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Further Reading:

Performance Guarantee from Building Contractor

Jean Michel wrote recently, asking: How do I find some way of getting a performance guarantee off the building contractor?

Most medium and large size construction companies in Thailand (and to a growing extent the smaller Phuket companies that are learning to work on higher end jobs) will be familiar with and used to granting various forms of assurances to their clients. These assurance typical fall into three categories, performance bonds, retentions and warranties.

In construction while there are various methods of making payments - be they measured and payable on a regular (usually monthly) basis or milestone based - one aspect is typical - the client makes a deposit to give the contractor security to start work - and then progress payments along the way are largely works value related. Contractors performance bonds (typically issued by the contractors bank) can be given to secure any advance payment. As the construction progresses the advances are usually drawn down incrementally against each progress payment, Additionally, retentions start to be made against the progress payments, such that at the time of completion the financial exposure has shifted from a client to contractor risk, to a contractor to client risk.

At the end of the construction period the client is however exposed to the contractor for building performance - and this is where retentions (typically 5% to 10 % of contract value for a period of 12 months) and warranties come into play. Warranties are usually given, but are typically limited to 12 months from practical completion in Thailand, and in residential buildings this is typically a long enough period for any latent construction defects to make themselves apparent.

With careful negotiation and then monitoring and implementation of the contract terms and the progress of payments there is not typically any significant exposure to either party in the process. By and large (clearly this varies contract by contract) you pay as you go - and the exposure to default of either party is small.

In a development however it is possible (but not so likely), that you will be contracting directly with the contractor. More likely, you will be contracting with the developer and he in turn is contracting with the contractor, so all the conditions of payment terms and warranties are with the developer rather than the contractor directly. Typically all the contractor to developer guarantees and warranties will be passed on in the same or similar format from the developer to the client (however a developer will rarely allow a client to make retention, though you can be sure he is making it against the builder).