Bank guarantee (as contract security)

A bank guarantee used as contract security is an unconditional, on-demand undertaking from a bank to pay the principal a set amount, held in place of cash retention as security for the contractor’s performance under a building contract.

How it works:

• Instead of the principal holding back retention (a percentage of each progress payment), the contractor provides one or more bank guarantees for the equivalent security amount.
• If the contractor defaults (fails to complete, or does not fix defects), the principal can call on the guarantee and the bank pays. It is unconditional, so the bank pays on the principal’s demand.
• The guarantees are released back at the contract milestones, typically half at practical completion and half at the end of the defects liability period, the same staging as cash retention.

Bank guarantee vs cash retention:

• Cash retention ties up the contractor’s money (the principal holds it). A bank guarantee frees that cashflow, but the bank usually requires its own security (property or a cash deposit) to issue it and charges a fee.
• For the principal it is security they can call on; for the contractor it preserves working capital.

Watch-outs:

• “Unconditional” / “on demand” means the bank pays on the principal’s demand without needing the contractor’s agreement; whether the call was justified is argued out afterwards.
• Make sure the guarantees are actually returned at the right milestones. Expired or forgotten guarantees keep costing the contractor bank fees.

Also known as: performance guarantee, security in lieu of retention.

Related

• Retention
• Practical completion
• Defects liability period

See also

• Practical completion notice

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Last updated: 2026-05-24. Verified: 2026-05-24. Quarterly review for currency.