Apart from the contract are any other documents commonly entered into by way of security – such as a guarantee from a building contractor's parent or ultimate holding company or a bond from a third-party surety?
It is common for the owner to demand from the contractor a performance guarantee to ensure compensation in the case of failure to perform its contractual obligations and against defects, the guarantee is mandatory in public works contracts.
The guarantee is given by the contractor by way of an independent ‘on first demand’ bank guarantee, insurance bond contracts, cash deposit or state securities.
The amount of the guarantee is indicated in the tender documents, up to a maximum of 20 percent of the contractual price. Additionally, the owner is entitled to retain an amount of 5 percent (or other percentage indicated in the tender documents) from each partial payment due to the contractor to reinforce the guarantee.
In public works contracts no instalments may be paid to the contractor unless a guarantee is in place.
No, performance bonds are not common, except when contracting with the government. Insurance companies usually offer such services. Guarantees from holding companies may be required, but that depends on the corporate structure of the contractor.
In relation to the construction activities comprised within a development project, the financier will usually require the benefit of all of the material contracts to which the employer is a party to be assigned to it by way of security. In this context, the employer is, of course, the borrower of finance from the financier. The type of security which the employer will usually obtain from a contractor (and which may then be assigned to the financier) includes the construction contract itself, the guarantee to the employer of the building contractor’s obligations under the construction contract (which is given by one of its parent companies or – exceptionally for large contractors – the ultimate holding company in the group) and the performance security from a third party surety to the employer.
Performance security can be either ‘on demand’ in nature (meaning that the surety would release bond monies on written demand from the employer) or ‘on default’ in nature (meaning that, broadly, a court judgement or adjudicator’s decision would be required to be presented by the employer before the surety would release bond monies). These bonds generally take the form of an unconditional undertaking from a bank or an insurance bond. The other type of security which may be obtained is retention monies, that is, monies which are deducted from a payment made to the contractor. Retention monies and performance security are usually limited to 10% (or less) of the contract sum.
On large projects it is also reasonably common to require the parent company of the contractor to provide a guarantee of performance. These guarantees often contain some type of limitation clause or financial cap limiting the guarantor’s liability.
Employers and third-party financiers will also require collateral warranty agreements from the building contractor, the key professional consultants and sub-contractors with design responsibility – giving them direct rights for poor performance. In addition, they will require contractual step-in rights in the main contractor’s collateral warranty agreement given to them (which is sometimes termed a ‘direct agreement’), giving them (or their appointee) the right either temporarily or permanently to assume the role of the employer under the construction contract where the employer is in breach, and/or while an attempt is made to remedy the breach.
The use of parent or third-party guarantees (whether bank or otherwise) as a security for the obligations of a contractor is proportionate to the scope of the development project. A guarantee amounting to 10% of the construction price or a right for the principal to withhold 5% to 10% on the invoices to be paid to the contractor is not unusual for high-end projects. This is the so-called retention guarantee under Belgian law. Parties can agree on a 5% or 10% retention on each invoice by the owner / client / principal. Such high-end contracts typically refer to a system of double acceptance, which determines that 50% of such a guarantee will be released on the issue of the procès-verbal of a provisional acceptance, with the remaining 50% on the issue of the procès-verbal of final acceptance.
The procès-verbal is the document prepared following a visit to the construction site by the parties, prior to the provisional or final acceptance by the client of the works. The document contains details of issues relating to the works that need to be resolved prior to the handing over of the works to the client. The provisional or final acceptance by the client is subject to the signing of the procès-verbal. It is then dated and signed by the parties.
With regard to house or residential construction works, mandatory provisions relating to the provision of a guarantee are governed by the Law of 9 July 1971 which regulates house construction and the sale of houses to be or being built. This law provides for what is known as a 100% guarantee, which applies to contractors who do not comply with the requirements of the law of 20 March 1991, which governs the activities of contractors and real estate developers.
In addition, the aforementioned public procurement legislation (see in particular article 27 of the Royal Decree of 14 January 2013 on the general execution rules of public contracts) imposes the duty on a contractor to provide a guarantee for the performance cq in the execution of the contract.
Corporate guarantees as such are not enforceable in the courts of BiH, hence in practice they do not provide adequate security. Security is often provided in form of a bank guarantee.
