Understanding Advance Payment Guarantee (APG) As A Contractor

posted by Sandra Olojede

July 15, 2017

Every contractor loves the sound of “mobilization fee” but many contractors do not know what its all about. An advance payment or mobilization fee is usually a percentage (between 10-30% in Nigeria, the Bureau of Public Procurement Act gives a upper limit of 15%) of the total contract value given to the contractor as a loan in other to facilitate the commencement of the contract. To obtain the mobilization fee, you would be required to get an Advance Payment Guarantee or Advance Payment Bond (APG/APB) with either a bank or an insurance company. APG/APB is used in almost all types of industries or sectors (private or public) but particularly in the construction or engineering industry.

An APG refers to an instrument issued by a financial institution (bank) to its customer to secure up front payments between the customer and a third party. While APB is an agreement between an insurance provider and a contractor, whereby the insurance provider undertakes the responsibility of fulfilling the contractual obligations of the contractor to another party in the event that that the contractor fails to deliver his obligations.

A contractor cannot receive an advance payment if he does not provide an APG, as this is mandatory to the disbursement of the mobilization fee or advance payment. Banks and insurance providers usually have requirements for issuing an APG which include; an application requesting for APG, having a registered business, operating an account with the bank, the contract agreement, collateral and any other requirements requested by the bank or insurance provider. For more information on the requirements you could visit your bank or service provider.

The rationale behind the APG is to secure the interest of the client after disbursing the mobilization fee, is to guarantee that the contractor delivers his obligations under the contract. Therefore in the event that the contractor fails to deliver the project as at when due, force Majeure, termination of contract by either the client or contractor, the client can recover his money through the following procedure;

1. The client shall serve a notice of termination on the contractor in accordance with the terms of the agreement.

2. Notify the bank in writing of the contractor’s default and request a refund of the advance payment to the extent of the service rendered. And in the case of an insurance provider file a claim to the insurance company.

As earlier discussed mobilization fee is a loan which would be recovered by the client through percentage deductions or on terms agreed between the contractor and client. Where the contractor has any outstanding APG payments to the client, he must take steps to extend the duration of the APG with the bank or insurance provider. Understanding the concept of APG would help you as a contractor to enter into better agreements in the execution of any contract.

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