Bonds - DONE

Question 1

What is a bond?

Answer 1

An arrangement where a contractual duty owed by one party to another is backed up by a third party

Question 2

What form must a bond be in?

Answer 2

• It must be in writing, it is common for it to be a deed
• It will contain a duration and financial limit

Question 3

Who normally provides a bond?

Answer 3

A financial institution e.g. a bank for a premium

Question 4

What are the different types of bond that may be provided?

Answer 4

• Performance bond
• Retention bond
• Advance payment bond
• Materials off site bond
• Payment bond
• Tender bond

Question 5

Where might bonds be appropriate?

Answer 5

• If the contractor is new or unapproved
• To protect the interests of a ‘one off’ developer
• Where a bond is thought appropriate to the risks of the project

Question 6

How can the employer call on a performance bond?

Answer 6

Performance bonds can only be called when the contractor has “breached” the building contract as opposed to “on demand” bonds which can be called at any time, regardless of fault

Question 7

What is a performance bond?

Answer 7

• Used as a means of insuring a client against risk of contractor failing to fulfil contractual obligations to the client
• The most common concern relates to a contractor becoming insolvent before completing the contract
• This compensation can enable the client to overcome difficulties that have been caused by non-performance of the contractor, such as, finding new contractor to complete the works
• Guarantor pays for loss up to value of bond

Question 8

What is the standard value of a performance bond?

Answer 8

Usually 10% of the contract value, the premium for taking out the bond is added to the contract sum

Question 9

What is the purpose of a tender bond?

Answer 9

• Covers employer if the lowest tenderer refuses to enter into a contract with them
• It should also prevent idle tendering - incentive to put in a serious price

Question 10

What is the standard value of tender bond?

Answer 10

1-5% of the tender sum

Question 11

What is a materials off site bond?

Answer 11

• Similar to advance payment bond and allows the employer to claim under the bond should the offsite materials not be delivered to site
• The risk of damage to the goods while offsite should be covered by insurance

Question 12

What is a retention bond?

Answer 12

• ‘Retention’ money held by a bank rather than the client holding back the percentage in valuations
• Provided by the contractor in lieu of taking retention from interim payments
• It should be to the same value as the retention deducted would have been

Question 13

What happens if the contractor does not maintain the retention bond?

Answer 13

The employer can deduct retention from interim payments

Question 14

Why might a retention bond be used?

Answer 14

May be used in difficult market conditions to aid the contractors cashflow

Question 15

What are the disadvantages of a retention bond?

Answer 15

• Employer would have to pay the premium for taking out the bond
• May reduce the contractors incentive to complete to standard and promptly
• Harms the employers cashflow
• Employer would not get the interest accruing on the amount of the retention bond