Advance payment bond

From CEOpedia | Management online

The term advance payment bond called also advanced payment guarantee refers to building terminology and is made in order to prevent the employer from insolvency of the contractor against full repayment of the advance, the employer will normally require the contractor to provide an advance payment guarantee that will protect the employer if the contractor fails to fulfill his contractual obligations[1].

The guarantee should be issued by an entity and country approved by the employer and in a form annexed to the conditions laid down or in another form approved by the employer and the guarantee must be valid until the advance payment has been repaid. The amount of the advance payment guarantee should be equal to the advance payment[2]. To protect the employer against subsequent non-performance of the contract, the contractor is usually required to provide an advanced payment bond to repay the money transferred in this case to the employer[3].

The advance payment bond should consist of

The information required to fill the advanced payment bond are such as following[4]:

  • The amount of the advanced payment
  • Schedule of pre-financing instalments which are to be returned at initial dates
  • The date by which the employer must make an advance payment
  • The clause authorising the contractor to making an advance payment

Termination of the advance payment contract by the buyer

If the contract is terminated by the buyer[5]: In this situations, if this happens take place when the contractor has been effectively overpaid due to an advance payment before the advance payment has been fully repaid. In this case, when a bond is established, it should be made clear how such a bond is to be used in the event of termination of the contract where there is an existing claim for an advance payment.

Advance payment contract's guarantee

An advance payment guarantee is not a general guarantee for all contractual obligations of the contractor, but, for example, it can only be requested on the basis of a written statement that the contractor has not repaid the advance in accordance with the contract and stating the amount that the contractor has not repaid[6].

Examples of Advance payment bond

  • Performance Bond: A Performance Bond is an Advance Payment Bond that guarantees that the contractor will complete the project to the specified standards and requirements.
  • Bid Bond: A Bid Bond is an Advance Payment Bond that guarantees that the contractor will sign a contract if their bid is accepted.
  • Payment Bond: A Payment Bond is an Advance Payment Bond that guarantees that the contractor will pay all their subcontractors and suppliers for the services or materials provided.
  • Retention Bond: A Retention Bond is an Advance Payment Bond that guarantees that the contractor will return any retained funds to the employer upon successful completion of the project.

Advantages of Advance payment bond

Advance payment bonds can be a beneficial form of financial protection for employers in certain construction projects. They offer several advantages, such as:

  • Improved cash flow: By ensuring that the contractor can access the necessary funds, the employer can benefit from improved cash flow and the assurance that the project will remain on track.
  • Reduced exposure to risk: An advance payment bond helps to reduce the risk of the employer being left out of pocket in the event of contractor insolvency.
  • Increased confidence: By having an advance payment bond in place, employers can have greater confidence that the contractor will be able to fulfil their contractual obligations.
  • Quick and easy: Advance payment bonds can be arranged quickly and easily, allowing the contractor to access the necessary funds and begin work on the project as soon as possible.

Limitations of Advance payment bond

Advance payment bonds have several limitations that should be taken into consideration. These include:

  • Advance payment bonds are limited to a certain amount. This means that if the contractor fails to fulfill their contractual obligations, the employer will only be able to receive the amount that was specified in the advance payment bond.
  • Advance payment bonds do not cover all the damages that might occur. This means that there are certain damages that the employer will not be able to recoup from the contractor if the contractor fails to fulfill their contractual obligations.
  • Advance payment bonds may not cover all the costs associated with the contract. This means that certain costs associated with completing the project might not be covered by the bond and may have to be borne by the employer.
  • Advance payment bonds typically have a short duration and may expire before the project is completed. This means that the employer may not be able to recoup their money if the contractor fails to fulfill their contractual obligations after the bond expires.
  • Advance payment bonds may not be available in some cases. This means that the employer may not be able to secure such a bond if the contractor is unable or unwilling to provide one.

Other approaches related to Advance payment bond

An advance payment bond (also known as an advance payment guarantee) is a form of security issued by a surety company to guarantee repayment of an advance payment made to a contractor. Other approaches related to an advance payment bond include:

  • Performance Bond - A performance bond is a guarantee that the contractor will fulfill their contractual obligations, and is typically issued in conjunction with an advance payment bond.
  • Retention Bond - A retention bond is a type of guarantee that ensures the employer will have the funds to pay for any additional costs that may arise during the project.
  • Bid Bond - A bid bond is a form of guarantee that a contractor will follow through with their bid if it is accepted.
  • Maintenance Bond - A maintenance bond guarantees that the contractor will properly maintain and repair the constructed project.

In summary, an advance payment bond is a form of security issued by a surety company to guarantee repayment of an advance payment made to a contractor. Other approaches related to an advance payment bond include performance bonds, retention bonds, bid bonds, and maintenance bonds.

Footnotes

  1. ↑ Greenhalgh B (2016)
  2. ↑ IBP (2015)
  3. ↑ Ndekugri I, Rycroft M (2012)
  4. ↑ Ndekugri I, Rycroft M (2012)
  5. ↑ Greenhalgh B (2016)
  6. ↑ Baker E, Mellors B, Chalmers S, Lavers A (2013)


Advance payment bond — recommended articles
Retention bond — Warranty bond — Contract guarantee — Corporate guarantee — Indemnity bond — Payment guarantee — Shipping guarantee — Back-To-Back Letters Of Credit — Cash Collateral — Market placing phase strategy

References

Author: Veniamin Terokhin

Retrieved from "https://ceopedia.org/index.php?title=Advance_payment_bond&oldid=89152"