Performance bonds are one of the most common types of construction guarantees on behalf of the employer. This insurance coverage provides an alternative form of financial/performance guarantee to support the contractor’s obligations.
To this end, the employer, the contractor and the insurance company maintain a three-parties relationship with the relevant agreements between them (ie the counter guarantee agreement between the contractor and the insurer; the policy conditions between the employer and the insurer), as well as potential additional guarantee from the contractor to the insurer to hold harm the counter guarantee agreement (such as real state guarantee, grantor).
In relation to the construction activities comprised within a development project, the financier will usually require the benefit of all of the material contracts to which the employer is a party to be assigned to it by way of security. In this context, the employer is, of course, the borrower of finance from the financier. The type of security which the employer will usually obtain from a contractor (and which may then be assigned to the financier) includes the construction contract itself, the guarantee to the employer of the building contractor’s obligations under the construction contract (which is given by one of its parent companies or – exceptionally for large contractors – the ultimate holding company in the group) and the performance security from a third party surety to the employer.
It is fairly common in Canada for contractors to provide a performance bond and a labour and materials bond. These bonds are issued by licensed surety companies. Under the performance bond, the surety has the right to complete the construction work following a default by the contractor or to pay a fixed amount to the owner. The labour and materials bond is designed for the protection of subcontractors and allows subcontractors to claim payment from the surety if the contractor fails to pay or becomes insolvent. In Ontario, both types of bonds are now mandatory for contracts on public projects that exceed $500,000 in value.
On larger projects, it is also common for major subcontractors to be required to procure both performance and labour and material payment bonds.
Performance security can be either ‘on demand’ in nature (meaning that the surety would release bond monies on written demand from the employer) or ‘on default’ in nature (meaning that, broadly, a court judgement or adjudicator’s decision would be required to be presented by the “obligee” under the bond before the surety would release bond monies). The latter is typical for both performance and labour and material payment bonds. Other types of security include letters of credit and retention monies, that is, monies which are deducted from a payment made to the contractor.
On large projects it is also reasonably common to require the parent company of the contractor to provide a guarantee of performance. These guarantees often contain some type of limitation clause or financial cap limiting the guarantor’s liability.
It is common for a performance guarantee to be given by a bank.
Apart from the guarantees, policies and insurances mentioned in the insurance section, there are no other common guarantees. However, this does not mean the parties cannot constitute any additional type of guarantee if the parties mutually agree on them, such as: secured transactions, surety bonds, escrow accounts, guarantees from an ultimate holding company.
Developers usually ask for a bank guarantee and/or a corporate guarantee from the contractor’s parent company.
Financiers (the banks and other institutions providing finance for the development) usually require a form of security relating to all of the material contracts to which the borrower is a party. In the case of construction projects the most common security is in the form of a mortgage over the relevant construction works. Further common types of security are: pledge of a group of assets, a pledge or assignment of receivables from contracts such as bank guarantees, insurance policies, leases and other project contracts etc.
Under the general conditions in the standard form construction contracts, AB 18 and ABT 18, the contractor must within a period of eight working days of the conclusion of the contract provide security for the due performance of his obligations towards the employer. This security may be in the form of an adequate guarantee from a bank or a savings bank, an insurance guarantee or other adequate types of security.
The security will normally be reduced in stages and ceases five years after handing over the construction works to the employer. Usually, the security offered by the contractor shall correspond to 15% of the contract price until handover of the works, which is reduced to 10% from handover to the first-year inspection of the property from which point the security is reduced to 2% until the final release.
If the employer discovers defects in the construction before the first-year inspection of the property, the reduction in the contractor's security may be postponed until the defects has been relieved by the contractor.
After the fifth-year inspection the security is completely released unless the employer has presented claims against the contractor.
The use of parent or third party guarantees (whether bank or otherwise) as a security for the obligations of a contractor is governed by article 1799–1 of the French Civil Code. The owner (maître d'ouvrage) must deliver to the contractor (entrepreneur) a joint bank guarantee equal to the entire price of the contract in order to secure the payment obligation owed to the contractor.
The owner is entitled to retain an amount not exceeding 5% of the entire price of the project in order to guarantee the remediation of any defects arising on the date of acceptance of the works. However, if the contractor delivers a bank guarantee equal to an amount not exceeding 5% of the price to the owner, the owner must pay 100% of the price to the contractor.
