Case Study - Key Issue 1

Question 1

What is a performance bond?

Answer 1

A financial guarantee provided by an insurer or bank as a means of insuring an employer against the risk of a contractor defaulting on any of its contractual obligations

Question 2

What types of performance bond are there?

Answer 2

Conditional - Requires the Employer to evidence the Contractors non-performance and that they have suffered a loss.
On-demand - No evidence required to claim on performance bond.

Question 3

Case study - Why was the contractor unable to obtain a performance bond?

Answer 3

Picture not 100% clear but some causes likely:
- Poor financial strength
- Difficulty in market to obtain performance bonds

Question 4

Case study - What is a high financial gearing and what does this mean?

Answer 4

It is a ratio used to show how much a company depends on debt to fund its operations.

Question 5

Case study - How much would a performance bond typically cost?

Answer 5

Variable but typically around 1%

Question 6

Case study - How much would a performance bond typically cover?

Answer 6

10%

Question 7

Case study - Did you consider taking out a project bank account whereby the contractor deposits a sum till completion?

Answer 7

This was considered, however, the Contractor did not like this route as it would effect their cash-flow and would cost them a lot upfront.

Question 8

Case study - Did you consider a parent company gaurantee?

Answer 8

This was not applicable as their was no parent company.

Question 9

Case study - Did you carry out a credit check on the company as part of the tender process?

Answer 9

Relied on Clients credit check. Contractor was put forwards by them - Lesson learnt

Question 10

Case study - Did you provide any legal advice on the options?

Answer 10

No as I am not a legal expert, however, I did liaise with the clients legal team to discuss the options.

Question 11

Case study - How did the enhanced retention work?

Answer 11

10% retention till 50% completed
7.5% retention till 80% completed
5% retention till sectional completion

Question 12

Case study - Would termination be possible within the JCT contract?

Answer 12

There are very specific requirements around termination which legal advice would need to be saught for. These are in Section 8 and include:
- Default by contractor
- Insolvency
- Corruption

Question 13

Case study - Why do you think there is an issue obtaining performanc bonds in the market?

Answer 13

• Market trends
• Uncurtainty in the insurance market
• Contractor liquidity

Question 14

Case study - Did you draft the clause for inclusion in the contract?

Answer 14

No, this was drafted by the Client’s solicitor as this was outside of my area of expertise.

Question 15

Case study - If your JCT Contract was still in review and the retentions not set/agreed – could you not have awarded to the next most advantageous tenderer?

Answer 15

This was discussed with the Clients legal & procurement team. It was decided by them that it was too far progressed to change tenderer.

Question 16

Case study - What would you do in the future to ensure the tendering contractors were able to provide the performance bond included in their tender?

Answer 16

Ask to see a bonding capacity assessment/letter from a reputable surety company.

Question 17

Case study - Were there any other procurement options that were considered as part of these works

Answer 17

A framework could have been used like the CCS, however LDC like to use local contractors and the urgency to carry works out may not have been suitable for the number of returns.

Question 18

Case study - Why did you need a performance bond? Why is it a significant risk?

Answer 18

Risk as it was a public project so needed security to the tax payer.

Question 19

Case study - What regulations governs procurement in local authority projects?

Answer 19

Public contracts regulation 2015 (Will be superceded by the Procurement Act 2023, in Feb 25)

Question 20

Case study - What is the process for termination under the JCT contract suite?

Answer 20

• CA issues notice to contractor
• If specified default continues for 14 days the Employer can terminate
• The employer has 21 days to terminate following expirey of the 14 days

Question 21

Case study - The project was procured traditionally, how did this impact the clients risk profile in construction?

Answer 21

The client would retain the design risk as they have prepared the designs for the tender.

Question 22

Case study - What is the commercial risk in terms of re-tendering that you considered? Appetite from the market?

Answer 22

Low apetite for the work. Could be a risk given the time of year works would have been carried out.

Question 23

Case study - What is the difference between a performance bond and retention?

Answer 23

Retention - provide the client with some security that the contractor/sub-contractor will return to correct any defects during the defects correction period, or defects liability period.

Performance Bond - Issued by an insurance company or a bank to guarantee satisfactory completion of a project by a contractor.

Question 24

Case study - Wouldn’t an enhanced retention put them at an even higher financial gearing ratio and put them at even greater risk of insolvency?

Answer 24

The risk was presented to the cleint but was deemed to be sufficiently low. The Contractor was also comfortable with the proposal and that they could continue on the basis. Value of works sufficiently low that it should have a huge impact on the Contractor cashflow.