Performance and advance-payment guarantees for contractors

Most construction and supply contracts in Kenya ask the contractor for bank security of some kind. Public employers commonly require performance security from the successful tenderer under the Public Procurement and Asset Disposal Act, 2015, and private developers and donor-funded projects usually ask for the same. Where the contract pays an advance for mobilisation, the employer will also want an advance-payment guarantee before releasing the money.

Each is a short letter from a bank. Each also affects your credit lines, cash flow and risk on the project for months or years, so it deserves the same attention as the contract.

Two guarantees, two jobs

A performance guarantee protects the employer if you fail to perform. If you abandon the works, fall seriously behind or leave defects unremedied, the employer can claim up to the guaranteed amount. The contract sets the amount, usually as a share of the contract price.

An advance-payment guarantee protects the employer's advance. If you receive money for mobilisation and then fail to deliver, the employer can recover the part of the advance you have not yet earned back through the works. Advances are normally recovered by deductions from interim payment certificates, so the guarantee should fall in step with those deductions.

Neither is a loan. The issuer pays nothing unless the employer makes a claim. If it does pay, it will recover the full amount from you, usually at once and from any security it holds.

Who issues them

In Kenya and across East Africa, most contract guarantees are issued by commercial banks. Some employers, including many public procuring entities, also accept guarantees or bonds from licensed insurance companies. Whether an insurance bond is acceptable depends on the tender documents and the contract. If they specify a bank guarantee, an insurance bond will be rejected, however strong the insurer.

For cross-border work, an employer may insist on a guarantee from a bank in its own country. Your bank can often arrange this through a correspondent bank, which issues the local guarantee against a counter-guarantee from your bank. This takes longer and brings a second bank's requirements, so build the time into your mobilisation plan.

Obtain every guarantee directly from the issuing bank or insurer. Employers often confirm a guarantee with the issuer before accepting it, and a document arranged through an unauthorised intermediary can cost you the contract.

What the bank assesses

A bank treats a guarantee as credit. It is taking the risk that it will pay the employer and then have to recover from you, so it looks at your business much as it would for a loan.

• The contract. The signed contract or letter of award, the form and amount of guarantee required, the payment terms and the employer's record of paying.
• Your capacity. Completed projects, current workload, and the team and equipment for this job.
• Your finances. Audited and management accounts, bank statements, existing facilities and a current KRA tax compliance certificate.
• Security. A counter-indemnity from your company and, depending on your record with the bank, cash cover, a charge over assets or directors' guarantees.
• Know-your-customer documents. Registration documents, details of directors and beneficial owners, and a board resolution authorising the request.

Guarantees also count against your overall limit with the bank. A large performance guarantee can use up headroom you were relying on for working capital, so plan the two together. Our brief on what lenders look for in a contractor's financing pack covers the wider file.

On-demand or conditional wording

The wording decides how easily the employer can claim. Under an on-demand guarantee, the issuer pays against a written demand that meets the guarantee's terms, usually with a statement that you are in breach. The issuer does not investigate whether the breach is real, and stopping payment is difficult. The grounds are usually narrow, such as clear fraud.

Under a conditional guarantee, the employer must first prove your default or produce a decision, such as an engineer's certificate, an adjudicator's decision or an arbitral award. That gives you more protection, and employers agree to it less often. Standard forms on public and donor-funded contracts are commonly demand guarantees, often issued subject to the ICC's Uniform Rules for Demand Guarantees, URDG 758.

The employer's form is often fixed. Check it anyway. Confirm that the amount and currency match the contract, that the beneficiary and contract reference are correct, that there is a fixed expiry date, and that the documents needed for a claim are clearly stated. For an advance-payment guarantee, confirm that it reduces as the advance is recovered.

Expiry, reduction and release

Every guarantee should end on a stated date or event. A performance guarantee usually runs to completion or the end of the defects liability period, as the contract provides. An advance-payment guarantee should reduce as the advance is deducted from interim certificates, either automatically or on presentation of each certificate, and fall away once the advance is fully recovered.

Expiry does not always mean release. Some banks keep the liability on their books until the original guarantee is handed back or the beneficiary confirms release in writing. Ask the employer for that confirmation when the obligation ends and pass it to your bank, so the limit is freed for the next job.

Watch for extend-or-pay demands near expiry. An employer whose project has slipped may ask the bank to extend the guarantee or pay it. Agree extensions early with both the employer and the bank, well before the final weeks.

Common mistakes

• Requesting the guarantee only after award, when the contract allows a short period to provide it.
• Accepting the employer's draft wording without checking it against the contract.
• Assuming an insurance bond will be accepted without confirming it in the tender documents.
• Forgetting that guarantees reduce the credit available for working capital.
• Keeping no diary of expiry dates, reductions and extension requests across projects.
• Leaving finished guarantees on the bank's books because nobody asked for a written release.
• Using an intermediary who cannot show they act for the issuing bank or insurer.

How we help

Epiidosis Africa helps contractors get guarantee-ready before the tender closes. We review the guarantee forms against the contract, prepare the bank file and introduce you to independent licensed banks. Our research practice can look into a new employer's background and payment record before you commit. Our insurance and risk consulting practice reviews the contract's risk terms and, where the employer accepts insurance bonds, supports your discussions with licensed insurers and brokers.

We do not lend or issue guarantees, and we can't promise approval. The decision rests with the bank or insurer that issues the guarantee.