Advance payment bonds
Produced in partnership with Kennedys

The following Construction practice note produced in partnership with Kennedys provides comprehensive and up to date legal information covering:

  • Advance payment bonds
  • Why are advance payment bonds used?
  • Key features of the advance payment bond
  • Other features of advance payment bonds
  • Execution
  • Demand procedure
  • Maximum bond amount
  • Duration of the advance payment bond/Implications of expiry
  • Time and indulgence provisions
  • Assignment provisions
  • More...

Advance payment bonds

An advance payment bond is a particular form of performance bond, invariably written as an 'on demand' instrument. See Practice Notes: Performance bonds—construction projects and On demand performance bonds—construction projects.

This Practice Note examines:

  1. the nature of advance payment bonds

  2. why they are used in the construction industry, and

  3. the key features in the wording of the advance payment bond

Why are advance payment bonds used?

The typical payment procedure, under any building contract, provides that the contractor will be paid in instalments, as each stage of the works is carried out following inspection, quantification and certification by the contract administrator. In short, payment is in arrears, in respect of work already carried out.

There will be circumstances in which an advance payment will be made to the contractor, for example to facilitate the contractor’s mobilisation procedures, or to assist the contractor to place orders for the long term manufacture and delivery of steel or other materials for example. Whenever an advance payment is made to a contractor, the employer is exposed to the risk of loss if the employer subsequently does not receive the benefit of the advance payment, through works delivered under the building contract. The most obvious risk is that of the contractor’s subsequent insolvency. The Supreme Court decision in Rainy Sky SA v Kookmin Bank provides robust support for the

Popular documents