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Bank Guarantee — Structure & Types
Governed by ICC URDG 758
Common Guarantee Types
Performance Bond
Typical amount: 5–10%
Ensures contract performance
Advance Payment
Typical amount: 10–30%
Protects pre-paid amounts
Bid Bond
Typical amount: 2–5%
Ensures bid commitment
Payment Guarantee
Typical amount: Full amount
Guarantees buyer pays seller
Key URDG 758 Principle
“Pay first, argue later” — the guarantor pays on a compliant demand without investigating whether the underlying default occurred. The principal must then pursue the beneficiary in a separate legal action.
Types of Bank Guarantees
Performance Guarantee (Performance Bond)
Purpose: Ensures the principal fulfills their contractual obligations (delivers goods on time, completes construction, etc.)
Typical Amount: 5–10% of contract value
Used In: Construction contracts, supply contracts, service agreements
Called When: Principal fails to perform according to contract terms, misses deadlines, or delivers non-conforming goods/services.
Advance Payment Guarantee
Purpose: Protects the buyer who has made an advance payment to a seller/contractor
Amount: Equal to the advance payment (often 10–30% of contract value)
Used In: Large capital projects, custom manufacturing, long-term supply contracts
Called When: The seller/contractor fails to deliver the goods or complete the project after receiving the advance.
Key Feature: The guarantee amount typically reduces automatically as deliveries are made (a "reducing guarantee").
Bid Bond (Tender Guarantee)
Purpose: Ensures a bidder submitting a tender will sign the contract if their bid is selected
Amount: 2–5% of the bid/tender amount
Used In: Government tenders, construction projects, procurement processes
Called When: The winning bidder withdraws their bid, fails to sign the contract, or cannot provide a performance bond.
Payment Guarantee
Purpose: Guarantees that the buyer will pay the seller for goods delivered or services rendered
Used In: Trade transactions where the buyer cannot obtain an LC, open account trade
Key Difference from LC: Payment guarantees are demand instruments — the seller calls them only if the buyer fails to pay. An LC is the primary payment mechanism.
Retention Bond / Maintenance Guarantee
Purpose: Replaces the retention money withheld by the employer in construction contracts
Benefit for Contractor: Receive the retained amount immediately rather than waiting for the defects liability period to expire