The Construction Contract Procedures Part B (VOB/B) dealing with security are mostly supplemented and detailed in the construction contract. In particular, the contracting parties commonly agree on the following types of security:
Generally, the contractor must provide a performance guarantee amounting to 10% of the gross contract value. However, it should be noted that under the jurisdiction of the Federal Court of Justice an on demand performance guarantee cannot be stipulated in general terms and conditions.
The amount of any payment/prepayment guarantee is also generally 10% of the gross contract value. In order to ensure that claims for the remaining remuneration are not unsecured at the end of the construction process, it is advisable for the contractor to agree that the prepayment guarantee only expires at the completion of the construction project.
Where agreed, the principal may hold back an amount of up to 10% of each instalment and the final payment as security. Generally, the parties agree that at the time the final invoice is issued, the retention is reduced to 5%. This is then paid into a blocked account unless the contractor provides a contractually agreed warranty guarantee in order to release the amount. An on-demand warranty guarantee cannot be agreed on in general terms and conditions.
Under the German Civil Code the contractor is entitled to register a builder's security mortgage on the relevant plot of land owned by the principal.
Again, under the German Civil Code the contractor has a claim against the principal for the delivery of a guarantee in the amount of the total remuneration owed – including remuneration for any variations – so far as not yet paid but contractually agreed plus 10% for ancillary claims. The guarantee, which can be issued by a bank or a credit insurer, is of more practical relevance than the builder's security mortgage. In the event that the guarantee is not provided the contractor may cease work.
Different types of security will be entered to guarantee performance of obligations by the parties to a construction contract. These include bid bonds, payment bonds and performance bonds.
Contractors will be required to provide a bid guarantee when bidding for a project. The owner may want some recourse if the lowest bidder fails to enter into the contract.
A payment bond is a guarantee by the surety that it will pay the contractor's bill for labour and materials incurred in the project. Labour and materials are defined as whatever is necessary to be used in the performance of contract.
Performance bonds guarantee the contractual obligation of the contractor will be met, protecting the owner from possible losses if the contractor breaches the contract or defaults. Performance bonds can be classified into conditional and on-demand bonds. Conditional bonds require the employer to prove the contractor has failed to perform his contract. An on-demand bond, on the other hand, requires no such evidence.
In Hungary, it is not usual to provide other security documents in addition to the construction contract, although sometimes parent company guarantees are provided by the employer if the employer is a special purpose vehicle.
To ensure that the funds earmarked for certain construction and building activities are used for the purposes specified in the construction contract, the Construction Act, requires the employment of a project fund manager for construction works exceeding currently the value of EUR5,382,000.1 The most important aspect of ‘project fund management’ is that the funds to cover the costs of the construction works must be deposited in advance into a separate account accessed exclusively by the project fund manager who is responsible for the distribution of these funds to the contractor and sub-contractors. Construction concessions and works awarded through public procurement are not subject to ‘project fund management’.2
The employer and the contractor might agree in the construction contract that a certain part of the contract price will not be paid at completion, for example 5% of the contract price is withheld until the occupancy permit relating to the works to be carried out becomes final and non-appealable, and an additional 5% is withheld until the expiry of the guarantee period. It is also common that the parties agree on the provision of a bank guarantee covering the potential warranty and guarantee claims of the employer during the guarantee period.
1 Actually applicable thresholds are published yearly on the website of the Public Procurement Authority of Hungary; https://www.europarl.europa.eu/contracts-and-grants/en/public-procurement.
2Gov. Decree 191/2009, 17.§ (2) b.)
On larger building projects, it would be usual for a developer to require either a performance bond from a surety and/or a parent company guarantee from the contractor.
Performance bonds will usually be required for the sum of between 10% and 12.5% of the contract price/value and may be either “on demand” or “conditional” (eg payable on proof of contractor default). Given some recent high profile insolvencies, performance bonds are generally required in all medium-to-large scale developments.
An assignment of the above to the funding bank is generally a pre-condition to bank funding and these forms of security are generally an integral part of the funder's security package.
In addition, the funding bank will generally require a developer to procure that the contractor, subcontractors and each professional consultant provide collateral warranties to the bank, with each warranty having “step-in” rights in favour of the bank, allowing the funding bank to step in to the various agreements.
