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Construction Law/Retention & Performance Bond


Dear Peter,

We have an issue with the client about releasing the retention money, Our client is requesting retention bond to release this money although we didnt have any thing about this in the contract,I'm including here the two articles:
22.1   Subject to Article 15.1 of the Schedule B, CONTRACTOR shall obtain and deliver to COMPANY by the EFFECTIVE DATE a bank guarantee in the form attached as Schedule C and in the amount of ten percent (10%) of the estimated CONTRACT PRICE (the "BANK GUARANTEE"), as security for the proper performance of this CONTRACT by CONTRACTOR, which shall remain in full force and effect and be held by COMPANY until the expiry of a twenty four (24) months’ period after the release of the PROVISIONAL ACCEPTANCE CERTIFICATE or until all outstanding financial matters have been settled, whichever is the later. The BANK GUARANTEE may be drawn by COMPANY upon COMPANY’s first written demand stating that CONTRACTOR has not fulfilled its obligations under the subject CONTRACT, notwithstanding any contest or other disagreement by CONTRACTOR. The bank providing the BANK GUARANTEE shall be subject to the prior approval of COMPANY. All costs of complying with the requirements of this ARTICLE 22.1 shall be borne by CONTRACTOR.  
15.1   GENERAL
•   All Unit Rate payments made to the CONTRACTOR will be based on the following rules:
•   0%-95%   Up to Mechanical Completion notification by CONTRACTOR (as defined in Schedule A – terms & Conditions) by monthly progress invoices
•   2.5%   At Pre-Commissioning Completion
•   2.5%   At COMPANY’s acceptance of completed QA/QC and Project Documentation for the system (signified by COMPANY issue of the pertinent MECHANICAL ACCEPTANCE CERTIFICATE to the CONTRACTOR)
COMPANY and CONTRACTOR agree that the sole purpose of the above milestone payments of 5% is to reimburse CONTRACTOR for completing Pre-Commissioning and QA/QC and Project Documentation deliverables to COMPANY. PARTIES agree also that the above milestone payments of 5% shall be used only for its intended purpose and no other.
•   The aforementioned payments shall be subject to 10% retention. In lieu of retention CONTRACTOR may provide a Bank Guarantee that will be released in accordance with Articles 22.1 of the Schedule A – Terms & Conditions.
•   Final payment for work executed under the CONTRACT shall only be made when all applicable quality assurance requirements have been complied with and approved quality assurance documentation, including all as built drawings, have been submitted by CONTRACTOR and the Regulatory Authorities (as applicable).
•   The Indirect Running Costs will be paid to CONTRACTOR based on the following mechanism: the total of Indirect Running Costs will be divided by the no. of months of duration of the WORKS as per attached PROJECT EXECUTION PLAN and this will be the monthly amount that COMPANY will pay to CONTRACTOR. CONTRACTOR to submit invoice at the end of each month. As for the Indirect Mob / Demob costs, they will be paid in accordance with the attached Table 7 – Mob / Demob Milestone Payments.
•   In addition, COMPANY agrees to grant to CONTRACTOR an Advance Payment equals to 10% (ten percent) of the estimated CONTRACT PRICE against an ADVANCE PAYMENT BANK GUARANTEE for the same amount in accordance with Schedule C2 of the CONTRACT. Such advance payment shall be offset on a monthly basis throughout the duration of the CONTRACT by reducing each payment by 10% (which is the advance payment percent out of the estimated total cost) up to the recovery of the total advance payment.

so does the Client has the right to ask this retention bond? the two articles are connected to each other and referenced to each other.


Dear Ahmad,

It would appear that the Employer does not have the right, but the Contractor does have the right.  

It is possible that the Employer is forced to spend his funding by a specific date or lose the funding.  This situation often arising with funding from the European Commission.  One solution for the Employer is to release the retentions against a bank guarantee, so that the funds are disbursed and not lost.  There is a misunderstanding among funders that release of cash against a bank guarantee is 'good' for contractors. I see no problem for the Contractor, except that he has to provide extra funds or guarantees in providing the retention guarantee, which affects his credit facilities and incurs charges.  Perhaps you could explain the situation to the Employer in an informal manner and ask him the reason for releasing the retention and requesting the bank guarantee.  

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Peter M. Elliott


First response to queries regarding extensions of time, variations orders, site instructions and payment using FIDIC and other forms of Conditions of Contract, based on English Law, and derivatives only. Anyone who needs advice about EoT should download and study the SCL Delay & Disruption Protocol before submitting a question.


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