Are Bonds & Guarantees Right for me/my business?
Whilst bonds and guarantees are commonly used in the construction and civil engineering industry, they are now becoming increasingly common to underpin other types of contractual obligations or meet statutory requirements. Bonds are typically arranged by a bank or an insurance company (via their surety department). The main advantage of arranging a bond with an insurer is it will prevent tying up your working capital. Bonds arranged with insurers can also be an easier process than via the banks.
A bond is a legally enforceable financial guarantee given by a third party (the guarantor) to a purchaser (the client) to guarantee the obligations of a supplier of goods, works or services under a contractor. The guarantor agrees to pay the client a sum of money if the contractor defaults on its obligations. The purpose of a bond therefore is to assist a client meet their additional expenses they will incur to remedy any default and complete the contract.
There are various forms of bond which are used in the construction industry, , the most common of which is the Performance Bond, discussed in further detail below.
A performance bond will normally guarantee the client 10% of the total contract value in the event of the contractor or supplier failing to perform to the agreed terms of the contract, often due to bankruptcy of the contractor.
The performance bond is designed to ensure that the contractor performs the works in accordance with the building contract. If it does not, the employer will suffer a loss, for example because of delay.
A bond is not a contract of insurance, so risk is not transferred to an insurer. A bond is issued on recourse terms, so if the performance bond is called upon to pay the client, the insurer is still entitled to seek reimbursement from the contractor.
Mitchell Charlesworth Insurance Solutions can assist you should you be required by your client to arrange any type of bond used in the construction or engineering sector. Please contact us and we can arrange a quotation for you.