What is Bank guarantee?

What is a bank guarantee?

A bank guarantee, or BG, is an undertaking by a bank, given at the request of its customer, to pay a named beneficiary up to a stated amount if the beneficiary makes a claim within the validity period. In tenders, the beneficiary is the buyer and the customer is the bidder or contractor.

It lets the buyer hold security without the bidder paying cash upfront. The bank usually asks the bidder for a margin or uses its sanctioned limits.

Where it is used in tenders

The bank guarantee is the instrument. EMD and performance security are purposes. Each has its own glossary entry: see EMD and PBG.

• As EMD or bid security, when the tender accepts a BG instead of payment
• As performance security after award, called a PBG
• Against an advance payment, where the contract allows one
• Against material or money released before work is complete, in some contracts

What buyers usually check

• The amount, beneficiary name and tender or contract reference
• That the wording follows the buyer’s format
• Validity and claim period, as required by the tender
• The issuing bank, often a scheduled commercial bank, and its confirmation

Tips for bidders

Ask your bank for the guarantee early and give it the buyer’s format word for word. Track every BG’s expiry and extend it when the buyer asks, as an expiring guarantee may be invoked.