Securities in FIDIC: Performance Security, advance and retention

Securities are the financial “skeleton” of a FIDIC contract. They protect the parties against non-performance and bad faith. Let’s go through the main types and the risks attached to them.

Performance Security (Sub-Clause 4.2)

The main guarantee is the performance security. The Contractor provides it (usually a bank guarantee) as a pledge that it will perform its obligations. If the Contractor materially breaches the contract, the Employer may, on certain conditions, demand under the guarantee.

Key points:

• Form and amount are set in the Particular Conditions (often 10% of the price).
• The validity period must cover performance and is usually extended until the Performance Certificate.
• The type of guarantee matters: “on demand” or conditional. On-demand is harsher for the contractor.

An on-demand guarantee can be called almost “on first demand”. So the wording of the conditions for calling it is critical for the contractor.

Advance Payment Guarantee

If the contract provides for an advance, the Employer usually requires a counter-guarantee for its repayment. As the works progress, the advance is repaid by deductions from interim payments, and the guarantee amount should reduce accordingly.

Retention

A percentage withheld from each interim payment as an additional quality safeguard. The accumulated sum is usually released in two stages: part at taking-over, the remainder after the end of the DNP. Retention is sometimes replaced by a retention bond.

Where the risks hide

• Mismatch between the terms of the guarantees and the contract. If a guarantee expires earlier than needed, the protection vanishes.
• Unfair (abusive) calls on an on-demand guarantee. The contractor must understand the grounds and remedies.
• Double security. Sometimes the employer demands excessive guarantees — this raises the project cost.
• Currency and jurisdiction of the guarantee. Especially in MDB projects.

Practical tips

• Check the type of guarantee (on-demand vs conditional) and the conditions for calling it.
• Watch the extension deadlines — a lapse may give a right to withhold payment.
• In MDB projects, check the guarantee forms against the bank’s requirements.
• Track advance repayment and the reduction of the advance guarantee.

Related topics — payments under Clause 14 and taking-over and the defects period. Need expertise on the guarantees of a specific contract? Write to us.