RACA Journal I May 2026 www. refrigerationandaircon. co. za 7
TECHTALK
THE FAMILIARITY AND COST OF BANK GUARANTEES Most contractors begin with bank guarantees. They are familiar, widely accepted and historically entrenched in the construction environment. But familiarity, as Loots pointed out, comes at a price.“ Banks issue guarantees against security – not against your performance risk,” she said.
In practical terms, that usually means 100 % collateral. Cash is tied up in fixed deposits, overdraft facilities are reduced, or credit lines are restricted. The bank is protected – but the contractor’ s working capital takes a direct hit.
“ When your cash or facilities are tied up in a bank guarantee, that capital is not available to run the project itself. It reduces your overdraft capacity, limits working capital and puts pressure on your ability to pay suppliers and subcontractors,” she explained.
And timing can compound the problem. Bank approval processes, especially in tight credit environments, can be slow. Contractors sometimes find themselves ready to mobilise on site, only to be delayed because the guarantee has not yet been issued.
A DIFFERENT APPROACH“ Insurance guarantees approach the same contractual requirement from an entirely different angle. Instead of demanding full cash cover, licenced short-term insurers underwrite the contractor’ s risk. They assess financial strength, track record, management capability and the nature of the contract. In many cases insurance guarantees can be issued with minimal or no cash collateral. That’ s a significant advantage,” Loots said.
To illustrate the difference, she used a practical example: a shopping centre HVAC installation valued at R18-million, requiring a standard 10 % performance guarantee. The guarantee value would be R1.8-million. Under a bank guarantee, that R1.8 million could be fully secured against cash or facilities.
Under an insurance guarantee, assuming 10 % collateral, the contractor may only need to secure R180 000. The remainder of the working capital remains available to fund the project.“ Yes, the premium might be higher, but you have far more working capital to use for your project,” she said.
Premiums are typically around 3 % a year of the guarantee value, calculated pro rata over the contract period. Unlike bank charges, insurance premiums are paid upfront because the guarantee, once issued, is uncancellable.
“ Unlike a normal insurance policy, you can’ t just stop paying and the cover cancels. Once the guarantee is issued, it stands,” she explained.
DO EMPLOYERS ACCEPT INSURANCE GUARANTEES? One of the most common concerns contractors raise is whether employers will accept insurance guarantees instead of bank guarantees.
Loots was unequivocal:“ Insurance guarantees have been around since the early 1980s. From the employer’ s perspective, the protection remains the same.”
They are legally enforceable and aligned with standard construction contracts such as Joint Building Contracts Committee( JBCC), and Fédération Internationale des Ingénieurs- Conseils( FIDIC). The employer receives the same contractual comfort.( The term‘ Employer’ has a specific legal meaning. It does not mean an employer in the labour-law sense. It refers to the party who appoints the contractor and for whom the works are being executed – essentially, the client / principal.)
That said, she highlighted an important operational difference.“ If you’ ve ever seen a claim on a bank guarantee, they usually just swipe your account and pay – few questions asked,” she remarked. Insurers, she said, do the opposite. They engage immediately, gather information and attempt to understand the situation before payment is made.
In fact, insurers often intervene proactively. Rather than paying out a full R1.8-million performance guarantee, Loots shared that insurers have in some cases provided partial funding – for example R750 000 – to assist the contractor in completing the project and avoiding a full claim.
“ They try to be proactive so the job doesn’ t stop. They want the contract completed.” Loots also clarified a common misconception: guarantees do not replace normal commercial insurance.
“ If you have a claim for equipment failing, or a structure collapsing, your normal insurance steps in. A guarantee only responds where you cannot complete the project,” she said. That distinction is critical. Public liability, contract works and other standard policies remain essential.
A strong warning accompanied the technical detail.“ It’ s critical that you use a licenced insurer or broker approved by the Financial Sector Conduct Authority,” Loots stressed.
Some credit providers issue cheaper guarantees under the National Credit Act without proper insurance backing. These may appear attractive – lower cost, no tangible collateral – but in the event of default, they may not honour claims.
“ We’ ve seen that many times in the industry. It can jeopardise projects and damage reputations,” she cautioned. RACA
networking associations
RACA Journal I May 2026 www. refrigerationandaircon. co. za 7