Guarantees and Bonds are related but are different.
A Performance Guarantee (PG) is a binding legal document issued by a bank or financial institution that confirms a contractor will fulfil the terms and specifications as set out in the client contract. If a contractor does not complete his or her obligations as stipulated in the contract, the client will be guaranteed compensation.
Under a Performance Bond (PB), the bank or financial institution usually pays on demand regardless of the underlying contract. This means that no proof of default is required, and the beneficiary will generally receive payment of the full amount upon written presentation stating that the contractor has failed to perform.
In general, a Malaysian company undertaking a contract awarded by the Malaysian government is required to provide 5% of the value of a contract as a performance bond. To facilitate contract undertaking, the government also allows an Advance Payment Guarantee of up to 20% of the contract value to contractor’s subject to approval.
Advance Payment Guarantees work in a similar manner to Performance Guarantees except that the government is also entitled to reclaim the advanced payment made if the contractor does not complete the contract.
