Construction guarantees and how to start a qualification enquiry

What a construction guarantee is

In a construction contract, the employer often asks the contractor for security: something that gives the employer a source of money if the contractor does not do what it promised. A guarantee provides that security. A bank, insurer or other approved issuer undertakes to pay the employer, up to a stated amount, if the conditions in the guarantee wording are met.

A guarantee is a three-party arrangement. The employer is the beneficiary, the contractor is the party whose obligations are secured, and the issuer gives the undertaking. The issuer’s promise is to the employer. The contractor’s promise is to the issuer.

CivilCovered arranges insurance and does not issue guarantees. Where we help with a guarantee enquiry, the guarantee itself would be issued by an approved guarantee provider after its own assessment.

Who may need a guarantee

• Contractors tendering for work where the tender documents require bid security.
• Contractors who have been awarded a contract that requires a performance guarantee before work can start.
• Contractors who are to receive an advance payment from the employer and must secure its repayment.
• Contractors who wish to release cash retention by substituting a guarantee, where the contract allows it.
• Contractors who want to understand whether their financial position and track record are likely to be viewed favourably before they tender.

The main types of construction guarantee

What guarantee providers assess, and why placement is not assured

Guarantee providers decide for themselves whether to issue a guarantee, in what amount, on what terms and against what security. There is no universal checklist that applies to every issuer and every contractor. In general terms, issuers look at the contractor’s financial strength, the contract and the contractor’s ability to deliver it, and the security available to support the issuer’s recourse.

Financial position

Financial statements, management accounts and information about the business’s cash flow, debt and assets.

Track record and capacity

Experience of similar projects, current work in progress and the resources available for the new contract.

The contract itself

The form of contract, the size of the guarantee compared with the contract value, the employer, and the wording of the guarantee required.

Security and counter-indemnity

Issuers may require sureties, cash deposits, other security or indemnities from the business and its directors.

Timing

Assessment takes time and cannot be assumed to fit a tight tender or award deadline. Start the enquiry early.

How a qualification enquiry works

1. 1

   Tell us what the contract asks for

   Send the tender or contract extract describing the guarantee, the amount, the wording and the dates.

2. 2

   Share business and project information

   We will ask for the business and contract details a guarantee provider usually requires. See performance guarantee application documents.

3. 3

   Confirm whether we can assist

   Placement capability is subject to confirmation. We will tell you plainly whether we can help with your requirement before any application is made.

4. 4

   Assessment by the guarantee provider

   The provider assesses the application and may ask for more information or security.

5. 5

   Terms, then issue

   If the provider offers terms, you decide whether to accept. A guarantee is issued only after the provider has approved it and the conditions are met.

6. 6

   Manage the guarantee

   Track expiry, reductions and release, and arrange the return of the original document when the guarantee is no longer needed.

Information we usually need for a quotation

A qualification enquiry is easier to assess when it includes the following. Missing items are not a bar to starting.

You do not need everything on day one. A short description of the work is enough to start, and the quote form only asks for the details relevant to your enquiry.