Real Estate

In the context of Latin American construction projects, a significant challenge faced by contractors is the requirement to provide performance security to back their payment and performance obligations. This need has become increasingly critical due to the common occurrence of delays in construction projects, exacerbated by the impacts of the COVID-19 pandemic. The traditional focus on the liquidity of performance security instruments, such as irrevocable standby letters of credit, has highlighted the complexities involved in ensuring prompt payment for damages in the event of a contractual breach. To address these issues, project owners and lenders have begun to adopt different approaches regarding contractor performance security. While liquid forms of security like letters of credit are preferred for their ease of access to funds, they come with additional costs and risks for contractors. For instance, contractors may face limitations on their credit lines, which can hinder their ability to secure substantial letters of credit. This situation creates a tension between project owners, who seek assurance of contractor performance, and lenders, who prioritize cost and time certainty during the construction phase. A notable case in Argentina illustrated the importance of liquid security when international project lenders scrutinized a contractors security package for wind projects. Despite the contractors extensive experience, the lenders concerns raised questions whether project owners should incur additional costs for security instruments that may never be utilized. This dynamic underscores the necessity for project owners to carefully consider the implications of performance security structures, especially in regions with political and legal instability. The financial and practical implications of structuring contractor security packages effectively can significantly influence the successful and timely completion of construction projects in Latin America. As the complexities of energy and infrastructure projects continue to grow, the ongoing debate regarding what constitutes bankable performance security will remain a critical consideration for all stakeholders involved.