What is an Advance Payment Bond?

Also known as an advance payment guarantee, an advance payment bond is a type of business arrangement between a business and a service provider that any advance payments for pending services will be returned if that provider does not fulfill his or her obligations to the client. The exact amount of the bond of guarantee will vary, based on the total amount that is provided to the provider on the front end before any services are undertaken. This type of guarantee on the advance payment protects the client from losing the investment in the provider should unforeseen factors prevent the provider from completing the agreed-upon tasks.

One common situation that involves the use of an advance payment bond is when a customer engages a contractor for the execution of some sort of construction project. The contractor may request that the customer provide some type of payment in advance to aid in covering the expenses associated with securing the equipment and materials that will be used in the construction. In return, the contractor agrees that in the event he or she ultimately does not use the funds for the purposes stated in the bond terms, the advance payment will be returned to the customer.

In many cases, the amount involved with the advance payment bond will decrease as the project passes through the startup phase and launches into the actual construction. For example, if the contractor does secure the equipment needed and that equipment is brought to the construction site, that portion of the bond is considered fulfilled. Once the materials are also purchased and transported to the construction site, the remainder of the advance payment bond is fulfilled. Even if later the contractor is no longer associated with the building project, he or she will owe nothing to the customer, as long as every provision with the bond has been fulfilled.

An advance payment bond does protect the interests of the customer, in that if the funds are not used for the specific purposes stated in the bond, the recipient is legally obligated to return those funds. Should the recipient attempt to default on the terms of the bond, the client typically has the right to some sort of legal recourse through the courts. Once the client has control of the funds once more, he or she can seek to continue the project with a new contractor or provider, using the recovered proceeds as part of the funding for the renewed project.