WHEN A CONTRACTOR REQUESTS A PAYMENT GUARANTEE FROM THE EMPLOYER, WHAT AMOUNT SHOULD IT BE FOR?
Clause 3.1 of the JBCC Series 2000 Principal Building Agreement requires the Employer, if the Contractor so requests, to "provide a payment guarantee for the fulfillment of the Employer's liability" in terms of the agreement.
This provision is interpreted to mean that the amount of the guarantee shall be sufficient to cover the Contractor's exposure to risk in the event of non-payment by the Employer.
The amount of the guarantee is not stated, simply because no standard amount could be agreed by the JBCC constituents.
For this reason the JBCC Series 2000 Tender Form now requires each tenderer to state the amount of the Payment Guarantee he requires at the time of tender, thus quite rightly making the Employer aware of all the terms of the Contractor's offer which he is considering for acceptance.
Contractors tendering under these conditions have to decide what the amount of the Payment Guarantee should be and to assess the Contractor's exposure to the risk of non-payment, the following is offered:
- In normal circumstances where interim certificates are issued within 10 days of the end of the monthly valuation period, payment to the Contractor should be effected for the first 4 weeks' turnover in week 7 or 8.
- In the event of late payment by the Employer, a further 2 weeks' work can easily have been done before the Contractor decides to write giving notice of default, resulting in him only being in a position to cancel the contract and cease work in week 12.
- The risk exposure to the Contractor could therefore be equal to 3 months' turnover at peak. On most projects peak turnover is during the latter stages, and this is when the payment guarantee is really essential.
- Where tender documents specify amended periods for certification or payment,
the risk exposure of the Contractor will correspondingly increase.
- Contracts of very short duration will introduce a greater risk exposure to the Contractor than on longer contracts, and in such situations the Contractor is often required to hand over possession of the works, thereby giving up his lien, at a stage when 50% or more of the contract value has yet to be paid. Without an adequate guarantee the Contractor has only to hope that payment will be made!
The calculation of risk exposure at tender stage based on peak turnover will not always be practical, and for this reason the following procedure is recommended which is based upon 3 times average turnover which is easily calculated by dividing the tender price by the duration in months.
Contract Duration Payment Guarantee
3 months 100% of contract sum
4 months 75% of contract sum
6 months 50% of contract sum
9 months 33.3% of contract sum
12 months 25% of contract sum
Circumstances will often prevail where the tenderer has confidence that the Employer will effect payment as required by the agreement, and in such circumstances the tenderer is at liberty to state in the tender form that no payment guarantee is required.
Contractors should note that they are not obliged to waive their lien in terms of Clause 3.2 of the agreement unless or until the Employer has provided the payment guarantee in terms of 3.1. Failure to provide the required payment guarantee constitutes a ground for cancellation by the Contractor in terms of 38.1.3.
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