Risk Planning Instruments

Question 1

What is a guarantee

Answer 1

A promise to answer for the debt, performance or miscarriage of another party. Open promise

Question 2

What is a bond

Answer 2

This is a promise by deed whereby the party making the promise promises to pay another party a sum of money. This is limited by a financial extent, usually about 10% of contract value

Question 3

What is the difference between a conditional bond and unconditional bond

Answer 3

Conditional= Inly payable upon actual proof of default and damages
Unconditional=Payable on demand, without proof of default or damage

Question 4

Why do clients try and avoid on demand bonds

Answer 4

Contractors will increase their tender price

Question 5

Who is often the guarntor

Answer 5

Parent company

Question 6

What are the different options for bonds

Answer 6

X13= Performance Bond- Insuring client against contractor failure
X14= Advanced Payment Bond- to cover mobilisation costs
X16=Retention Bond- in case of defects arising
Tender Bond= Ensures winner of tender doesn’t back out

Question 7

What is indemnification

Answer 7

contractual obligation of one party to compensate the loss incurred by another party.
Risk transfer from one party to another- but doesn’t reduce net loss in the project and therefore often used in conjunction with insurance

Question 8

Indemnification: Employers Risk

Answer 8

o Unavoidable results of the works or Employer default
o Loss of/damage to Contractor’s plant and materials in transit for which the Employer is responsible
o Loss of/damage to works and any plant and materials due to a Specified Peril (including radioactive contamination)
o Loss of/wear or damage to defect-free parts of the works taken over by Employer
o Loss of/wear or damage to works and any equipment, plant and materials retained on site by Employer after termination
o Any other Employer’s risk stated in Contract Data

Question 9

Indemnification: Contractors Risk

Answer 9

o claims from third parties
o loss or damage to works, plant, materials and equipment
o loss or damage to client property
o death or injury of employees

Question 10

What are the 2 different types on insurance

Answer 10

-Liability Insurance
- Loss Insurance

Question 11

What is liability insurance

Answer 11

o The insurer will indemnify (compensate) the insured against any damages and legal costs arising from an established legal liability towards a third party
o Result mainly from indemnity provisions in contracts- e.g. professional indemnity

Question 12

What is professional indemnity for

Answer 12

 Required by consultants and contractors with design responsibility to back up indemnities to employers against liability for professional negligence.
 Usually subject to a financial limit. Consist of a series of annual written contracts on a claim made basis

Question 13

What is loss insurance

Answer 13

o Reduces both the total economic loss and the net risk and uncertainty in the project
o Instead of incurring a risk of a large loss, the insured party incurs a specified smaller loss (the premium) in return for the insurance coverage should the large risk materialise
o More effective if insurer’s right of subrogation is waived or a joint names policy is taken out,

Question 14

What different types of loss insurance can you get

Answer 14

-Construction all perils
-Specified perils
-Terrorism cover

Question 15

Who is responsible for taking out insurance

Answer 15

Contractors

Question 16

What does right of subrogation mean

Answer 16

the right of insurance companies to go after directors, other employees and subcontractors for money

Question 17

What is a dictum

Answer 17

a genuine pre-estimate of loss likely to result from the foreseeable breach and that is payable regardless of the actual loss

Question 18

What do delay damages set out

Answer 18

out the compensation due to the employer, the type of delays which are compensable, a duty by the innocent party to mitigate a loss

Question 19

When is the client not entitled to delay damages

Answer 19

 The Contractor does not receive extension of time for excusable or compensable delays (e.g., damage resulting from a Specified Peril)
 A condition precedent notification (e.g., non-completion certificate) is not issued or
 If the completion date is no longer applicable (i.e., time is at large

Question 20

What are collateral warranties

Answer 20

create a contractual link between parties who do not directly have a contract with each other.

Without this can cause difficulties if there is a dispute over the work that is or has been done or if one of the parties goes out of business

Question 21

• Contracts (Rights of Third Parties) Act 1999

Answer 21

Creates a statutory right of a third party to enforce a contractual term
By express provision in the contract
An alternative to collateral warranties

Question 22

Which is preferred a bond or guarantee

Answer 22

Always prefer a guarantee as long as a good guarantor, because it covers the entire debt and doesn’t impact the tender price

Question 23

Whats the difference between insurance and liability

Answer 23

Insurance provides protection for your liabilities