Employers will often request security in their preliminary tender documents to guarantee contractual obligations are met and avoid losses as a result of principal insolvency.
A performance bond or contract guarantee covers the damages suffered by the beneficiary in the event of non-performance under the contract by the contractor. Performance bonds are widely used across all industries, and in the UK they are typically for 10% of the contract price.
As this type of bond can be arranged on an unsecured basis, it is more advantageous to issue performance bonds through a specialist surety company rather than a bank. In addition, a bond arranged in this way will not necessarily restrict working capital, and more equitable bond wordings can be secured.
Retention bonds or maintenance bonds are issued in favour of the employer or main contractor. The purpose of the bond is to remove the requirement for retention monies to be held back on interim payments throughout a contract’s lifespan. The key benefit is to free up cash that would otherwise be withheld from the principal until the end of the defects period. On some types of contract, the contractor may also be asked to provide a warranty bond for the duration of the defect’s liability period.
The value of outstanding retentions can build up over time to a substantial sum which can deny precious working capital to contractors.
Advanced Payment Bonds
Advance/stage payment bonds (APBs) are particularly prevalent in the engineering, manufacturing and construction sectors, although they are also used in other industry sectors. APBs guarantee that monies provided in advance of goods/services will be reimbursed to the customer if the contractor defaults.
As this type of bond can be arranged on an unsecured basis, it is more advantageous to issue APBs through a specialist surety company rather than a bank. In addition, a bond arranged in this way will not necessarily restrict working capital, and more equitable bond wordings can be secured.
A bid bond is issued as part of a supply bidding process by the contractor to the employer to provide a guarantee that the winning bidder will undertake and accomplish the contract under the terms at which they bid. During the bidding process, the contractor will estimate what the job will cost to complete and submit their price to the employer in the form of a bid. Where an employer does not know whether a contractor is financially stable or has the necessary resources to take on the project, the bid bond gives them reassurance that, should the project fail, they can collect compensation from the bond. Bid bonds are a useful tool at tender stage as can help prevent contractors from submitting frivolous or inappropriately low bids to win a contract.
Offsite Material Bonds
An offsite material bond covers an employer against the risk of paying the contractor for materials or plant equipment being manufactured off-site. If the contractor becomes insolvent, the employer can claim on the bond for the goods it has paid for in the event that these goods are not delivered to site. As the materials / plant equipment arrives on site, the bond value can reduce gradually, this allows for the contractor to free up cash flow which would otherwise be tied up in undelivered materials.