Thursday 11th January
Construction bonds – security against contractual performance
Hannah Sewell-Moore, Surety Manager, Kerry London provides insight into how surety bonds can provide additional financial protection for construction projects of all sizes.
Bonds guarantee project completion if the contractor cannot finish it, making them extremely valuable to project owners/employers. There’s no doubt that construction bonds are an invaluable asset to any construction project, particularly during periods of economic instability when contractor insolvencies increase.
How can bonds help your business?
Having a bond in place from the start of a construction project can alleviate breaches associated with failure to deliver and remove much of the stress from day one. Dispute management is often costly and time-consuming, putting pressure on the entire construction supply chain.
How can bonds help your construction business grow?
Bonded tenders offer employers several advantages that non-bonded tenders don’t. They offer project completion guarantees regardless of insolvency or disputes and demonstrate the bidding contractor’s financial credibility. Insurers conduct thorough financial risk assessments as part of the bonding process and are a seal of financial approval for the construction project employer.
An alternative solution to retentions
Bonds remove the need for contract retentions and can reassure sub-contractors worried about the risks of late payments. A healthy cash flow is essential for any business, especially if they want to reinvest to secure new business.
In construction, the average profit margins are less than 3%, so waiting for a 5% contract retention payment can be severely detrimental to a company’s cash flow. On larger projects, in particular, sub-contractors can wait lengthy periods for a project to be signed off. Restricted cash flow inevitably affects the potential for reinvestment and growth, so using a construction bond instead of a retention can be a lifeline for many contractors of all sizes.
The Construction Leadership Council (CLC) successfully lobbied to remove retention clauses in NEC contracts, making retentions one of a list of options that includes performance bonds as a suitable alternative. The CLC is also currently lobbying JCT to remove retention clauses as standard in their new suite of construction contracts, which are due to be published this year.
“The Department for Business, Energy and Industrial Strategy – now part of the Department for Business and Trade – commissioned consultancy Pye Tait to report on the subject as part of a broader consultation into the use of cash retentions in the construction industry.
The report concluded that, among other things, the use of retentions resulted in higher costs for clients, poorer relationships in the supply chain and constraints on business growth. It identified some alternatives to retention, including retention and performance bonds.”
Source: RICS Journal
In addition to providing financial security, construction bonds offer sub-contractors more liquidity because they don’t affect credit options or loans available from their bank.
Contact Kerry London to find out how bonds can help protect your company’s cash flow
A surety broker can offer advice, arrange the most appropriate bond wording, and secure the best rate. Kerry London’s Bonds team has underwriting experience within our team, which means we can draft and negotiate bonds wordings with insurers to suit individual needs. Kerry London can arrange bonds to suit both private and public sector projects.
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Kerry London is authorised and regulated by the Financial Conduct Authority. The company is a leading UK independent and Lloyd’s accredited broker, which means that we work with a wide range of niche and major insurers.
This note is not intended to give legal or financial advice, and, accordingly, it should not be relied upon for such or regarded as a comprehensive statement of the law and/or market practice in this area. In preparing this note, we have relied on information sourced from third parties, and we make no claims as to the completeness or accuracy of the information contained herein. You should not act upon information in this bulletin nor determine not to act without first seeking specific legal and/or specialist advice. We and our officers, employees or agents shall not be responsible for any loss whatsoever arising from the recipient’s reliance upon any information we provide herein and exclude liability for the content to the fullest extent permitted by law.
Categories: Bonds, Construction,
