Down payment, or an advance payment, bond is the bond required to secure the payment against default by the contractor if the client agrees to make an advance payment to a supplier.
In most of the cases on a construction project, an advanced payment guarantee will be required by the client if the contractor requests advance payment to help them meet significant start up or procurement costs that may have to be incurred before construction begins.
An advance payment bond is normally an on-demand bond, which makes it mandatory for the bondsman to pay the amount of money set out in the bond immediately on demand, without any preconditions having to be met. This is as opposed to a conditional bond (or default bond) where the bondsman is only liable if it has been established there has been a breach of contract.
Advance payment bonds must be very carefully drafted to set out the circumstances for payment and to make clear they are on-demand bonds.
Advantages of advance payment bond:
- Additional liquidity is received to finance activities/orders.
- The buyer is secure with a guarantee his advance payment will be returned if the contract isn’t fulfilled