The funding bank will generally also take a security assignment over all of the main agreements that the borrower company enters into, which usually include the development agreement, construction contract and professional appointments.
The client does not commonly give security to cover the risks of delayed or absent payment. However, if the client is a special purpose vehicle, the sponsors may be required to provide corporate guarantees or comfort letters in relation to the SPV’s obligations.
Contractors are usually requested to deliver a performance bond (in the form of a first demand bank or insurance guarantee) securing the contractor’s obligations under the building contract and the damages deriving from a breach thereof. The relevant amount is agreed upon by the parties and is usually set in the range of 5–20% of the consideration due to the contractor.
In private works, except for large-scale infrastructure constructions, construction bonds are not very common. In public works, the government authority often requires a contractor to secure a construction bond for default of payment by the contractor. It is not common that a surety would assume specific obligations of the contractor other than payment of moneys.
The parties can agree that additional security will be provided before the construction works can commence. This security may consist of bank guarantees, group guarantees, step-in rights, completion guarantees and, for example, deposits in escrow. All of these require the additional agreements to be entered into, as well as proof of, for example, the bank guarantee provided. A bank guarantee is a valuable document issued by a recognized banking institution, which the bank issues either to the bearer or in the name of a specified beneficiary.
Yes, it’s common for the contractor to provide bonds from third-party sureties to secure performance of the contract (despite the levels of bonding commonly seen as a proportion of the contract price being low by international standards). The standard contract documents state that the principal may provide a bond (though this is not common). Depending on the identity of the contractor and its corporate structure, a parent company guarantee may also be required by the principal.
In Nigeria, the usual security required by the parties for a building or construction contract are performance bonds and advance payment guarantees by third parties and usually commercial banks.
The bonds and guarantees provide security to the employer in the event that the contractor fails to commence or complete the construction works.
The parties may agree that the employer shall provide a payment bond to ensure or guarantee that that the contractor is paid as appropriate. The contractor may provide this security in favour of the subcontractors.
The parties may also agree that in lieu of the employer retaining 5% of the amount due to the contractor under any payment certificate, to ensure that the contractor is put in funds to execute the construction works, a retention bond will be taken out by the contractor by which the employer will be paid the amount which it would have retained in the event that the contractor fails to carry out the works or remedy any defects.
In principle, the parties to a contract are free to agree whether security should be provided for the performance of their contractual obligations. The standard documents require both the contractor and the builder/client to provide security.
The standard form contracts do however require both the contractor and the builder/client to provide security.
The contractor must provide security for the performance of its contractual obligations during the construction period and the defects liability period. The amount varies between different standard documents, but is also subject to agreement between the parties. The security is often reduced after the contract work is taken over by the client during the defects liability period.
The client must also provide security for the fulfilment of its contractual obligations. The security covers claims in respect of the obligations to be performed by the contractor up to the time when the final invoice is received by the client from the contractor.
Documents commonly contain by way of security the following:
It is common for the employer to demand a guarantee of performance of the construction works and a guarantee that the works will be free from defects. These guarantees are usually given by the contractor by way of an independent 'first demand' bank guarantee (insurance bond contracts are also used) or deposit. The employer is granted a contractual right to withhold part of the construction price, for a specified period of time (to be agreed) as security against any construction defects that may arise during the specified period. In public contracts, works of less than € 200,000.00 in value do not require a guarantee, unless otherwise established in the tender rules. The usual amount of the guarantee is 5% of the construction price that the employer must pay to the contractor.
In order to protect against the possibility of not receiving the construction works at the completion date, the client/employer may negotiate some additional security in the contract.
First, it may ask for bonds and guarantees. If the contractor breaches the contract, the performance bond will usually entitle the employer to a payment of an amount up to about 10 percent of the contract price. The guarantee of the contractor's obligations is generally given by a holding company but these guarantees often contain some type of limitation clause or financial cap. In addition, a bank guarantee may be provided by the contractor.
Secondly, a guarantee may also be requested from subcontractors or professional consultants.
Guarantees from a building contractor's parent or ultimate holding company are not typically used in Slovakia.
