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Bank Guarantees come at a Price

Many contracts in the construction industry require some kind of guarantee. This might be in the form of a performance bond, warranty bond, bank guarantee, or otherwise. These guarantees are often subject to negotiation. I have good experience in negotiating reimbursement of costs for bank guarantees. My advice might be applicable to short term contracts (less than 1 year) with values not exceeding EUR 2 Mio. The recommendations might serve other contract negotiations as well.  

Return on Investment

Since bank guarantees put a restrained on your liquidity, you might as well seek reimbursement for the service. You can use your calculated or actual Return on Investment, but will your client be interested in these figures. I recommend using a 20% annualized ROI to make it easy.  

Guarantee Period

The period for which the bank guarantee is required will be input for your reimbursement calculation. The year should be divided by the actual duration to get the actual return you will miss. Or you can calculate your missed return per unit (e.g. day, week or month).  

Start Up Costs

You have to make arrangements for the guarantee. Your bank will charge you for setting up the bank guarantee or for other services. These costs should be added to the price your client pays for the service. Also you financial department will work some hours to arrange the bank guarantee. All these costs should be added to the loss of revenue.  

Start of Negotiations

The method that served me well is to exclude all forms of guarantees and bonds in the initial stages of the commercial process. After you have been technically qualified and you have got the commercial attention, you know that your client is enthusiastic about your offer. When your client submits his draft contract agreement, he is far in the commercial process. In the contract you will still find the clauses in relation to bank guarantees. You point out that your proposal has been based on the assumption that no bank guarantees are required. Your client will ask you to include the bank guarantees.  

Further Negotiations

After your client has requested you to include the bank guarantees, you will calculate the costs. You can submit the costs, together with the calculation. In this way the client knows the method of calculation. Your client might ask for a discount on the costs of the bank guarantee. You can point him to the duration and the amount of the bank guarantee, so your client can decide for himself.  

“Bank Guarantees are a commercial tool. After the technical staff at the client approved your proposal, the procurement department will have struggles to decline your proposal because of costs for bank guarantees.”  

“Maybe this approach is not how we should do business. But if we do not do it, others will.” 


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