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 of the contract and will not default, the Principal of the Contract is the beneficiary of this bond not the contractor themselves - this is despite the fact that the Contractor arranges the bond and pays 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. However, the Surety retains the right to seek the full recovery of funds from the contractor - this is why as long as a contractor is deemed able to fulfil their contractual obligations, the risk to the Surety is quite low, and therefore 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.
Arranging a Bond
To arrange a bond, simply contact your Coverforce Broker who will be able to answer any further questions you have, and provide you with the correct form to complete.
You have the option of applying for bonds individually and supplying extended company details each time or alternately you can set up a facility with the insurer whereby your company details are held on file and requesting a bond is simply a matter of completing a short form with the specific bond details.