Bonds

Question 1

What is a bond

Answer 1

Construction bonds are protection for the owner of the bond against, non payment, lack of performance, company default and warranty issues

Question 2

Can you list some different bonds that might be used on a project?

Answer 2

Performance bond
Retention bond
off-site materials bond
advance payment bond
tender bond

Question 3

What is a performance bond?

Answer 3

A form of security provided by a contractor to a developer or employer, it consists of an undertaking by a bank or insurance company to make a payment to the employer in circumstances where the contractor has defaulted under the contract

Question 4

Why might the employer want a performance bond from the contractor?

Answer 4

If the contractor is relatively new or unapproved
If there is concern about the contractors finances/commercial standing
If the economy might be heading into a recession
Employer simply wants to protect their commercial exposure

Question 5

Whats the difference between on demand performance bonds and conditional performance bonds?

Answer 5

On demand bonds - Money set out in the bond is immediately available on demand without needing to satisfy any preconditions, unless the demand is fraudulent
Conditional bonds - Requires the employer to provide evidence that the contractor has not performed their obligations under the contract and that they have therefore suffered a loss because of it

Question 6

What is the typical value of a performance bond

Answer 6

Usually, 10% of the contract sum

Question 7

Whats the risk of not having a performance bond?

Answer 7

If a contractor goes insolvent, and no PB is in place, then the employer would be liable to pay for all the costs to deal with the insolvency
These costs include sourcing a new contractor to complete the works and any premium that would attract

Question 8

What are the alternatives to a performance bond?

Answer 8

A parent company guarantee (PCG), thats only if the selected contractor is a part of a larger group of companies

Question 9

What is a tender bond?

Answer 9

Requested by the employer when inviting contractors to tender for a contract
It provides security against the risk of the successful bidder failing to enter the contract, helps to prevent idle tendering

Question 10

What is a retention bond

Answer 10

A type of performance bond, the surety company will pay the employer if the contractor fails to rectify any defects immediately after contract completion