Last edited 20 Aug 2019

Advance payment bond for construction contracts

If the client agrees to make an advance payment (sometimes referred to as a down payment) to a supplier, a bond may be required to secure the payment against default by the contractor. This is referred to as an advance payment bond (APB), advance payment guarantee or advance stage payment.

Typically on a construction project an advanced payment bond will be required by the client if the contractor requests advance payment to help them meet significant start up or procurement costs that may have to be incurred before construction begins.

For example, where the contractor has had to purchase high-value plant, equipment or materials specifically for the project. The bond will protect the client in the event that the contractor fails to fulfil its contractual obligations, for example if the contractor becomes insolvent.

An advance payment bond will normally be an on-demand bond, meaning that the bondsman pays the amount of money set out in the bond immediately on demand, without any preconditions having to be met. This is as opposed to a a conditional bond (or default bond) where the bondsman is only liable if it has been established that there has been a breach of contract.

Advance payment bonds must be very carefully drafted to set out the circumstances for payment and to make clear that they are on-demand bonds.

A ‘vesting certificate’ or ‘certificate of vesting’ may be required from the contractor (or sub-contractors or suppliers), certifying that ownership of goods, plant or materials listed in a schedule will transfer from one party to the other upon payment and confirming that they will be will be properly identified, separately stored, insured and are free from encumbrances (such as retention of title).