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The Name’s Bond….Performance Bond.

Well it seems that the construction sector has nearly recovered to its pre-recession heights. The spectre (pardon the pun!) of business failures seems to have passed; enquiries have increased significantly and, say it quietly, margin seems to have returned!

One noticeable feature of the recovery has been the increased caution of employers. Contract terms are more demanding and increasingly we are seeing more requests for Performance Bonds. Banks can often offer the best rates and most flexibility with regard to bond wording, however, this can impact on borrowing facilities and that can cause liquidity issues. By using a third-party Surety or Insurer you are opening an additional credit line. iStock_LondonConstruction There is a number of Potential Performance Bond providers but we would suggest that caution is exercised and the following 4 items are considered:

  • Is the Insurer/surety UK-based and do they have an adequate solvency rating?

By placing in the bond offshore in an unrated market there is no certainty that the provider can meet their financial obligations.

  • Is the wording being proposed acceptable to the Insurer/Surety?

Often employers, via overzealous legal teams, try and impose “on demand” wordings which are unacceptable to the UK bond market. Essentially this means that the employer can demand payment of the bond for any reason and not just non-performance or liquidation. This creates an unacceptable risk and every effort should be made to renegotiate the wording type.

  • Do the bond terms require personal guarantees?

Most bonds will contain a counter indemnity to ensure that the bond provider can make a recovery should the business go into liquidation, however, beware of personal guarantees which may be placed upon the directors of the company. Also be aware that these personal guarantees could attach to future bonds without explicit referral and any new bond application.

  • What is the form of contract?

The form of contract may also have a bearing on the Insurer’s/Surety’s appetite. JCT contracts are ordinarily acceptable; however, the trend towards NEC means that increased responsibilities are made on the contractor which bond underwriters will not wish to support.

Further consideration should also be given to the cost of the bond. Ordinarily a bond is required for 10% of the contract price, however, if possible try and negotiate a lower amount and also try and restrict the bond period to practical completion rather than the maintenance period. AM-HeadShot

Performance Bonds can be complex and require careful consideration. ProAktive’s team of construction experts can guide you through the nuances and provide the expertise you require. By Andy Morley

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