Where the guarantor is required to pay on demand regardless of the underlying contract conditions. Generally referred to as an on-demand bond. It is generally an irrevocable contract.

A letter of credit is effectively a promissory note to pay a specified amount of money to a designated person (usually the municipality/employer) upon receipt of a demand upon occurrence of an event specified in the letter.

If irrevocable, a letter of credit is, generally, a secure guarantee. In the event of a default on the contract, the issuing guarantor will provide the municipality with access to the funds secured by the letter of credit upon submission of the agreed to documentation. There is no discussion about the contract and/or the event(s) giving rise to the breach.

By comparison, a conditional performance guarantee may be secure, but guarantors are unlikely to assume an unconditional obligation to make payment in the event of a breach and will take steps to investigate and discuss the breach prior to making any payment to the employer.

With conditional performance guarantees, there is more room for discussion. For instance, there may be disputes regarding whether a contractor indeed defaulted in its obligations, or whether the employer has fulfilled all its obligations so that it may make a claim on the performance bond.

A performance surety bond benefits the employer by providing a way to pursue financial compensation if a hired contractor falls short of performance requirements. The guarantor agrees to guarantee payment for valid claims up to the total surety bond amount. The purpose is to create an accessory obligation and not a primary obligation. A suretyship.

Generally a contractor might require funds in advance from employers to secure materials. A form of security would be required by the employer to secure the funds released to the contractor. However, again the wording of the security will dictate the security intention. Where there is a condition and such conditions can be disputed in terms of the underlying contract, such guarantee would be considered as a conditional advance payment guarantee. Where the wording might be irrevocable consideration would be given to Letters of Credit or Advance payment bonds.

Employers might retain an amount on each payment certificate submitted by the contractor for the duration of the defects liability period stipulated in the construction contract. A contractor might offer to provide security to release such funds to the contractor. The contractor would then have to provide security against the release of retention funds. The wording of the guarantee could indicate the intention and nature of the type of security.

Bid bonds guarantee the employer that the bidder will enter the contract and undertake the project according to the bid’s terms and conditions should the contractor be awarded the project. This is often used when contractors bid for projects outside the national borders.

A letter of intent is generally a document required by the contractor when submitting their bid. Such a letter might be required pertaining to guarantees and insurance cover and guarantors and insurers would provide letters of their undertaking to issue guarantees and insurance covers, should the contractor be awarded a project.