Construction Security and Performance Documents Flashcards
What is a Bond?
Bonds are means of protection against the non-performance of the contractor. They are an undertaking by a bondsman or surety to make a payment to the client in the event of non-performance of the contractor.
Intends to encourage performance
Typically expire on PC date
Cost of the bond usually borne by the contractor, although likely to be reflected in their tender price
Rules of Bonds?
Must be in writing and in the form of a deed
Duration depends on the terms given by guarantors
Financial limit of liability are expressed in the contract of guarantee
What are “On Demand” & “Conditional” Bonds?
On Demand
• Value of bond can be raised straight away
Conditional
• Requires the client to provide evidence that the contractor has not performed their obligations under the contract and that they have suffered loss as a consequence
What types of bonds are there in construction?
- Performance bond
- Advanced payment bond
- Off-site materials bond
- Retention bond
- Defects liability bond
- Adjudication bond
What is a performance bond?
A bond that insures a client against the risk of the contractor fulfilling contractual obligations to the client
Typically set at 10% of the contract value
Cost of the actual bond is typically 1% of contract value (dependant on financial stability contractor)
Usually Conditional
Section 7 of JCT
Example would be if contractor went insolvent, the bond would finance the employer to re-tender the works
What is typically included within a performance bond?
Parties names (Contractor / Guarantor / Employer)
Background (refer to contract, the works, limitations)
Deed witnessed (guarantor guarantees to the Employer that in the event of a breach of the contract by a contractor or termination of the employment of the contractor)
Maximum aggregate liability of the guarantor and the contractor under the bond
The laws that govern bond e.g. England and Wales
Benefit of the contract may be assigned to the guarantor
Company numbers & addresses (contractor / guarantor / employer)
Bond Amount
Expiry date of bond e.g. date of issue of certificate of making good defects
Execution as a deed
Disadvantages of “On Demand” Performance Bond?
More expensive to client
Negative impression on contractor
Parent Company Guarantee can sometimes be better as Parent company can step in and fulfil all of obligations of the insolvent contractor
What is an advanced payment bond?
Schedule 6 Part 1 OR Contract Particulars 4.6
If the client agrees to make an advanced payment to the contractor (e.g. where the contractor incurs significant start up and procurement costs before construction begins) a bond may be required to secure the payment against default by the contractor.
Usually on Demand
Taken out by Contractor
What happens if the Bondsman disputes the amount?
If the guarantor refuses to pay because it disputes the actual amount, it will be liable for interest and costs as a result of it’s delay.
What is an Offsite materials bond?
Schedule 6 Part 2 OR Contract Particulars 4.15.4 / 5
It can sometimes be appropriate for the client to pay for items even though they remain off site e.g. plant or materials.
Bond secures payment against default by the contractor
Usually on demand
Usually up to the value of the materials offsite, with the value of the bond reducing as deliveries to site are made
What is a defects liability bond?
Can be used to ensure that the contractor continues to provide services rectifying defects that become apparent after PC has been certified.
Usually on demand
What is an adjudication bond?
Can be used to ensure that the contractor continues to provide services rectifying defects that become apparent after PC has been certified.
Usually on demand
What is a Retention Bond?
Schedule 6 Part 3 OR CP 4.17
Retention bonds are way of avoiding problems associated with retention recovery.
Amounts that would otherwise have been held as retention are instead paid, with a bond being provided to secure the amount.
Contractor pays for bond but usually reflected in their tender price
Bond must be increased for variations during the project. If not increased during the project, then the % percentage can be taken against variations through interim valuations
Similar to retention, the bond’s value will usually reduce after the certification of practical completion.
Why may a retention bond be used?
May be used in difficult market conditions to aid the contractor’s cashflow
Disadvantages of retention bond?
Employer pays a premium on taking out the bond
Harms the employers cashflow
May reduce the contractor’s incentive to complete works to a good standard and promptly
What is a Tender Bond?
Submitted by a tender to ensure a successful tenderer’s commitment to commence the contract
Used to make sure the contractor successfully executes the contract
Typically set at 1-5% of contract sum
Normally on demand
Rarely used in the UK, more international
Usually used with main contractor’s and subcontractor’s
What is a Parent Company Guarantee?
A company that controls another subsidiary company is known as a “Parent Company”
A form of security that may be required by clients to protect them in the event of default on a contract by a contractor that is controlled by a parent company.
The parent company guarantees that in the event the contractor defaults on their obligations, the parent company is required to remedy the breach, meeting all the contractor’s obligations under the contract.
Includes latent defects up to 12 years
Often used as an alternative to a performance bond
Not all companies have a parent company
Can be considered a negative as if the contractor goes insolvent there is risk that the Parent Company may also be in financial difficulty
Client confused whether to go for Performance Bond or Parent Company Guarantee, what would you advise?
Parent Company Guarantee might be suitable, as allows Parent Company to fulfil obligations of contract for Subsidiary Company. In the event the contractor goes insolvent – will the Parent Company have financial problems too? Due diligence would need to be carried out on Parent Company
Bond you have to pay for, contractor will pass on cost to Client
What is Assignment?
Transferring the benefits of the contract
E.g. Collateral warranties / Third party rights
What is Choses in Action?
Property rights
What are collateral warranties?
Agreements, which are associated with another primary contract. They provide a duty of care to be extended by one of the contracting parties to a third party who is not party to the original contract.
Create direct contractual relationships between parties that would not otherwise exist
Where would you find Collateral Warranties?
Must be stated in contract documents or amendments (details must include the number, format and from whom)
Stated in the Contract Particulars if they APPLY and who they are between
Duration of Collateral Warranties?
Usually duration of limitation period of contract (6 or 12 years)
Advantages of collateral warranties?
Provide protection against hidden defects which may only become apparent sometime after the completion of the project
Bypasses the privity of contract (private to the parties in the contract) & Allows third parties to claim benefits of contract (e.g. if the subcontractor went bust then the employer would have no link to them due the privity of the contract between the contractor and the subcontractor)
May include step in rights allowing the beneficiary to step into the role of the employer. This is important to funders of a project
Clearly sets out benefits
Industry is familiar
Easy to call upon if disputes arise
