What Is an Advance Payment Bond?

The short answer

An advance payment bond relates to an advance payment released under the underlying contract. It supports the Principal's obligation to apply, liquidate, account for or return that advance as specified in the contract and the bond.

The amount, timing, reduction and release of an advance payment bond are not universal. They depend on the applicable contract, bond wording, rules, circumstances and insurer requirements.

What an advance payment bond is

An advance payment bond, sometimes called a mobilisation or downpayment bond, is used where the Obligee releases money before the Principal has fully performed the corresponding work, supply or service. The bond gives the Obligee a surety undertaking connected to that advance.

The Principal is the contractor, supplier or business receiving the advance. The Obligee is the owner, buyer or procuring entity releasing it. The Surety issues the bond and undertakes only what the bond says it undertakes.

The obligation it supports

The bond does not support the advance in the abstract. It supports the specific obligation described in the contract and bond. That may involve using the advance for the project, liquidating it through progress billings, returning unused or unliquidated amounts, or complying with other conditions stated in the documents.

Because the underlying obligation is tied to the contract, applicants should avoid assuming that one advance payment bond form works for every project.

When it may be required

An advance payment bond may be required when the contract allows an owner or buyer to release funds before the corresponding work or delivery is complete. The requirement is usually stated in the contract, notice of award, purchase order or bidding documents.

No single advance-payment percentage or bond period should be assumed. The governing documents should be checked for the amount, validity, reduction mechanism, release conditions and required wording.

How it generally works

The Principal applies to the applicable insurer or Surety with the contract documents and the advance-payment clause. The insurer evaluates the applicant, the obligation, the size of the advance, the project or supply arrangement, the expected liquidation or repayment method, and the supporting documents submitted. Evaluation, underwriting, requirements, terms, pricing, approval and issuance remain functions of the insurer or Surety.

If approved and issued, the bond is provided before or in connection with the release of the advance. If the Principal liquidates or repays the advance as required, the bond may reduce, expire or be released according to the documents. If the Principal fails to meet the bonded obligation, the Obligee may make a claim, and the Surety's response depends on the bond terms, facts, documents and law.

Relationship to other bonds

An advance payment bond is separate from a performance bond. A performance bond supports performance of the bonded contractual obligation. An advance payment bond supports the treatment of the advance. A project may involve both, but each has its own scope, amount, validity and release conditions.

Practical points applicants should check

• The clause authorizing the advance and the required bond.
• The amount to be bonded and whether any reduction is allowed as the advance is liquidated.
• The exact validity period and release conditions.
• The records needed to prove liquidation or repayment.
• Whether the bond wording matches the contract requirement.
• Whether other project bonds will use the same bonding capacity.