Advance payment guarantees for contractors

What an advance payment guarantee is

Some contracts provide for an advance to help the contractor mobilise, buy materials or pay for long-lead items. Because the employer is paying before it receives value, it often asks for security that the advance will be repaid if the contract does not proceed as agreed.

An advance payment guarantee provides that security. If the contractor fails to recover the advance through the contract’s payment process, for example because it defaults or the contract ends early, the employer can make a demand on the guarantee for the unrecovered amount, subject to the wording.

When an advance payment guarantee comes up

Contracts with a mobilisation or materials advance as part of the payment terms.
Contracts for equipment or materials with long manufacturing lead times, where the employer pays a deposit.
Public and private employers who have a policy of requiring security for any payment made in advance.
Contractors who are deciding whether the benefit of an advance justifies the cost and obligations of the guarantee.

What to check before you accept an advance

Amount and reduction: The guarantee amount is usually tied to the advance. Check whether it reduces as the advance is recovered, and how that reduction is evidenced.
Recovery mechanism: The contract usually recovers the advance by deductions from payment certificates. The guarantee wording should match that mechanism, to avoid a guarantee that remains at full value after the advance has been repaid.
Timing of issue: The guarantee is normally required before the advance is paid. Delay in issuing it delays the money.
Expiry: A guarantee that expires before the advance has been fully recovered may expose the employer, and the contract may require its extension.
Use of the advance: Some contracts restrict how an advance may be used. Misuse can create contract issues separate from the guarantee.

Important limitations and obligations

Repayment: If the issuer pays the employer, the contractor is normally obliged to reimburse the issuer under its counter-indemnity.
Cash-flow trade-off: An advance helps cash flow, but the guarantee has a cost and may require security. Compare both before deciding.
Provider limits: Providers may limit the total guarantees they will issue for one contractor, so an advance payment guarantee can use up capacity that would otherwise be available for a performance guarantee.
No assurance of issue: A guarantee is issued only if the provider approves the application. We cannot promise the outcome or a timetable.

How an advance and its guarantee move together

Stages of an advance payment arrangement
Stage	What happens	What to watch
Contract award	The contract provides for an advance and requires a guarantee.	The prescribed wording and the amount
Guarantee issued	The provider issues the guarantee and the contractor delivers it to the employer.	Date of issue and the expiry date
Advance paid	The employer pays the advance after receiving the guarantee.	Whether payment is made within the contract period
Recovery	The advance is recovered through deductions from payment certificates.	Whether the guarantee reduces in step with recovery
Release	Once the advance is fully recovered, the guarantee is no longer needed.	Return of the original document to the issuer

Information we usually need for a quotation

We would normally ask for the following to start an advance payment guarantee enquiry:

The contract extract that provides for the advance and the guarantee.
The amount of the advance, how it is to be recovered and the dates involved.
The employer’s prescribed wording, if there is one.
Your business and director details and recent financial statements.
A summary of the project and your relevant experience.
Any other guarantees or security already in place for the contract.

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.

Frequently asked questions

Does the guarantee amount reduce as the advance is repaid?

That depends on the wording. Some guarantees reduce in line with recovery through payment certificates, and others do not. Check the contract and the wording before you accept the advance.

Can I use the advance for anything I like?

Check the contract. Many contracts restrict the use of an advance to mobilisation, materials or related costs.

Is this the same as a performance guarantee?

No. An advance payment guarantee secures repayment of the advance. A performance guarantee secures performance of the contract. A contract may require both.