Advance Payment Bonds in Construction

Many large construction projects require the purchase of materials in advance to avoid being impacted by changes in prices or availability of materials later. There is always a risk to the Employer in advancing money to a contractor to purchase these materials. An Advance Payment Bond or Guarantee is an insurance product that protects the Employer for the money being advanced to a Contractor. The Bond will provide cover should the Contractor default on completing the project after being paid in advance. While there is a cost in providing the Bond, it greatly assists the cash flow of the Contractor while protecting the Employer.

The value of the bond is the amount advanced. It is usually an on-demand bond, meaning that if called on, the bond will immediately be paid out. Advance Payment Bonds are not subject to payment of a First Loss, excess payment or a deductible. When issued by an insurance company, they have the advantage of not infringing on working capital as compared to being issued by banks. Project performance in terms of cost, time and quality performance is highly and positively supported by advance payments. Moreover, advance payments positively support the efficiency, competitiveness and profitability of construction organisations.

The following are some of the consideration’s insurance carriers look at when underwriting an advance payment bond application:

1. The contractor’s experience with the type of project at hand. The more the experience the better in terms of ultimate insurance premium. This also includes the experience of the key individuals in the contractor’s team.
2. The financial position of the contractor. This includes checking audited financials, bank statements and cashflow positions.
3. The security offered by the contractor. Depending on the size of the advance payment bond, insurance carriers may require security in the form of immovable property or movable property ceded to them through the requisite arrangements. For smaller amounts, insurance carriers may require counter indemnity guarantees from the directors of the contracting company.
4. In certain cases where the contractor is relatively new, insurance carriers may request to be co-signatories on the account into which the advance payment funds will be made to ensure that they are used correctly for the actual project.

Whether you are the Employer or the Contractor our team of professionals will assist you in structuring an Advance Payment Bond for your construction project. Talk to us today.