Construction Guarantees in South Africa

A Construction Guarantee is just like a 'Letter of Credit', or a written undertaking

Construction Guarantee
Construction 'Retention' Guarantee - Security against defective workmanship

Why Contruction Guarantees:

Major construction works are currently under way in various cities and towns across South Africa. Most of the contracts governing these works, require the contractor to provide a construction guarantee to the owner (or employer) guaranteeing the contractor’s performance undertaken in terms of the construction contract, or Principal Building Agreement (PBA).

Construction Guarantees are used to indemnify the employer against damages suffered in the event of the contractor’s default under the PBA.

Various short-term insurance companies (or 'Guarantors') are issuing Construction Guarantees on behalf of contractors to provide a benefit to employers upon the occurrence of certain eventualities relating to the failure of the contractor to perform its obligations under the PBA. The Short-Term Insurance Act defines a guarantee policy as “a contract in terms of which a person, other than a bank, in return for a premium, undertakes to provide benefits if an event, contemplated in the policy as a risk relating to the failure of a person to discharge an obligation, occurs”.

The purpose of a construction guarantee, is to create a primary obligation on the guarantor to make payment upon the occurrence of a certain event, and the obligation may be equated to an indemnity.  In this event, the construction guarantee will operate independently of the PBA.

Since a Construction Guarantee forms an integral part of the construction documents underlying a construction project, it should not be automatically concluded that it must be interpreted with reference to the PBA. Drafting and interpreting construction guarantees remain a complex area of our law. Employers and guarantors, in the context of the construction industry, should, therefore, be mindful of the terms and conditions of the construction guarantee in order to ascertain whether the guarantee intends to create a principal obligation or an accessory obligation to the PBA, as failure to do so will almost inevitably result in complex litigation.

DIB Solutions (Pty) Ltd have partnered with reputable underwriters and various insurance companies in order to assist our clients with appropriate Insurance cover – we can therefore also assist clients with tailor-made products (where applicable) at competitive premiums. We provide a professional and personal service, as well as build long-term relationships with our clients. There are a few types of Construction Guarantees, which can be confusing – therefore discuss your individual needs with one of our experts.

Some of the Construction Guarantees that exist are the following:

  • Advance Payment Guarantee:  Where the employer makes an advanced payment to the contractor, the employer will require an advance payment guarantee;
  • Bid Bonds or Tender Guarantee:  Where a contract was awarded through a tendering process, then normally all contracts will be accompanied with a tender guarantee. The principle here is to cover the employer against costs incurred where the tender for some reasons could not be taken up;
  • Performance Guarantee:  The performance guarantee covers the employer if the contractor fails to perform as governed by the contract. It therefore covers the cost of completion;
  • Retention Guarantee:  The retention guarantee is a form of security against default or defective work.
From the above it is clear that Construction Guarantees are all about 'reducing the risks' for employers (or owners), of construction projects.

Also note some of the risks related to Construction Guarantees:

  • The contractor's ability to finish the job; Adequate access to capital; Work alongside employer management; Pricing and costing done up-front is correct; Have the skill-set to manage, deploy and complete the contract.
  • Product wordings may differ and some employers may expect unfair contract terms. The 3 parties to the contract, namely the Employer, the Contractor and the Guarantor, should all be protected fairly.

Please contact us today for fast, friendly, professional advice and service!

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