Payment Milestones, Retention and Bonds on Process Equipment Orders

On an engineered equipment order, the buyer normally pays in stages, and each payment should be released against evidence: a confirmed order, approved drawings, materials in the shop, a passed factory acceptance test (FAT), delivery and final acceptance. Money paid ahead of delivery is commonly secured by an advance payment guarantee from the supplier's bank, performance by a performance bond or parent company guarantee, and the last part of the price by retention held until defects are put right.

Under the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act), a contract only to make and deliver plant is not a construction contract. The Act's stage payment, payment mechanism and adjudication rules do not apply, so those exist only if your contract provides for them [1, 2]. Statutory interest on late payment between businesses still applies under the Late Payment of Commercial Debts (Interest) Act 1998, unless the contract gives a substantial remedy instead [3].

Why this matters now

Payment terms change what a bid really costs. Two quotes at similar prices can tie up different amounts of your cash, for different times, with different sums at risk if the supplier fails.

The rules are also moving. On 24 March 2026 the government said it intends to stop retention being withheld under construction contracts [4]. As of October 2026, the Commercial Payments Bill, which includes a ban on retention clauses in the construction sector, has completed its House of Lords stages, with third reading on 20 October 2026, and passes to the House of Commons [7]. It is not yet law and its wording may change. The ban targets the construction sector, so a supply only order that the Construction Act excludes may fall outside it; check the final text.

How a milestone schedule is built

A milestone is a point where a defined piece of work is finished and can be checked. A good schedule pays for progress you can verify, not for time passing.

Seeing material in the shop does not make it yours. Under the Sale of Goods Act 1979, no property passes in unascertained goods until they are ascertained, and property in specific or ascertained goods passes when the parties intend, judged from the contract, their conduct and the circumstances [5]. So ask for a clause passing ownership of paid for material to you on payment, with the material marked as yours.

Pay against documents, not the supplier's word that a stage is done; our FAT checklist shows what a passed test should prove. Keep enough back after delivery to get commissioning faults and the dossier closed out, and set where risk passes in transit with the right Incoterms rule.

Advance payment guarantees, performance bonds and parent company guarantees

An advance payment guarantee secures repayment of money paid before delivery. If the supplier neither delivers nor repays, you demand the money from its bank, stating how the supplier has failed [6]. In the model bank wording we reviewed, the guarantee becomes effective only once the advance reaches the supplier's account with that bank, an optional clause reduces it by a percentage of each delivery's value, and it expires on a fixed date [6]. Set that date after the latest realistic delivery. The wording is issued subject to the ICC Uniform Rules for Demand Guarantees, 2010 revision (URDG 758) [6].

A performance bond pays you if the supplier fails to perform. The key choice is on demand or default:

A parent company guarantee (PCG) is a promise by the supplier's parent to answer for its subsidiary. Its liability usually lasts as long as the subsidiary's, and the threat of a call often brings the parent in to fix problems. But if the subsidiary fails for financial reasons, the parent may fail too, so a bond from a sound bank or insurer is usually the stronger protection [9]. Ask for the security that matches the risk, and expect the supplier to price it.

Retention and its release

Retention is money you keep back from each payment, or from the price, as security for defects. In UK construction it is commonly around 3% to 5% of amounts due, with half typically released at practical completion and the rest once defects in the defects period are put right [4]. On equipment orders it may be a final payment held until acceptance or to the end of the warranty. Give every release a trigger: the acceptance certificate, then the end of the defects period. A supplier may offer a retention bond instead of cash; Clyde & Co say these are not yet widely used [4].

When the Construction Act applies

Where a contract is a construction contract, the Act's rights, including stage payments and adjudication, are implied as terms if the contract does not deal with them adequately [2]. Two exclusions in section 105(2) matter for process plant [1]:

• Manufacture or delivery to site of plant, machinery, equipment or materials is not a construction operation, unless the contract also provides for installation [1, 2].
• Assembly, installation or demolition of plant or machinery, and steelwork that supports it or gives access to it, is excluded on a site whose primary activity is nuclear processing, power generation, water or effluent treatment, or the production, transmission, processing or bulk storage (other than warehousing) of chemicals, pharmaceuticals, oil, gas, steel or food and drink [1].

So a supply only order sits outside the Act, and a supply and install order on a chemical, pharmaceutical or food plant may too, depending on the site's primary activity [1]. The exclusion names only plant, machinery and its supporting steelwork, so civil and building work on the same site needs its own check [1].

If you want Construction Act style rights in a supply contract, the contract must give them expressly [2]: stage payment due dates, how either side notifies a disputed amount, and a dispute route such as adjudication. Late payment interest needs no clause; the 1998 Act already implies it [3]. This is general information, not legal advice.

Practical example

An illustrative case: two firm bids for the same packaged skid, delivered at month 10, accepted at month 12, with a 12 month defects period. The buyer's cost of capital is taken as 8% a year, and each payment is discounted to its value at the order date.

Bid B costs £10,000 more on paper but about £2,990 less in present value. It also puts £95,000 less in the supplier's hands before delivery, needs a £51,000 advance payment guarantee rather than £150,000, and holds £51,000 for a year after acceptance.

The ranking depends on the rate: below about 6% a year, Bid A becomes cheaper. Bid B's supplier funds most of the build itself, so check it can carry that. Put the schedule beside price and technical scores in your quotation comparison sheet.

Put the payment terms in the RFQ

State your milestones, evidence and securities in the RFQ so every bidder prices the same terms, and ask for any departure as a priced alternative. ChemCapital sends one structured RFQ to all your suppliers at once, issues formal purchase orders that suppliers confirm, and records supplier milestone updates, with every interaction, revision and decision logged with a timestamp. That gives you a dated record to check each payment claim against.

Ready to tie every payment to evidence you can check? Start a free 14 day ChemCapital trial, with no credit card needed.