The most common securities are:
Slovak law also recognizes bank guarantees, bills of exchange, securing transfer of right and the institute of suretyship.
Pledge rights can be over an:
as well as over an asset, right, other property value, flat or non-residential premises, which may be acquired by a pledgor in the future.
Pledge rights and mortgage (in case of real estate) are established upon a written agreement and are created in the moment of registration with the respective pledge right register (Land/Cadastral Register, Notary Central Register of Pledge Rights, Commercial Register, in case of securities the Register of Pledge Rights to Securities of the Central Depository of Securities).
However, the requirement for written form is not necessary for
The performance of a construction contract obligation may be secured by a temporary transfer of the debtor's right or third person's right to the creditor (“securing transfer of right”). This type of security relies on the fact that the ownership right to a particular asset is temporarily transferred to the creditor. The agreement for securing a transfer of right must be in writing and shall contain specific details of the secured obligation and specification of the right that is being transferred for the benefit of the creditor, rights and obligations of the participants of the agreement in relation to the transferred right during the term of the securing transfer of right, its appraisal in money, performance of the securing transfer of right and the lowest bid in case of a voluntary auction. In the case of a transfer of right of a person other than the debtor, the agreement securing the transfer of right has to contain the designation of the debtor as well.
Until the cessation of the securing transfer of right, the creditor shall neither be entitled to transfer the transferred right to another person, nor to encumber it in the interests of another person. Should the subject-matter of the agreement on securing transfer of right be a real estate, the cadastral administration shall mark this fact by making a note in the Cadastral Register.
Suretyship is established by a written declaration of the guarantor addressed to the creditor in which the guarantor takes over the obligation to settle the claim of the creditor in the event the debtor fails to comply with the obligation. Unless agreed otherwise, the guarantor is liable for the whole of the debt. The basic condition for suretyship is that the related declaration must be in writing, to be valid.
In the case of a bill of exchange, Slovak law provides for strict formal requirements (eg: written form) the lack of which causes invalidity.
Two forms of security are commonly provided by the contractor to the developer:
It is possible to take additional security. The employer often requires a bank guarantee from the contractor, but this is a question for the employer when deciding which contractor to use.
The parties commonly agree on the following types of security in a construction contract, especially in public procurement situations:
The contractor provides a bid bond to the employer during the bidding process in order to provide security in the event that the bidder defaults in the process of entering into the construction contract.
The contractor provides a performance bond to the employer during the construction contract in order to provide security in the event that the contractor defaults in performing its duties under the construction contract.
Employers will usually require a 10% performance bond and an advance payment bond. In Abu Dhabi these bonds are nearly always ‘on demand’ in nature (meaning that the surety would release bond monies on written demand from the employer).
Any funder will usually require the benefit of all of the material contracts to which the employer is a party to be assigned to it by way of security. The documents to be assigned to the funder include the construction contract itself, any guarantee to the employer of the building contractor’s obligations under the construction contract and the performance bond from a third-party surety to the employer.
In addition, funders will require contractual step-in rights in the main contractor’s collateral warranty agreement given to them (which is sometimes termed a ‘direct agreement’), giving them (or their appointee) the right either temporarily or permanently to assume the role of the employer under the construction contract where the employer is in breach, and/or while an attempt is made to remedy the breach.
Employers will usually require either a parent company guarantee or a performance bond or sometimes both. Performance bonds can be either 'on demand' in nature (meaning that the surety would release bond monies on written demand from the employer) or 'on default' in nature (meaning that, broadly, an expert's or court decision would be required to be presented by the employer before the surety would release bond monies). If the contractor is being paid an advance payment, employers will also usually require an advance payment bond.
Any funder will usually require the benefit of all of the material contracts to which the employer is a party to be assigned to it by way of security. The documents to be assigned to the funder include the construction contract itself, the guarantee to the employer of the building contractor's obligations under the construction contract and the performance bond from a third-party surety to the employer.
In addition, funders will require contractual step-in rights in the main contractor's collateral warranty agreement given to them (which is sometimes termed a 'direct agreement'), giving them (or their appointee) the right either temporarily or permanently to assume the role of the employer under the construction contract where the employer is in breach, and/or while an attempt is made to remedy the breach.
