Bank guarantee
A bank guarantee (or unconditional undertaking) is security provided instead of cash retention - the bank promises to pay the beneficiary on demand, which keeps cash in your business but exposes you to the builder calling on the security.
"Unconditional" is the operative word: in most drafting the builder can convert the guarantee to cash on demand, without first proving you breached anything. Your protection is the contract's recourse clause - what the builder must establish, and what notice they must give, before having recourse to security.
Guarantees also consume your bank facility and usually require cash backing or security, so they are not free - they are a different shape of the same cost.
Why it matters to subbies
The negotiation points: recourse only after written notice of a substantiated claim, release dates tied to YOUR completion milestones, and the guarantee amount stepping down at PC.
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General information for Australian subcontractors, not legal advice - contract drafting and state legislation vary and change; your document and your state's Act govern. Written by Mat Kennedy at The Construction Contracts Co.