What is a Guarantee?
A guarantee is a written undertaking by an institution, (the guarantor) on behalf of a party, (the principal) to pay an agreed amount to another party, (the beneficiary) if the principal defaults in terms of the contract between them.
Type of guarantees
There are generally two types of guarantees. The first is a Co-principal Debtors guarantee where the principal’s defence is the guarantor’s defence. The second is a demand guarantee. This guarantee stand separate of the underlining contract of agreement and any dispute on the underlining contract can not be brought in for consideration for not paying the guarantee except in the event where the actual call in itself is fraudulent.
Benefits of an Insurance Backed Guarantee
- Insurance backed Guarantees do not require 100% collateral.
- In a challenging environment and economy whereby cash is king for every contractor, the insurance backed guarantee does not place un-due burden on the cash flows of the entity.
- Enable the contractor to bid for bigger contracts as the guarantee collateral required is reasonable.
- All collateral held by Insurers earns Interest. The collateral and interest are returned to the client should the guarantee be cancelled and there was no claim.
- Once a guarantee facility has been put into place the issuing of guarantees are effortless.
We endeavour to deal only with insurers who possess a global credit rating of A- or above as far as practically possible. This ensures the easy acceptance of guarantees. Most astute employers do not accept guarantees from an inferior-rated company, or guarantees issued under the National Credit Act (NCA) as the claim settlement abilities are poor in case of the former or unknown in the latter.
Type Bonds and Guarantees
- GM Financials Services specialises in the following type of Guarantees
- Construction Related Guarantees which include Bid Bonds, Advance Payment, Performance and Retention Guarantees.
- Court Bonds
- Mining Rehabilitation Guarantees
- NHBRC Guarantees which include Late Enrolment and Sectional Title Guarantees
- Trade Guarantees which includes Fuel Guarantees, Customs Bonds, Educational Guarantes, Logistics Guarantees and Utility Guarantees
Facility for Performance Guarantee Application Questionnaire
Performance Guarantee for a new project (if you have a facility in place) - Questionnaire
Advance payment Guarantee App Form (if you have a facility in place) - Questionnaire
Construction Guarantees / Bonds
The following Construction Guarantees are available in the African market
- Advance Payment Guarantees and Materials of Site Guarantees
- Performance Guarantees
- Retention Guarantees
- Bid Bonds Guarantees
Advance Payment Guarantee/Bond
Some contracts make provision for Employers/Principals to pre-finance a contractor by making payments before the commencement of the contract. The Employer/Principal secures such a risk by requiring an advance payment guarantee/bond in return. Usually, the guaranteed amount will decrease in accordance with the percentage of the work certified. The guarantee/bond will be equal to the pre-financed amount - usually 30%.
This bond is required when submitting a tender and secures the employer from the premature withdrawal of a tender and to if the appointed contractor is unable to fulfill its contract award conditions.
This is most probably the most common form of guarantee, which protects the Employer/Principal against the risk of the contractor failing to comply with the conditions of the contract. Traditionally, the guarantee amount is equal to 10% of the contract sum. However, recently the new format JBCC "fixed" (7.5%) guarantee or "variable" (12.5% reducing to 2%) guarantee was introduced, of which the latter version includes a retention provision.
Retention Guarantee / Bond
The bonds effectively replace the actual retention fund. Most contracts make an allowance for the Employer/Principal to retain a percentage of the funds payable to the contractor during the construction period as a form of security against default or defective work. A portion of the funds retained is paid out at the end of the construction period and the balance at the end of the maintenance (defects liability) period. Funds released with a guarantee/bond significantly enhance working capital.
"South Africa has identified electricity as being a possible hinge on growth due to the increasing demand. With the high level of renewable energy potential, a target of 10 000 GWh with 3 725 to be generated from renewable energy sources has been set as the new target to ensure that electricity demands are met with, which is in accordance with the capacity allocated to renewable energy generation in IRP 2010-2030. The Department of Energy has established the Renewable Energy Independent Power Procurement Programme ("REIPPPP") that has been designed so as to contribute towards the target of 3725 MW and towards social-economic and environmentally sustainable growth, and to start and stimulate the renewable industry in South Africa." In keeping with the GM Financial Services culture of solutioning our clients, relationships have been created with guarantors in the market to provide insurance backed capacity with a total guarantee capacity in excess of R 1.5 billion per project. Bid Bonds, preferred Bid Bonds, as well as the performance, retention guarantees and advance payment guarantees form part of the suite of products offered.