The usage of guarantees and payment-related instruments in the commercial management of construction contracts

Abstract

This research work is aimed at addressing the guarantees and payment-related instruments used as part of the commercial management process of construction contracts. The concerned instruments typically consist of: retention amounts, performance bonds or guarantees, advance payment guarantees, retention bonds, withholdings, setting-offs and liquidated damages. Each of these instruments is defined by a set of parameters; that is, acquisition time and methods from the contractor, usage instances and methods by the client, returning time and methods to the contractor and rate or ceiling or recovery rate ranges with respect to the initial contract price and-or interim payment certificates. Common practices in the construction industry adopt some popular rates for these instruments, an example of which would be to hold around 10percent of each interim payment certificate as a retained sum and to return half of the aggregate amount to the contractor at the substantial completion date of the project and the other half at the end of the defects liability period. Such mechanisms have become conventional, unquestioned by clients and adopted almost invariably without inquiring about their origins, irrespective of the specific characteristics and needs of a project. Furthermore, even though standard general conditions of the contract for construction define these instruments, neither do they present a method for setting the above-mentioned parameters, nor do they specify clear ranges of values for them or suggest adjustment mechanisms. This proposed research will endeavor to study these instruments, in line with the standard practices used for international construction contracts and the published scholarly work found on the topic. An investigation of the reasons underlying the adoption of some popular rates will be attempted, along with a verification of their veracity and an exploration of all the possible adjustments that can be made to the parameters of these instruments in addition to all possible interactions between the