the employer (or owner) for damages – if the contractor does not perform as agreed or defaults.

The contract between the employer (or owner) and the contractor, is often referred to as the Principle Building Agreement (PBA).

The main product providers of Construction Guarantees, are Banks and Insurers.

A few types of guarantees exisit - These options may be confusing...
 
Various types of Construction Guarantees exist, namely:
  • Advance Payment Guarantee:  Where the employer makes an advanced payment to the contractor, the employer will require an advance payment guarantee;
  • Bid Bonds or Tender Guarantee:  Where a contract was awarded through a tendering process, then normally all contracts will be accompanied with a tender guarantee. The principle here is to cover the employer against costs incurred where the tender for some reasons could not be taken up;
  • Performance Guarantee:  The performance guarantee covers the employer if the contractor fails to perform as governed by the contract. It therefore covers the cost of completion;
  • Retention Guarantee:  The retention guarantee is a form of security against default or defective work.
From the above it is clear that Construction Guarantees are all about 'reducing the risks' for employers (or owners), of construction projects.

Risks - A quick summary of some of the risks are:  The contractor's ability to finish the job; Adequate access to capital; Work alongside employer management; Pricing and costing done up-front is correct; Have the skill-set to manage, deploy and complete the contract.

Product wordings may differ and some employers may expect unfair contract terms. The 3 parties to the contract, namely the Employer, the Contractor and the Guarantor, should all be protected fairly.

Some leading insurers and underwriting managers offer these specialist products. Therefore a few product options are available and contractors should consider all these options to their advantage.

In fact, the smartest thing you can do is -- Get a specialist broker to do it for you!
 
 
 Costruction 'Retention' Guarantee - security against defective workmanship
 
 
 
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