The Civil Engineering Contractor May 2019 | Page 37

THOUGHT LEADERS
guarantee (the ‘guarantor’) will
have the right to recover the full
amount from the contractor.
The contractor therefore needs
to provide the guarantor with
enough comfort and security
so that a full recovery can be
made by a guarantor, should there
be a claim on a guarantee. The
amount of security will depend
on the risk profile of the industry,
the contractor, and the specific
contract.
Banks are generally conservative and
demand higher levels of security, often
requiring up to 100% of the value of a
guarantee in cash and/or other forms
of security. Insurers generally require
a lot less tangible security than a bank
and might often only rely on what is
referred to as paper securities, such as
www.civilsonline.co.za
suretyships and company indemnities.
In comparison to a bank, a guarantee
issued by an insurer can therefore
free up a contractor’s working capital
substantially.
Retention monies are typically
withheld by an employer to protect
it from any defects that occur under
the maintenance period of the
contract. This money will be used
when the contractor does not return
to site to repair the defects. Some
employers are willing to pay out
the retention monies in exchange
for a retention money guarantee. To
issue such a guarantee, a bank may
require the full amount of the cash as
security for the guarantee, therefore
tying up the working capital, rather
than releasing it for the contractor to
use in their business. In comparison,
“The worse the cycle, the
more guarantee claims
one can expect due to
the higher incidences of
contractors’ failure.”
an insurance-based guarantor might
only need a portion of the cash, if
any, which is far more beneficial for
the contractor.
Demand guarantees
A demand guarantee is a contract
in which the guarantor promises to
pay the beneficiary a certain sum of
money upon the beneficiary’s first
demand alleging a certain event. The
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