Why security is given

A principal (or head contractor) will often require security from a contractor or subcontractor.  The purpose of security is to secure the contractor’s performance of its contractual obligations. The circumstances or events in which security may be called upon depends upon the terms of the contract. These circumstances would typically be where:

• the contractor can no longer perform the contract;
• there are defects that the principal seeks but which the contractor fails to rectify; and
• the contractor owes money to the principal.

Security is also often used as a risk allocation device to protect a party’s interest against a contracting party who does not have deep pockets. For example, the contractor may also insist that the principal provides security to secure the principal’s payment obligations, particularly where the principal is not a substantial company.

Security may also be required where the contractor seeks payment for goods or materials that have not yet been incorporated into the project works.