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Performance Bond
One of the primary forms of bonds used in the construction sector is the performance bond. Its purpose is to offer assurance to the employer by covering potential losses or damages sustained if the contractor (or Sub-contractor) fails to fulfil their contractual obligations. In this scenario, the bond will be called, and the Surety will be responsible for compensating the employer for the net damages up to the bond’s value or arranging the completion of the works as specified in the contract. The bond value is usually 10% of the contract value, which should allow the employer to find a new contractor/sub-contractor to complete the works if needed.
Advance Payment Bonds
Employers often provide contractors with upfront payments to procure and secure essential materials and goods to begin a project. To safeguard this payment, in the case of contractor insolvency or an incomplete project, an Advance Payment bond can be agreed at negotiation. The bond amount typically matches the advanced sum. This is particularly crucial for contractors’ cash flow when significant deployment costs are involved or when specific goods are materials with lengthy lead times need to be acquired.
Retention Bonds
A retention bond is a type of guarantee which ensures the contractor receives the full amount of their payment certificate without any deductions. It primarily runs during the defects period of a contract and serves to reduce retention, thereby improving a company’s financial position and access to capital. These bonds are increasingly requested for as they eliminate the need for the owner/client to retain cash from the contractor to ensure satisfactory completion of the work. The bond amount is usually equal to the amount of retention money which is being held.
Highways and Section Bonds
Typically sought after by home builders, a Section Bond (pertaining to the Highways Act 1980) provides assurance to a local authority or utilities company that a contractor will complete their work to a standard that can be adopted. These bonds encompass various sections such as Section 38 (for new roads), Section 104 (for sewers), Section 278 (for public highways), and more. The bond sum is equal to the amount which represents the authority’s assessment of properly constructing the roads and sewers
Restoration Bonds
A restoration bond gives comfort to a landowner or the Environment Agency that the land being worked on will be returned to its original condition upon the expiry of the relevant operating license. This is usually mandatory if undertaking works in somewhere like a quarry. The bond amount represents the cost involved to restore the land back to its original state.
Bid Bonds
This product guarantees that if you are the winning bidder on a project, you will honour your obligations to enter the contract and perform the work as set out in your bid. This may extend to guarantee your obligation to provide a performance bond for the contract if your bid is successful. You may find these bonds requested when bidding for public works contracts.
Deferred Land Purchase Guarantee
A deferred land purchase guarantee gives a landowner comfort that payment of instalments will occur in the event that the builder or developer defaults. These payment bonds, often on-demand, would be suitable if the landowner agrees to sell the land in question on deferred payment terms. This type of guarantee is common for developers to request.
Insurance Deductible Guarantees
The Insurance Deductible Guarantee is generally applicable for Tier 1 contractors and serves as an alternative to a letter of credit (LOC). Since larger companies have higher sums insured on their motor or employee liability insurance programmes, their insurance premiums tend to be more expensive, but this cost can sometimes be mitigated by opting for a large deductible. The Insurance Deductible Guarantee functions as on-demand guarantee that can be provided to the insurer as a form of security against the possibility of insolvency. This eliminates the risk of non-payment of the deductible.
Pension Deficit Guarantees
Similar to the Insurance Deductible Guarantee, the Pension Deficit Guarantee is designed to cater to the needs of large Tier 1 contractors. If your company offered a final-salary pension scheme to both current and former employees, it is possible that the scheme’s actuary may discover a pension deficit, meaning that the anticipated future obligations will exceed the value of the fund. The Trustees of the pension fund will insist on a recovery plan to be in place to ensure the deficit is dealt with and will often require a form of security, such as a letter of credit, which can be called in the event the sponsoring corporation fails to meet its recovery obligations. A surety bond can be used in lieu of an LOC, freeing up the bank facility to be used for other means.
To learn more about Gallagher Specialty and how they can help your business, contact their construction team:
Joe Pascale, joe_pascale@ajg.com (Surety)
Paul Smith, paul_smith5@ajg.com (Surety)
Clara Hudson, clara_hudson@ajg.com (Construction)
