Understanding Advance Payment in the Construction Industry: Clause 14.2 of the FIDIC Contract

Asad Ali

Sun, 04 May 2025

Today, we're going to discuss about Clause 14.2, which covers advance payment. We wil be discussing it in simple terms so you can understand it quickly and effectively. If you want to read more details, you can refer to the original contract document, which I have attached for your reference.

Clause 14.2 deals with advance payments. One of the most common conditions you will see in contracts is that if no advance payment is mentioned in the contract data, this clause does not apply. It is that simple. This stems from the concept of party autonomy, meaning the parties involved can agree on any terms they want, as long as they are within legal boundaries. When you see a phrase like this, it usually means the clause is optional. If an advance payment is specified, the employer provides it as an interest-free loan. An interest-free loan means that when money is borrowed, the borrower does not pay any interest on it, unlike regular loans where lenders charge interest rates that can vary.

The purpose of the advance payment, as mentioned in the clause, is for mobilization or design if needed. Design work, for instance, must often be completed before the actual work can start. Mobilization covers the costs of preparing the site, such as bringing in machinery and manpower. The advance payment is a percentage of the total contract value and is issued in the currency stated in the contract data. If you're working in the UK, for example, payments will likely be made in pounds, whereas in the Middle East, it could be dirhams, depending on the location of the project.

One important aspect of advance payment is the advance payment guarantee. Whenever someone receives advance payment, the lender (in this case, the employer) needs assurance that the money will be returned. To secure this, a third party—often a bank—provides a guarantee. If the contractor cannot repay the advance, the bank will cover the loss. The contractor must secure this guarantee, and it must be equal to the amount of the advance. For example, if the contractor receives 10% of a £100,000 contract, they will need a guarantee for £10,000, which will reduce as the advance is repaid.

Repaying the advance payment works by deducting a portion from the contractor’s monthly payments. Typically, 10% of the monthly payment is deducted until the advance is fully repaid. For example, if the contractor claims they have completed 20% of the work in the second month, 10% of that 20% (or £2,000 in our example) will be deducted. This process continues each month based on the progress made. By the third month, for instance, if the contractor has completed 30% of the work, an additional £3,000 will be deducted, leaving £7,000 remaining. These deductions continue until the full advance has been repaid.

If the advance payment guarantee is about to expire and the advance has not been fully repaid, the contractor must extend the guarantee. This is done by approaching the bank to revise the guarantee with new dates. If the contractor fails to extend it, the employer has the right to deduct the entire remaining balance from the next payment.

The engineer will issue an advance payment certificate within 14 days of receiving the necessary documents. This timeline is specified in the contract, and it binds both the contractor and the client to act within this period, making it a time-bar clause. Once the payment certificate is issued, the employer must release the advance payment to the contractor.

The repayment process is also clearly laid out in the contract. Deductions begin when the contractor has completed 10% of the work. For example, in a £100,000 contract, once the contractor has completed £10,000 worth of work, deductions begin. Typically, 25% of each payment will go toward repaying the advance, but this percentage can be negotiated.

If the advance is not fully repaid by the time the project is completed or the contract is terminated, the remaining balance must be repaid immediately. Whether the project finishes as planned or the employer terminates the contract due to issues, any outstanding advance payment will be deducted from the final payment or demanded in full.

In summary, advance payment is essentially an interest-free loan provided to help the contractor start the project. It is repaid through deductions from the contractor's payments as the work progresses.