Construction guarantees - the tripartite relationship

There is no doubt that the construction industry in South Africa is under huge economic pressure as a result of the shortage of capital investments being made in the country.

This in turn results in a lack of projects being put out to tender. Couple this with the fact that medium to small contractors, as a result of the lack of tenders, have to compete with the larger construction companies who are hungry for work.

A time to reflect

With the above mentioned, you have an industry that is being forced to operate at lower profit margins.

It is during these times that construction guarantors should be viewing this period in a positive light as a time to reflect on past industry trends, to review current facilities and to look at strengthening relationships.

A three-way playoff

Reference is made to the tripartite relationship which is defined as ‘an involvement of three parties or participants, in essence a three-way playoff.’

In the construction guarantee arena this refers to the ‘guarantor’, the ‘broker’ and the ‘contractor’.

Too often there is evidence to show that this tripartite relationship is neglected and thus the guarantor, as well as the broker, could find that this results in the loss of the contractor as a valued client, as well as increasing the risk of a guarantee being called up on.

If there is actual or potential conflict present between the three parties, this can put strain on the relationship.

As simple as this may sound, establishing integrity and trust is critical to the success of any project. Without this fundamental understanding, fear, mistrust and defensiveness affect the business relationship.

Cultivating the relationship

The benefits of cultivating this relationship are enormous and can be achieved by simply arranging regular meetings with the contractors and their supporting brokers and using these to positively reinforce the relationships.

By opening opportunities for all parties to discuss any problems being experienced in the industry and on their construction sites, and to identify those problematic areas to see what possibilities exist for the guarantor to assist the contractor in successfully negotiating their way, relationships are nurtured.

There is also a knock-on effect where the broker’s relationship is strengthened with his or her client as the contractor feels that the guarantor has made the effort to make a personal visit with the broker and to show a personal interest in them as a valued business partner.

It provides an ideal opportunity for the guarantor to discuss the contractor’s facility and also to provide proactive and productive critique to them on the way they conduct their guarantee facility. This ensures that they successfully deliver on their project obligations and therefore, protects their guarantee facilities.

Success for all parties

In concluding the matter, it is vital that the contractor hears first-hand from the guarantor, and that there is regular communication between all parties to ensure success for all parties.

It is also of great benefit to any contractor that the guarantor and broker assist the contractor in finding appropriate solutions to problems that they might be experiencing on specific projects. The guarantor has access to a wide panel of experienced industry specialists, who specialise in construction guarantees and would prefer to be proactive rather than reactive in resolving disputes before a guarantee is called up.

The team needs to be working against variables, not against each other. This close collaboration between the three parties can effectively reduce risk, animosity and expenses.

It is clear that if this tripartite relationship is nurtured and given the attention that it deserves then there is no reason why all three parties cannot mutually benefit and prosper. The broker and the guarantor will have a client for life.