What is a bond?
- Provides protection against non-payment, lack of performance, company default and warranty issues.
- An arrangement where a contractual duty owed by one party to another is backed up by a third party.
Can you list some different bonds that might be used on a project?
- Performance bond
- Retention bond
- Offsite materials bond
- Advance payment bond
- Tender bond
What is a performance bond?
- A form of security provided by a contractor to an employer.
- It is an undertaking by a financier to make a payment to the employer should the contractor default under the contract.
When might the employer want a performance bond?
- If the contractor is new or unapproved.
- If there is concern over the contractors financial standing.
- Uncertain economic conditions.
- The employer wants to protect their commercial exposure.
What is the difference between on-demand and conditional performance bonds?
On-demand Bond
- Money set out in bond is available on demand without needing to satisfy any preconditions (incl. contractors liability).
Conditional Bond
- Requires employer to evidence that the contractor has not performed its obligations under the contract.
What is the typical value of a performance bond?
- Usually 10% of the contract sum
What is the typical cost of a performance bond?
- Depends largely on financial stability of the contractor and any previous claims.
What is the risk of not having a performance bond?
- If a contractor goes into liquidation and no bond is in place, the employer would be liable for all costs to deal with e.g sourcing a new contractor to complete the works.
Are there any alternatives to a performance bond?
- Parent Company Guarantee if contractor is part of a group of companies.
What is a tender bond?
- Provides security against the risk of the successful bidder failing to enter into contract.
- Helps to prevent idle tendering.
What is an off-site material bond?
- Covers an employer against the risk of paying for materials being manufactured off-site.
- If the contractor becomes insolvent, the employer can claim on the bond for goods paid for.
What is a retention bond?
- Provides a guarantee that the contractor will remedy any defects after the project has finished.
- Provides same level of comfort as withholding retention but enables the contractor to be paid the full value of certificates.
What are the disadvantages of a retention bond?
- The employer will ultimately have to pay the premium throughout construction for taking out the bond.
- May reduce contractors incentive to complete the works promptly and to the desired standard.
Why might a retention bond be used?
- May be used in difficult market conditions to aid the contractors cash flow.
What is an advance payment bond?
- A bond which provides protection when making payments to contractors in advance of works being done.
- The bond may secure the payment against default by the contractor.
