A construction contract is a written agreement between the employer and the contractor to perform a part of or all of the work in the construction investment. Advance payment guarantee is one of the terms in the construction contract, a form of performance security in the construction relationship so that the contractor can carry out the preparation work for the project’s construction. Guarantee is used in many different fields, including construction. Therefore, in this article, TNTP lawyers will clarify the issues on construction contract advance guarantees for project enterprises and readers to refer to.
1. What is the construction contract advance guarantee?
• Guarantee is one of the performance security measures as prescribed in Clause 7, Article 292 of the Civil Code 2015.
• According to Clause 1, Article 18 of Decree 37/2015/ND-CP (“Decree 37”), advance on a construction contract is an amount of money offered in advance by the employer to the contractor without interest rate for necessary preparations before conducting the tasks under the contract.
Thus, the construction contract advance guarantee is a legally binding to ensure that the contractor does not violate the contract, does not violate the contract implementation schedule, and ensures that the contractor uses the advance for the right purposes with the advance period equal to the contract implementation period.
2. Time to make construction contract advance
• Under Clause 2, Article 18 of Decree 37, contract advance is made only after the construction contract takes effect.
• At the same time, in Clause 2, Article 6 of Decree 37, the effective date of a contract is the date when it has been signed (affixed with stamp if any) or other specific times as agreed in the contract and the employer has received performance security issued by the contractor (for such contract requires performance security).
Thus, the time to make the contract advance is after both parties sign the contract or after the effective date specified in the construction contract. In addition, it is necessary to have a site clearance plan in accordance with the agreement in the contract, and at the same time, the contractor has received an advance guarantee (if any) corresponding to the value of each currency that the parties have agreed upon.
3. Regulations on contract advance guarantee
According to the provisions of Clause 4, Article 18 of Decree 37, contract advance payment guarantee is regulated as follows:
• For construction contract with an advance payment value higher than one billion dong, before the employer carry out the advance payment, the contractor must submit to the employer an advance payment guarantee with value and currency equivalent to the advanced amount of money. Any construction contract below one billion dong and lower, and construction contracts in the form of self-performing including the contract executed by a community under the target programs, advance payment is not an obligation.
To make it simple, in small-scale contracts, the employer shall consider and decide on the implementation of a contract advance guarantee to ensure that it is appropriate to the nature of the contract and to reduce unnecessary procedures.
• In case the contractor is a partnership contractor, individual members of the partnership must submit to the employer advance payment guarantee with the value equivalent to the amount advanced to each member except all the members of the partnership decide on the leading member for submission of payment guarantee to the employer.
• The validity period of advance payment guarantee must be extended until the employer has recovered all the advanced amount of money. Value of advance payment guarantee shall decrease gradually in proportion to value of advance payment recovered via each payment made between the parties.
Thus, it can be simply understood as follows, for construction contracts with an advance payment value greater than 01 billion dong, the contractor must submit a contract advance payment guarantee to the employer, after that, the employer will make the contract advance payment to the contractor. In the case the contractor is a partnership contractor, each member of the partnership or the head contractor of the partnership (according to the agreement) submits a contract advance payment guarantee to the employer. For construction contracts with an advance payment value less than or equal to 1 billion dong, a contract advance payment guarantee is not required.
Finally, the construction contract advance payment guarantee is an important provision that regulates and legally binds the employer and the contractor to ensure that the parties perform the construction work properly and the advance payment will be used for the right purpose. The employer and the contractor need to clearly understand and recognize the importance of the advance payment guarantee in the construction contract so that the preparation for the construction of the project can proceed smoothly.
Above is an article by TNTP lawyer about “Issues on construction contract advance guarantees”. Hopefully, this article will be helpful to readers, project enterprises, and contractors with construction plans in the future.
Sincerely,
