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Financial Instruments (Bonds/Guarantees/Sureties)

For ensuring and securing performance of obligations of a Contractor under the Contract, Clients seek guarantees which in most cases act as a deterrent to ill performance and if needed monies are available for appropriation of losses due to default.

A Guarantee or Bond is an instrument of financial surety, issued by a bank or financial institution in favor of the Client, at the request of the Tenderer/Contractor, promising to pay the Client, on a demand made by the Client to the bank in case of there being a default in Tenderer/Contractor’s performance under the ITT/Contract.

To have the intended purpose served, in most cases the guarantee sought is unconditional meaning, the bank honoring its commitment should do so unconditionally guarantee without recourse to any reason or verifying if there was a default or not merely on demand made by Client.

Thus a Contracts Engineer should review and evaluate Contractor’s obligations to arrive at guarantees required. All such requirements should be clearly specified in the ITT/Contract attaching the formats and approved wordings of such guarantees/bonds. Material deviations to these provisions should not be accepted and if any be referred to the appropriate authority.

Definitions used in this section

Provisional Acceptance is generally defined, as being the event when the Works/Services are taken over by the Client and the warranty / defects liability period starts. It signifies completion by Contractor of all its obligations except warranty. The Client is in (legal) possession of the Works/Services/ facilities and has put it to beneficial use, has full ownership and is responsible for its operation, maintenance and safe custody. A certificate is issued by the Client signifying completion known as the Provisional Acceptance Certificate (PAC).

Final Acceptance The event when all the obligations of a Contractor including warranty are complete is known generally as the Final Acceptance of Works/Services. A certificate is issued by the Client signifying completion known as the Final Acceptance Certificate (FAC).

The above terms are defined for a broad and basic understanding of related issues in this section only. These terms have different connotations under different situations, depending on Contractors obligations under a Contract.

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