What is the advance payment guarantee on a performance bond?

An advance payment bond guarantees the completion of commercial construction contracts and prompt delivery of advance payments. The bond guarantees reimbursement of advance payments used by a contractor to purchase essential materials and machinery needed to start work onsite.

Why do employers ask contractors to arrange advance payment guarantees on a performance bond?

Employers ask contractors to purchase advance payment guarantees because they pay the employers even if the contractor fails to deliver the goods or perform contracted services due to insolvency. An Advance Payment Bond guarantees the employer won’t lose money on advance payments to the contractor if something goes wrong.

What situations are covered by Advance Payment Guarantees?

Advance Payment Bonds cover a range of issues that prevent a Contractor from completing a project, including supply chain problems and insolvency.

Are Advance Payment Bonds a contractual requirement?

Advance Payment Bonds are a contractual rather than a legal requirement. They are increasingly used in commercial construction contracts during tough economic conditions because they reduce the financial risks associated with construction projects. Bonds also support the contractor’s cash flow, saving them the expense of purchasing materials in advance and waiting for project completion to get paid.

Who arranges advance payment guarantees?

Insurance brokers specialising in surety bonds and construction insurance have the knowledge and experience to arrange guarantees. A broker can assess contractual requirements and work with contractors to prepare the essential information insurance companies require to organise an advance payment guarantee.

When should I arrange an advance payment guarantee?

Advance Payment Bonds often feature as a contractual obligation on new construction projects. They should be put in place for the tender stages of a construction project to protect the advance payment amount in case of problems such as contractor insolvency. Employers may view bonded tenders more favourably because of the extra financial security they provide.

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