What is a bank guarantee in a construction contract?
A bank guarantee is a bank's undertaking to pay the client a stated sum if the contractor fails to meet an obligation, and on an EPC contract there are usually two of them: one securing the mobilisation advance, one securing performance.
Also called BG, performance guarantee, advance payment guarantee.
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Bank guarantee in plain words
The bank does not lend money; it lends its promise, against the contractor's credit limit and a fee. The advance payment guarantee covers money already handed over. The performance guarantee covers the job being finished.
Why does bank guarantee matter?
Guarantees consume the contractor's banking limit, which is the same limit that funds working capital. A guarantee left open after its obligation ended is borrowing capacity sitting idle.
Which guarantee is which?
| Guarantee | What it secures |
|---|---|
| Advance payment guarantee | The unrecovered balance of the mobilisation advance. Steps down as the advance is recovered |
| Performance guarantee | Completion of the work. Furnished up front and held through the contract |
| Security deposit in lieu | CPWD allows the deducted deposit to be released against a bank guarantee once it reaches a threshold |
Per CPWD General Conditions of Contract 2019, which sets the performance guarantee at 5% of the tendered amount and requires the advance guarantee to cover 110% of the outstanding advance.
Where does bank guarantee mislead?
Nobody chases a guarantee's release, because releasing it saves a fee rather than producing cash. Guarantees routinely stay open months past the event that discharged them.
What do people get wrong about bank guarantee?
- Leaving an advance guarantee at full value
- It is meant to step down as the advance is recovered. Left at the original figure it ties up limit against money that has already been repaid.
- Confusing the two guarantees
- Discharging the performance guarantee because the advance was recovered, or the reverse, is a common and expensive filing error.
How does Crestline measure bank guarantee?
Crestline ages each guarantee from the event that should release it, in the same way it ages retention from the completion certificate, so an expired obligation surfaces instead of quietly renewing.
The working-capital lens