In relation to the construction activities comprised within a development project, the funder will usually require the benefit of all of the material contracts to which the employer is a party to be assigned to it by way of security. In this context, the employer is, of course, the borrower of finance from the funder. The documents to be assigned to the funder include the construction contract itself, the guarantee to the employer of the building contractor’s obligations under the construction contract (which is given by one of its parent companies or – exceptionally for large contractors – the ultimate holding company in the group) and the performance bond from a third party surety to the employer. Performance bonds can be either ‘on demand’ in nature (meaning that before the surety would release bond monies on written demand from the employer) or ‘on default’ in nature (meaning that, broadly, a court judgement or adjudicator’s decision would be required to be presented by the employer before the surety would release bond monies).
Bonds and guarantees form part of the standard security package. If the contractor breaches the construction contract, the performance bond will usually entitle the employer to payment of an amount up to about 10% of the contract sum for the underlying building contract. The guarantee of the contractor’s obligations is given by a superior company within its corporate group but these guarantees often contain some type of limitation clause or financial cap limiting the guarantor’s liability.
Funders will also require collateral warranty agreements from the building contractor, the key professional consultants and subcontractors with design responsibility giving them direct rights for poor performance. In addition, they will require contractual step-in rights in the main contractor’s collateral warranty agreement in their favour (which is sometimes termed a ‘direct agreement’), giving them (or their appointee) the right either temporarily or permanently to assume the role of the employer under the construction contract where the employer is in breach, and/or while an attempt is made to remedy the breach.
This ‘direct agreement’ has the following effect:
In relation to the construction activities comprised within a development project, the funder will usually require the benefit of all of the material contracts to which the employer is a party to be assigned to it by way of security. In this context, the employer is, of course, the borrower of finance from the funder. The documents to be assigned to the funder include the construction contract itself, the guarantee to the employer of the building contractor's obligations under the construction contract (which is given by one of its parent companies or – exceptionally for large contractors – the ultimate holding company in the group) and the performance bond from a third party surety to the employer. Performance bonds can be either 'on demand' in nature (meaning that before the surety would release bond monies on written demand from the employer) or 'on default' in nature (meaning that, broadly, a court judgement or adjudicator's decision would be required to be presented by the employer before the surety would release bond monies).
Bonds and guarantees form part of the standard security package. If the contractor breaches the construction contract, the performance bond will usually entitle the employer to payment of an amount up to about 10% of the contract sum for the underlying building contract. The guarantee of the contractor's obligations is given by a superior company within its corporate group but these guarantees often contain some type of limitation clause or financial cap limiting the guarantor's liability.
Funders will also require collateral warranty agreements from the building contractor, the key professional consultants and subcontractors with design responsibility giving them direct rights for poor performance. In addition, they may require contractual step‑in rights in the main contractor's collateral warranty agreement in their favour (which is sometimes termed a 'direct agreement'), giving them (or their appointee) the right either temporarily or permanently to assume the role of the employer under the construction contract where the employer is in breach, and/or while an attempt is made to remedy the breach.
This 'direct agreement' has the following effect:
As a rule, security documents, such as bank guarantees and guarantees from the parent or any third party company are used in Ukraine. Surety agreements are commonly used as well.
Common forms of bonds that protect various parties to the construction process are performance bonds, payments bonds, and lien bonds. A contractor can post a performance bond whereby a surety guarantees to the owner that the contractor will complete the construction work. A contractor also can post a payment bond whereby a surety guarantees that the contractor will pay its subcontractors and suppliers. A lien bond protects the owner’s property from mechanics liens.
The contractor’s surety, however, not only shares some of the obligations of the contractor but also has the right to assert some of the contractor’s defenses. For example, if the owner does not pay the contractor and, in turn, the contractor does not pay the subcontractor, then the surety can assert owner’s lack of payment as a defense to the obligation to under the bond to pay the subcontractors.
A guarantee by a parent or holding company may be desirable, if the assets against which a party to the contract would make a claim are held by that parent or holding company.
The security documents used to secure a project vary considerably depending on the nature and purpose of the construction works as well as the zone in which the construction takes place. The common position is that, in commercial arrangements, the contractor would ordinarily be expected to issue a performance guarantee or a performance bond from a third-party surety or alternatively a bank or parent guarantee is used extensively. The type of security undertaken is subject to agreement between the employer and the contractor.
