Want to free up your Working Capital?

Published: 12/03/2018

Want to free up your Working Capital?

In a market characterised by credit rationing, Surety and Contract bonds are an efficient and cost effective way to finance your contract security obligations. Read on to find out how these bonds can help your business.

How do Surety and Contract Bonds work?

Surety and Contract Bonds are three party contracts where the "Surety" (typically an insurer) provides a guarantee to the Principal of a Contract that the contractor will carry out works according to the terms and conditions of the contract without default. Should the contractor default, the bond provider is committed to pay. Therefore, the principal is the beneficiary of this bond not the contractor, despite the contractor being the one to arrange the bond and pay for the premium.

Contract Bonds are primarily used in the construction and infrastructure sectors to cover performance obligations, as they offer a more flexible alternative to bank guarantees or retention funds and help to free up working capital. This is possible because Surety Bonds are unsecured, meaning they require no tangible financial security to put in place, which leaves the contractor with the ability to use their often stretched working capital on financing projects, rather than on guarantees.

Surety and Contract Bonds are unable to be cancelled by the Surety. In the event of a claim the Surety must pay the Principal their full entitlement under the Bond. The Surety however retains the right to seek the full recovery of funds from the contractor. Therefore, as long as the contractor is deemed able to fulfil their contractual obligations, the risk to the Surety is quite low, and Bonds are able to be arranged with less emphasis on financial security and more on the performance and abilities of the contractors business.

Types of Surety and Contract Bonds

  • Performance Bonds
  • Provides security to the beneficiary against contractor non-performance or default, and supports contractor obligations during the contract period.

  • Bid Bonds
  • Supports a contractors bid to tender to ensure that they will enter into a contract if accepted.

  • Advance Payment Bonds
  • Secures the beneficiary's position on funds advanced to the contractor for capital purchases or site preparation.

  • Retention Release Bonds
  • Provide security to the beneficiary when the contractor is advanced funds from the retention fund.

  • Maintenance Bonds
  • Secures contractor's post-completion obligations during the warranty or latent defects period, usually 3-12 months post-completion.

  • Off-Site Material Bonds
  • If goods or materials are held off site and paid for by the beneficiary, the bond responds if the goods or materials are not available when required for use in the contract.

How do I arrange a bond?

To arrange a bond, you can consider these two options:

  1. You can apply for bonds individually and supply extended company details each time.
  2. You can set up a facility with the insurer whereby your company details are held on file and to request a bond you simply complete a short form with the specific bond details.

How Coverforce can help?

For more information or to arrange a bond, contact Coverforce on 1300 503 503 and speak to one of our construction specialists today.

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