Construction can be a risky investment, but if you request a guarantee of compliance from the contractor, you as the project owner can increase the probability of successful completion of the project. A performance guarantee acts as an insurance policy for the owner in case the contractor does not comply with the terms of the construction contract. Compliance guarantees are issued through a third-party guarantee company that insures the contractor and pays claims to the owner.

Function

A construction compliance guarantee is sometimes necessary for a client who wants an insurance policy for the job envisaged. When a contractor is awarded a construction contract, the owner can demand a compliance guarantee to ensure that the work will be completed or the owner will be adequately compensated for any monetary damage. The owner can submit a claim for damages up to the total amount of the action. Compliance guarantees are often standard for public works jobs.

Terms

Before acquiring a compliance guarantee, the terms of such guarantee must be accepted by both parties. The total scope of work, the estimated value of the work and the term for its completion must be determined before the issuance of the insurance. In addition, the contractor and the owner must establish the terms for the resolution of performance issues and the filing of a claim for compliance guarantee. The issuer of the guarantee will usually define the terms of the compliance guarantee, payments and claims.

Cost

The cost of the compliance guarantee is paid by the contractor, which usually includes this cost in the company’s offer for the project. The cost of the guarantee depends on a variety of factors, including the total cost of the work and the type of construction that is carried out. The cost can be between 1 to 5 percent of the estimated cost of construction. If the issuing company determines that the contractor is responsible for a risk investment, the initial costs for the guarantee will be higher.

Benefits

One of the benefits is to demand a compliance guarantee as an insurance policy for the owner. Contractors must qualify to face these guarantees, so the contractor’s ability to purchase insurance will give the owner peace of mind that the contractor is financially stable and more likely to be able to complete the job. The compliance guarantee also assures the owner that if the contractor does not finish the job or it takes longer than agreed, the owner will be adequately compensated for the mishap.

Disadvantages

A mandatory compliance guarantee puts smaller companies at a disadvantage for the acquisition of a work. These companies may not be able to pay or qualify for the link. Other contractors may not be willing to pay up front or complete additional work to purchase a warranty. This can lead to a decrease in competition among contractors for the owner’s project. The lack of competing contractors may imply higher bids for the project. Contractors must also include the cost of the guarantee in their offers, which leads to higher total costs for the owner.