Contractors’ guarantees a must-have for building agreements

Starting building renovations or building a new home without a comprehensive contract, including stipulated construction guarantees, is very dangerous, says attorney PJ Veldhuizen of Gillan and Veldhuizen Inc.

“We have represented many clients involved in legal battles with building contractors who, despite having been paid have failed to pay third party sub-contractors and subsequently gone insolvent. The unpaid third party sub-contractors in turn refused to complete the assigned work, for obvious reasons,” he says.

“The typical tale of a builder mismanaging cash flow and leaving sub-contractors and owners high and dry in the middle of a building project can easily be avoided with what is known as a contractor’s guarantee. This is usually provided by an insurance company, and will guarantee that the contractor will perform as undertaken in terms of the construction contract or principal building agreement (PBA).

“If you are paying in advance for services, you need to have insurance, otherwise you will find yourself without a chair when the music stops,” warns Veldhuizen.

“These guarantees can protect owners from many common and costly matters which may arise during a building project, such as the contractor:

  • failing to provide the materials or goods for which a payment has been made.
  • failing to achieve the performance specifications set out in the agreement.
  • failing to rectify a defect.
  • failing to pay sub-contractors for work for which the payment was made.

“On the other hand, owners should also provide guarantees that they will pay when they are called upon to do so, as stated in the agreement. This is the quid pro quo which should be demanded by the contractor,” says Veldhuizen.