Why the contractor's guarantee is a must for building agreements

PJ Veldhuizen, attorney, Gillan and Veldhuizen

The unpaid third party sub-contractors in turn refused to complete the assigned work, for obvious reasons.

The stereotypical tale of a builder mismanaging cash flow and leaving sub-contractors and owners high and dry in the middle of a building project can easily be avoided with what is known at a contractor’s guarantee. This is usually provided by an insurance company, and will guarantee that the contractor will perform as undertaken in terms of the construction contract or principal building agreement (PBA).

“If you are paying in advance for services, you need to have insurance, otherwise you will find yourself without a chair when the music stops,” warns Veldhuizen. These guarantees can protect the owner from many common and costly matters which may arise during a building project, such as the contractor:

• Failing to provide the materials or goods for which a payment has been made.
  
• Failing to achieve the performance specifications set out in the agreement.
  
• Failing to rectify a defect.
  
• Failing to pay sub-contractors for work for which the payment was made.

On the other hand, an owner should also provide guarantees that he will pay when he is called upon to do so, as per the agreement. This is the quid pro quo which should be demanded by the contractor.