Bank Guarantees in Construction Contracts
A bank guarantee is a bank’s undertaking to pay the employer a sum if the contractor defaults — a bid bond at tender, a performance bond during execution, and an advance payment guarantee.
The three kinds
The bid bond, 1–2% of the tender, secures the seriousness of the offer until award. The performance bond, 5% on government work under the tendering regulations, secures execution through to handover. The advance payment guarantee matches the advance and reduces as it is recovered.
Their cost and effect
Banks charge an annual commission and block cover against your facilities, so guarantees consume your credit ceiling and their cost belongs in the estimate. Managing the guarantee portfolio — issuing, reducing and cancelling after handover — saves real money.
The risk of a call
Guarantees are usually payable on first demand and can be called without proof of default. Tracking the contractual obligations, the guarantee periods and their timely renewal is therefore a matter of survival, not clerical administration.
Worked example
A SAR 20 million government tender: a 2% bid bond of SAR 400,000 with the offer; on award a 5% performance bond of SAR 1 million; and with a 5% advance, another million-riyal guarantee that reduces as the advance is recovered — three guarantees whose dates must be managed precisely.
FAQ
When is the bid bond returned?
To unsuccessful bidders after award; and to the winner on providing the performance bond and signing the contract.
Does Etimadco account for guarantees?
The cost calculator includes guarantee costs within the indirects, and the contracts module tracks their periods and warns you before they expire.
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