Bonds and guarantees in construction — and the expiry trap

The three you will meet

A performance bond, commonly around a tenth of contract value, pays the employer if the contractor fails to perform. An advance payment guarantee secures the advance the employer has handed over before any work exists, and reduces as the advance is recovered. A retention bond substitutes for cash retention — the contractor keeps its money, the employer keeps its security.

On-demand versus conditional is the whole game

An on-demand bond pays on demand. The employer calls it, the bank pays, and the argument about whether the call was justified happens afterwards — with the money already gone. A conditional bond requires the employer to establish default first, which puts the burden, the cost and the delay on the other side.

On-demand is the norm in the GCC. Which means a contractor’s security can be converted to cash by an employer with a grievance and a fax machine, and the contractor’s remedy is to sue for its return. That is a materially different commercial position from the one most contractors think they are in.

The expiry trap

Every bond has a validity date. Projects run late. And the bond that was obtained, celebrated and filed in month one quietly lapses in month thirty — at which point the contractor is in breach of a condition it satisfied faithfully for two and a half years.

Nobody notices, because attention flows to what has not yet been obtained. Nothing watches what already was. It is the same failure that lets a crane permit expire, an insurance policy lapse, and a licensed inspector’s certification run out — and it is one alert board away from never happening.

The related leak is the APG that never reduces. As the advance is recovered from interim payments the guarantee should step down, and if nobody manages that, the contractor is paying bank charges on a guarantee securing money it has already repaid — for the length of the project.