Advance payment bonds and the money that goes out first

An advance payment is money paid to the contractor before the corresponding work has been carried out, usually to fund mobilisation, long-lead procurement or a specialist deposit. It is common on projects with heavy off-site fabrication and unusual elsewhere.

It reverses the ordinary position of construction payment, which is that money follows value. That reversal is exactly why it is bonded.

The bond and the recovery run together

The advance is recovered out of subsequent payments, usually as a percentage of each certificate until it is extinguished. The bond should reduce in step, so that at any moment it covers what is still outstanding rather than the original sum.

A bond that stays at the full amount throughout means the employer holds more security than its exposure, which the contractor is paying for. A bond that does not reduce at all and then expires on a date fixed at the start can leave the exposure uncovered at the end.

Recovery that is too slow

If the recovery percentage is set low to help the contractor’s cash flow, the advance can still be substantially outstanding late in the job, which is precisely when contractor failure is most likely.

A useful check is to compare the outstanding advance against the value of work remaining. Once the outstanding advance exceeds what is left to build, the employer cannot recover it through the account at all, and is relying entirely on the bond.

What to check

• Does the bond reduce as the advance is recovered, and on what evidence?
• Does it expire on a fixed date, or when the advance is fully recovered?
• Is the recovery rate fast enough to extinguish it well before completion?
• Is the advance ring-fenced for what it was given for, or does the contract simply hand over cash?

The accounting

An advance is not a valuation. It does not represent work done, it does not attract retention in the ordinary way, and it should not be shown as certified value, because doing so overstates progress by exactly the amount paid.

It is a payment on account against future work, recovered as that work is certified. Keeping it visible as its own line, with the outstanding balance shown, is the only way anybody can see the exposure at a glance.

When to say no

Where the contractor is unrated, where the bond does not reduce, or where the advance is a substantial fraction of the contract sum, the sensible answer is often that the employer is being asked to fund a business rather than a project. Materials on site, verified and vested, achieve much of the same result with far less risk.