Performance Securities (bonds & guarantees)

Question 1

What is a performance security?

Answer 1

A security product related to the performance of a contract

Question 2

What is a security?

Answer 2

A type of contract that promise something on the action or inaction of something else

Question 3

What is a bond?

Answer 3

A type of security that provides a beneficiary a pre-detemined/calculated financial compenstation

A glorified “i owe you” - a contract that can be similar to insurance

Question 4

What is a guarantee?

Answer 4

A contract involving a third party who guarentees the obligations of one party to the beneficiary

A contract with a guarantor

Question 5

In a construction contract, what is a parent company guarantee?

Answer 5

A guarentee that guarantees the obligations of a contractor by the parent company

Particually usefull if a contractor is part of a group with many assets

Question 6

What is a performance bond?

Answer 6

A type of bond that can be called if a contractor defualts on their obligations

monetery remuniation - the bond is a payout only

Question 7

When using a parent company guarantee from a company based outside of the UK what should be done?

Answer 7

Recieve approriate legal advice (from the country) to ensure the PCG has legitimate legal standing within that country

Question 8

What is the difference between a primary and secondry obligation?

Answer 8

Primary: Obligations from the signing of the contract
Secondry: Obligations only from a specified point - e.g. an insolvancy from a subsidary

Question 9

How would the requirement of a performance bond effect the contract sum?

Answer 9

The performance bond would likely effect the contract sum as the contractor would have to pay a premium for the bond, it will however reduce the risk and could be better value than without

Question 10

How would the requirement of a parent company guarentee effect a contract sum?

Answer 10

The contract sum should not be increased too much - appart from administrerative fees the contractor will not have to pay anything to anyone

PCG’s are a potential great low cost way to decrease employer risk

Question 11

How can you reduce the cost of a performance bond?

Answer 11

Lower the risk to the surity provider

e.g. use with a PCG to increase the assets of the obligations

Question 12

What is a retention bond?

Answer 12

An alternative to normal retention reductions - uses a bond at a cost to mean that the contractor does not have retention amounts taken away from them on each interim payment however the employer can retreive the retention amounts for purposes such as rectifying defects ect…

Question 13

What is an advanced payment bond?

Answer 13

Allows the employer to make an advance payment to the contractor with the caviat that they can claim the monies back through the advance payment bond

usefull when there is a large amount of prelims required early on

Question 14

What is a tender bond?

Answer 14

Allows employers to claim the bond if after a long/expensive tender process a the tenderer pulls out meaning they need to delay the program and restart the tenderprocess

Less common in the UK construction industry

Question 15

What is an off-site material bond?

Answer 15

A bond which secures the value of materials stored off site. It allows the employer to pay the contractor for materials not yet needed in the program without the risks typically associated with storing materials off site

The bond will cover the materials not being delivered to site

Question 16

What are the types of bonds often used in construction?

6

Answer 16

1. Performance Bond
2. Retention Bond
3. Advanced Payment Bond
4. Tender Bond
5. Materials off-site Bond
6. Payement Bond

Question 17

What is the difference between on-demand and conditional bonds?

Answer 17

Demand: The beneficiary calls the bond without question
Conditional: The beneficiary would have to provide evidence conditions had been broken

Question 18

What is the typical value of a performance bond?

Answer 18

Usually 10% of contract sum

Question 19

What is the purpose of performance securities?

Answer 19

To increase likely hood the contracts objective can be completed - REDUCE RISKS

Question 20

What are the alternatives to performance security?

Answer 20

The employer allowing the risks at a discounted price

Can end up costing them a lot - they hold the risk

Question 21

What bonds are under the standard JCT Building contract?

Answer 21

1. Advance payment
2. Materials off-site bond
3. Retention bond

Question 22

What would a typical fee for a performance bond be?

Answer 22

Typically betweekn 1% and 5% but will soley depend on this risk of the contractor defualting on performance

Question 23

Why might a contractor be relctant to use a performance bond?

Answer 23

It may effect their ability to claim finance in the imeadiate future

It is a liability

Question 24

Can one project have both a performance bond and parent company guarentee?

Why?

Answer 24

Yes - the provide different things

Question 25

What form must a bond be?

Answer 25

Written, normally will be a deed.

Question 26

Who normally provides a bond?

Answer 26

Often a finacial institution, e.g. a bank for a premium

Question 27

What is a payment bond?

Answer 27

A type of surety bond which guarantee that all entities involved with the project will be paid

Question 28

What would the employer need to do in order to claim a performance bond?

Answer 28

As a conditional bond - the employer would need to prove there had been a defualt