Bonds

Question 1

What is meant by the term subrogation? What can you do to safeguard against it?

Answer 1

Subrogation - right held by most insurance carriers to legally pursue a third party that caused an insurance loss to the insured. This is done in order to recover the amount of the claim paid by the insurance carrier to the insured for the loss

Policy taken out as Joint names policy (EMP, MC, SUB) to safeguard against it
- Only option C which can reduce to specified
perils and take off SUB from joint names

Question 2

Under NEC4 what if there is loss / damage to the works after takeover? Who is responsible? What if the MC was not liable?

Answer 2

NEC4 – MC Liability goes from start date to end of defects period – MC must promptly repair any damage in this period

After takeover, MC is responsible – IF MC not liable, need to prove it, carry out works anyway and then claim via a compensation event from employer

Question 3

What is project insurance? What advantages does it offer?

Answer 3

Project insurance – Client takes out a single policy which covers everything within project (public, works, indemnity, bonds) – contractor does not have to take any policy out

• Cost is cheaper (usually MC takes out works insurance, public liability etc and Sub will add on too such as professional indemnity and all adds to their tender costs, sometimes there is unnecessary duplications)
• Client less risk – as they are policy and risk holder
• No blame culture due to subrogation – all under one joint names policy – it will pay out whatever and specific to the project

Question 4

Explain retention bonds and advanced payment bonds – how do they work? (this may be asked like this or just one of them may be asked about)

Answer 4

Retention Bond - type of Performance Bond that protects the client after the completion of the contract. This provides a guarantee that the contractor will fix any issues after the job / project has finished (even after full payment has been made)

- Every interim valuation, client retains a % of the 
      value, MC cash flow issues cos of this so asked 
      to take out a retention bond soon as they have 
      possession of site instead to cover risk.

    - Retention bond value – set % of the value of the 
      maximum amount of retention that would be held 
      at each valuation
- Increases until practical completion where 50% 
      retention is returned, and final cert bond expires

Advance Payment Bond - If the client agrees to make an advance payment to a supplier, a bond may be required to secure the payment against default by the contractor. It is paid back proportionally at IV’s until it is paid off

Question 5

Why must a % for retention be included in Contract Particulars? Why should a retention statement still be produced?

Answer 5

The % sets the value of the bond and if no bond has been taken out, employer deducts retention in normal way and would need a %

Retention statement – still needs to be stated for the bond for the financial institution so they know the value

Question 6

What is latent defects insurance? How much does it cost? What advantages does it offer?

Answer 6

Provides cover for new buildings (or new works to existing buildings) in the event that latent defects become apparent
- doesn’t cover project, covers building upon
completion (12 years usually as a deed)

Costs between 0.5- 1.5% of the construction cost of the building

Adv:

• Do not have to go back to contractor to make good of defects, the LDI pays out instantly.
• Enhances the saleability of the property- a vast majority of mortgage lenders and banks require a structural warranty or latent defect insurance

Question 7

What are bonds? Explain the different types of bonds available within the construction industry?

Answer 7

A bond is an arrangement which the performance of one to another is backed by a third party who pay out if the duty is not performed.

Types of bond:
Conditional – payment is made if and when certain conditions are met, and evidence is provided of this
Unconditional – payment is called upon whether or not there has been a breach of contract unless there is clear evidence of fraud

Many individual:
o	Performance
o	Maintenance 
o	Advance payment 
o	Retention

Question 8

What is a performance bond? What are the advantages and disadvantages of Parent Company Guarantees v Performance bonds?

Answer 8

Performance bond - insuring a client against the risk of a contractor failing to fulfil contractual obligations to the client (timing, quality, insolvency, liquidation like Carillion etc)

PB - More expensive (5% contract sum + tender price)
PCG - Cheaper

PB - Expire after practical completion
PCG - Up to 6 or 12 years depending on deed

PB -limited value to amount states
PCG - unlimited value

PCG - insolvency issues if smaller company having financial issues, bigger company probably is too
PB - no insolvency issues

PB - Conditional bond, Must abide by all t&c’s in order to claim from it