The performance guarantee is an EPC employer’s most important financial security line: when the contractor abandons the works or commits a serious breach, it is the fastest money reachable without waiting for an award. Article 16 of Decree 37/2015/ND-CP frames the security level at 2%-10% of the construction contract value. But a guarantee is worth something only when its form is right, its validity is long enough and its calling conditions are written so they can actually be triggered when needed.
Security level and validity period
Clause 4, Article 16 of Decree 37/2015/ND-CP sets performance security — in cash or as a bank or financial institution guarantee — at 2%-10% of the contract price; for high-risk projects the level may be higher but not above 30% and must be approved by the person with investment decision authority. Private EPC projects bargain by reference to this framework, and the level commonly chosen for complex plants sits around 10% because the cost of replacing a contractor mid-project is very large. The security must be effective from or before contract effectiveness and maintained until the contractor completes its obligations, typically through handover acceptance plus a buffer for processing demands.
Two form defects routinely drain a guarantee’s real value: the guarantee expires before acceptance because the schedule slipped and nobody extended it, and the guarantee’s calling conditions require an arbitral award or the contractor’s consent — conditions that turn it into a commitment nearly impossible to trigger once the contractor has stopped cooperating. Employers should put the guarantee expiry date on the same review calendar as contract progress and make extension a dated contractor obligation falling a safe margin before expiry.
Calling the guarantee: conditions and procedure
The employer may demand payment from the issuer where the contractor breaches the secured obligations — typically abandoning the works, serious unremedied delay, or failure to perform after rightful termination — and the employer has followed the contract’s notice and cure sequence. The demand procedure is a written payment demand to the issuer within the guarantee’s validity, with a statement of the contractor’s breach and the documents the guarantee requires. Under a properly drafted on-demand guarantee, the issuer pays against formally compliant documents without trying the underlying dispute.
On the contractor’s side, legitimate protection is a contract term limiting calls to amounts matching identified breaches or losses, plus consequences where a call proves wrongful: the employer must repay, and compensate financing costs and losses. In arbitral practice, a hasty guarantee call on unclear breaches seriously damages the employer’s own legal and commercial standing, so the call decision should be lawyer-reviewed against the breach file the way a termination decision is.
Step-down structures and foreign bank guarantees
Performance security can be designed to step down with progress to cut the contractor’s cost — for example halving after mechanical completion or major sectional acceptance, with the balance held to the end of the warranty period or swapped for retention money. The step-down must be written into the contract from the start and implemented by amending the guarantee with the issuer; an oral side agreement to reduce it has no effect on the issuer. The balance point is that the remaining security at each stage must always cover the cost of completing the remaining work plus defect risk.
Where a foreign contractor brings a guarantee from a foreign bank, the Vietnamese employer must test domestic enforceability: market practice is to require a Vietnamese bank to confirm, advise or issue a counter-guarantee against the foreign bank’s original guarantee, giving the employer a domestic issuer responsible for payment under Vietnamese banking law and practice. A guarantee standing solely in the name of a foreign bank with no Vietnamese presence forces any call through foreign banking systems and law — far slower and costlier when an emergency hits.
Frequently Asked Questions
How large is an EPC performance guarantee, usually?
Under Clause 4, Article 16 of Decree 37/2015/ND-CP, performance security for construction contracts is 2%-10% of the contract value; high-risk projects may go higher but not above 30% and need investment-decision approval. Private EPC projects agree by reference to this framework, with complex plants commonly choosing around 10%.
When may the guarantee be called, and how?
When the contractor breaches the secured obligations, such as abandoning the works or serious unremedied delay after due notice, and the employer has followed the contract’s notice sequence. The employer sends a written payment demand to the issuer within the guarantee’s validity with a breach statement and the documents the guarantee requires; a proper on-demand guarantee pays against formally compliant documents.
Can the guarantee step down as work progresses?
Yes, if the contract provides a step-down mechanism — for example reducing after major acceptance milestones and holding the balance to the end of warranty or swapping it for retention. Reductions must be executed by amending the guarantee with the issuer. The amount remaining at each stage should still cover completion cost of the remaining work plus defect risk.
Is a guarantee from a foreign bank acceptable?
It can be accepted, but the employer should additionally require a Vietnamese bank to confirm it or issue a counter-guarantee against the original, creating a domestic issuer responsible for payment. A guarantee solely from a foreign bank with no Vietnamese presence makes any call far slower and more expensive in an emergency.
Practical recommendations
Before accepting a guarantee, the employer should test four elements the way it would test a security asset: the amount against contractor-replacement cost, the expiry date against schedule plus a demand-processing buffer, calling conditions that genuinely trigger when the contractor stops cooperating, and an issuer with domestic presence and payment capacity. A guarantee passing all four is real protection; missing one, it is just expensive paper in the contract file.
This article has been quality-reviewed by the FLAW AI Legal Council