The advance payment and its guarantee under FIDIC

An advance payment under FIDIC gives the contractor a lump sum at the start of the works, so that mobilisation, early procurement and setup are funded before the first Interim Payment Certificate lands. Sub-Clause 14.2 governs it, and the important thing to hold is that it is a loan. It is paid against security, and it is recovered out of the money the contractor would otherwise have been paid for the work.

Paid against a guarantee

The advance is only released once the contractor has provided an advance payment guarantee, usually a bank guarantee, in the amounts and currencies of the advance. The guarantee has to stay valid and enforceable until the advance has been repaid, but its value can be reduced as the outstanding balance falls. That reduction is the part that gets missed: a guarantee left at full value long after most of the advance has been recovered is a cost and an exposure the contractor is carrying for nothing.

Recovered through the certificates

Repayment is made by deductions in the Interim Payment Certificates. Two thresholds usually apply, both set in the Appendix to Tender.

• A start threshold. Recovery begins once the certified work, excluding the advance and deductions, passes a stated percentage of the accepted contract amount.
• A recovery rate. From that point, a percentage of each certificate is deducted until the advance has been repaid in full, commonly before the works are substantially complete.

Because recovery is a percentage of each certificate, the deduction rises and falls with the monthly valuation, and the balance outstanding changes every certificate. Tracking it loosely is how a contractor reaches the end of the job still nominally owing an advance that was in fact repaid months earlier.

Why it belongs in the cash flow

The advance front-loads the cash and then suppresses it. Early certificates receive an injection; later ones are cut by the recovery. A forecast that shows the advance as a receipt but forgets the clawback overstates the middle of the job and understates the pinch when recovery bites. Model both legs, and release the guarantee the moment the balance clears.