Performance Bonds
A performance or contract guarantee bond has long been an established practice when appointing a contractor to undertake major works. The reason for these types of bonds is to protect the employer from the original appointed contractor failing to carry out their contracted duties in terms of performance and delivery, amongst other things. Bonds act as an important safety net to enable a principal to finish the project.
Although banks have traditionally supplied bonds those involved in the construction industry are increasingly turning to the insurance industry as a source of bonds as there can be major differences between the wordings of bonds provided by banks and insurance companies. Ultimately this means the liabilities that sit with the suretyprovider in the event the bond is called into action will not be the same. The most common difference is whether the wording makes a bond “on demand” or not.
The difference between the two can generally be described as:
- An on demand bond does not require the employer to sue the contractor and prove breach of contract
- A non on-demand bond requires the employer to establish the contractor’s breach of the building contract.
Generally speaking banks will not supply on demand bonds, but might make exceptions for major contractors. Insurance bonds are more flexible in wording and typically will not erode the contractors credit line. We have expert partners who can help you arrange a bond. Typically they will require the following pieces of information:
- A completed Bond Application Form
- Latest audited and/or latest management accounts
- A copy of the proposed wording.
