Why the need for bonds?

 

In an uncertain world companies awarding contracts require financial protection should the chosen contractor fail to perform it's contactual obligations. The insurance companies that have established themselves as specialist surety companies provide financial protection to the beneficiary/employer under their bonds and the contractors still receive the protection of their contract conditions.

 

This differs significantly when bonds are issued by banks, which are frequently written completely independently of the contract conditions, to the detriment of the contractor.

 

There are two markets for the issue of bonds, one is through a Surety Company and the other is via a Bank but it is clear that the benefits of placing a bond in the Surety market far outweigh those of a Bank, and these are as follows:

1. Bonds do not reduce a company's working capital or borrowing facilities with its clearing bank.
   
2. Surety companies will issue "conditionally worded" bonds. They are not payable on first demand and give a company the protection of the contract conditions.
   
3. Surety companies rely on a counter indemnity and not a fixed and floating charge as with a bank.

 

Disadvantages of Bonds issued by banks.

 

1. Reduce working capital and restrict the company's borrowing
   capacity.
   
2. Normally a bank requires a charge on a company's assets.
   
3. Banks issue "on-demand" bonds, which are payable on first demand
   and are independent of the contract conditions.

 

Types of Bonds commonly used in the building and construction industry.

Bid Bond
Performance Bond
Advance Payment Bond
Maintenance Bond
Retention Money Bond
Road and Sewer Bonds
Duty Deferment Bond

 

Types of Bonds and Insurance Cover only available through specialist Underwriters

Unfair Calling Cover
Foreign Investments/Assets Cover
Trade Credit (which includes Domestic and International Receivables)
Mobile Assets Cover
Foreign Purchase Contracts
Performance Risk Bonds
Political Risk Insurance