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Here’s What You Need to Know About Bank Guarantees for Construction

Here’s What You Need to Know About Bank Guarantees for Construction
25 February 2022    Education, Tips and Trick
Written by Adam Fonsecha S.S.

Have you hired a contractor? Are you about to sign the contract that sets your house construction underway? Before that, there are a few things that you need to learn regarding Bank Guarantees for house construction. Bank Guarantees might sound unfamiliar to you, especially if you have little knowledge in construction. Therefore, Emporio Architect will share useful information regarding the explanation, types, and benefits of Bank Guarantees for house construction. Curious yet? Grab your snacks, and let’s get into it.

The Definition of Bank Guarantees

Bank Guarantees can be defined as a written statement issued by a certain bank, as the guarantor party, to its customer, as the guarantee receiver party. Bank guarantees involve 3 parties, which include the bank (the guarantor), the project’s owner (the guarantee beneficiary), and the contractor (the guaranteed party). In this case, the contractor as the guaranteed party will propose a Bank Guarantee’s application to the bank. The bank, as the guarantor, will issue a guarantee to the customer, which is you. You, as the beneficiary party, will receive the guarantee that has been issued by the bank in accordance with the agreement letter between the guaranteed party (the contractor) and the beneficiary party (you/the project’s owner).

The Benefits of Bank Guarantees

bank guarantees for construction

Not many people figure that Bank Guarantees offer many benefits for transaction or business partnerships where both parties still don’t fully trust each other. This situation is where Bank Guarantees come into play because it reduces potential losses and wipes concerns of both parties during the course of the partnership.

For the bank itself, Bank Guarantees make it easier for its customers to conduct a transaction or run a business partnership. On a side note, this service brings profit for the bank through the customer’s fees and guarantee provided.

The benefits of Bank Guarantees for the beneficiary and guaranteed parties are to ensure that the partnership circles around trust and to ensure that the project’s owner is given the confidence that the contractor will complete the obligations of the partnership. Therefore, the guarantees beneficiary will not experience any concerns or suffer any losses.

Types and Procedures of Bank Guarantees

bank guarantees for constructuin

There are many types of Bank Guarantees that can be applied in a variety of fields. In construction, Bank Guarantees that can be applied to support the construction contract are:

1. Bid Bond

It’s a Bank Guarantee provided to the project owner for the essentiality of the contractor who will participate in the tender bid for a project as a condition for the contractor to participate in the tender process.

2. Performance Bond

It’s a Bank Guarantee provided to the project’s owner for the essentiality of the contractor to guarantee the project’s implementation.

3. Advance Payment Bond

It’s a Bank Guarantee provided to the project’s owner for the essentiality of the contractor in regards to the advance payment received by the contractor.

4. Maintenance Bond

It’s a Bank Guarantee provided to the project’s owner for the essentiality of the contractor in order to guarantee the maintenance of the project that has been finalized by the contractor.

In order to apply the Bank Guarantee, the project’s owner and the contractor first need to agree on a construction contract. The following are the construction contract stages with a bank guarantee:

1. Preparation Stage for Contractors Tender Bid

2. Implementation Stage for Contractors Tender Bid

At this stage, the contractor should submit a bid bond bank guarantee.

3. Contract Signing Stage

At this stage, the contractor should submit a performance bond bank guarantee.

4. Contract Implementation Stage

At this stage, the contractor should submit an advance payment bond bank guarantee if the contractor accepts down payment and submits a bank guarantee for maintenance once the contractor has finalized the construction.

bank quarantees for construction

Those are an explanation regarding Bank Guarantees for construction. It can be concluded that Bank guarantees are necessary to build trust between business parties that want to conduct transactions or partnerships. Therefore, if you want to sign a business partnership or hire a contractor service, it’s much safer to ask for Bank Guarantees from the other party you’re in business with.

However, the project’s owner or the beneficiary party of a Bank Guarantee needs to take notice of several things before agreeing to a Bank Guarantee, which are:

  • Ensure beforehand that the Bank Guarantee is authentic and verified by the guarantor party.
  • Verify the Bank Guarantee’s expiration date in accordance with the partnership’s time period.
  • Verify and digest the claim terms to facilitate the Bank Guarantees if needed.

After done reading this article, you would have known that other than conducting a tender bid and choosing a payment system, you also need to pay attention to Bank Guarantees before hiring a contractor. Therefore, before signing the construction contract, it’s best to ensure the contractor provides Bank Guarantees as an assurance that the contractor will rely on its liability to carry out its duty and obligations until the project is finalized according to plan, fully functioned, and durable.

However, Bank Guarantees are rarely used for house construction on a smaller scale due to its downside, including its fees that can be considered expensive, the requirement that the parties involved have to be the bank’s customers during the complicated process of issuing the Bank Guarantees.

Not only that, the contractor as the guaranteed party needs to provide collateral in the form of a deposit or savings to the bank during the active time period of Bank guarantees as a warranty. Even so, Bank guarantees can protect you from potential losses if the contractor fails or disappoints to fulfill its duties. Therefore, you can take advantage of Bank Guarantees if you need extra and guaranteed protection because, factually, contractors will take their duties far more seriously and more liability.

Have you understood about Bank Guarantees but yet to have a house design for the construction? Don’t be concerned, just give Emporio Architect’s customer service a life-changing call to earn yourself the most professional architecture service. Make your dream home come to a realization and upgrade your family’s life quality with Emporio Architect.

Fairus Rizki Nurrahmawati, S.Ars
Adam Fonsecha S.S.
Born and raised in Bali, Indonesia, does not limit his passion for learning other languages and desire to reach multiple continents through his writing. Writing articles has been his journey since graduating as it connects him with many people locally and globally. Also, nothing beats the feeling of readers taking an interest in a product that has been literately created into a future promise.
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