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Construction Law/Deduction on account of invalid Performance Guarantee

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QUESTION: Dear Sir

Assalam o alaikum

I want to know that which Clause of FIDIC (Plant and Design Build 2002) allows deduction from Contractor's Payments on account of invalid Performance Guarantee ?
Secondly how shall we calculate the amount of Deduction  for example if the Performance Guarantee is expiring 4 months before the Expiry date of Defects Notification Period ?
Thirdly Sir, Deduction on this account can be made only from final bill or it can also be done while releasing first or second half of Retention Money ?

ANSWER: Dear Mr. Abdul Waheed,

Thanks for your question and my response is as follows:

Q-1: I shall be obliged if you can throw some more lights on the specific issue involved to be able to answer the question specially regarding invalid performance guarantee? I am curious why it was accepted in the first place.

Q-2: The amount of deduction has to be related to various grounds for which this deduction is to be made and so you have to base amounts for such calculation accordingly.

Q-3: I can advice on this point after seeing details provided against Q-1 and Q-2.

I can not give general response as the points raised are incidents specific and so await your further clarifications.

Regards,
Liaqat Hayat

---------- FOLLOW-UP ----------

QUESTION: Sir,

The Contractor was granted EOT by the Employer on recommendation of "The Engineer" but the Contractor didn't extended the Performance Guarantee as per the revised completion date after issuance of EOT.

After completion of the project and issuance of Taking over Certificate the Contractor applied for release of 1st Half of retention money. The Consultant of the Project (i.e The Engineer) has recommended Contractor’s request for release of 1st Half of retention money, for approval of the Employer. It is mentioned in the letter received from the Engineer that “the Contractor has not extended the Performance Guarantee up to Defects Notification Period, however deduction on this account can be considered at later stage”.

I am unable to understand the above quoted statement of the Engineer as I feel that such relaxation should not be given to the contractor.

So that is why I want to know that which Clause of FIDIC (Plant and Design Build 2002) allows deduction from Contractor's Payments on account of invalid Performance Guarantee?

Secondly how shall we calculate the amount of Deduction for example if the Performance Guarantee is expiring 4 months before the Expiry date of Defects Notification Period?

Thirdly Sir, Deduction on this account can be made only from final bill or it can also be done while releasing first or second half of Retention Money?

Answer
AOA,
I feel you are referring to FIDIC(plant and design build 1999) in which clause 4.2 deals with performance security.It says in third para, in event of failure by contractor to extent the security,the Emoployer can make a claim under the security and this is what is happening in your case.Please remember you have make the claim as per provision of clause 2.5 .So this is my answer to your Q1
Regarding your second question,you mean the premium for four months on account of early expiry of the security.This can be worked out in consultation with the same bank /insurance co. on pro-rata basis as paid earlier by contractor along with a margin for assets kept by the bonding co.provided by the contractor to them.I think this is what you want to inquire.
Regarding third question ,it has to be employer's decision when to deduct specially when contractor is consistently in default.
With best wishes
LIAQAT HAYAT

Construction Law

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Liaqat Hayat

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I can answer questions based on FIDIC 4 and FIDIC 1999 [design-build] with particular reference to time extension , price adjustment and disputes. I am in particular more inclined for response to points pertaining to how claims should be framed and put up in case of technical or other contractual shortcomings. Regarding procurement matters I have spent over 5 years as procurement specialist for highway authority and dealt with numerous claims and disputes in the capacity of "The Engineer" .

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