What is Advancement Payment Bond?
These types of bonds are normally associated contracts for the construction of property or erection of plant and machinery. Normally payments are made by the principal to the contractor on either total completion of a project or on completion of each phase of the project. The payments are normally made after approval of the costs by the Architects and Quantity Surveyors of the project. In any case, the contractor must use some of his own finances to do the necessary work and then await payment.Sometimes the project may be so large that the funds required by the contractor even for one phase of the project may be beyond his financial resources, and in some cases, the principal may make an on-account payment to the contractor, subject to the final costs being assessed, in which event an Advance Payment Bond will be called for.
Sometimes, materials may be bought in bulk by a contractor, to obtain quantity discount, but the materials will not be used immediately, but over a period of several years. The principal may make a payment for the materials bought, subject to confirmation that they will be used for their project only and for no other project. In such a case also an Advance Payment Bond will be required.
If after receiving the Advance Payment, the contractor fails to finish the contract, abandons the site, or fails to use the materials, the amount paid would be called for, and in case the contractor fails to do so, the bond amount would be called for. This type of bond insurance is only given when the actual Contractors All Risks or Erection All Risks Insurances policies are also taken up with UAP.
