Performance Bonds – A Guide to Principles and Practice
If you are either a Developer or a Contractor involved in construction work of any kind then you really need to know about Performance Bonds.
Performance Bonds (sometimes known as Construction Bonds or Contract Bonds) are a type of insurance that provides financial compensation to a Property Developer or Owner, be they private or public, in the event of the contractor failing to complete the works specified within the contract – chiefly as a result of the contractor going out of business for example.
So, if the original Contractor fails to satisfy the contract requirements by becoming financially insolvent then the bond pays out a specific sum of money enabling the Developer to complete the construction project by appointing another Contractor thus affording a degree of financial protection.
It is usually the case that the Developer or ‘Employer‘ will require the contractor to purchase the Bond from an insurance or ‘surety‘ company (the bond provider) as part of their overall agreement.
How much can be paid out if something goes wrong?
In most cases the bond amount (the amount payable) is set at a maximum of 10% of the overall value of the contract. Many construction contracts state that the Contractor is paid in multiple stages and therefore 10% is usually enough for the Developer not to be left out of pocket. Construction Bonds can, in certain circumstances, be set at higher amounts of 15% or 20% of the overall contract amount.
How much do Performance Bonds cost?
As with all insurances, it depends. The bond provider will assess the overall risk and charge a suitable premium. To set their price, terms and conditions they expect to receive at least:
- A Bond Application Form
- 3 years of full accounts from the contractor
- The Contractor’s latest set of Management Accounts (current to within the last 3 months)
- A copy of the bond wording proposed by the Developer
The better the Contractor’s financial position, the better the chances of receiving a Performance Bond at a good market rate.
What else can I do to keep the costs down?
There are several ways to make sure you qualify for a Performance Bond and pay a competitive price:
Start early: Don’t leave it too late. Make the bond application at the contract tender stage.
History: Insurers feel more confident if the contractor is well established. That does not mean relatively new contractors will be refused but expect additional terms and conditions and possibly a higher price.
Be standard: Where possible, try and negotiate that the bond format used is the ABI (Association of British Insurers) wording. Insurers tend to charge more the further you detract from the standard wording.
Don’t flood the Surety Market with your bond application. A little unusual this one but it is worth knowing that Bond Providers do not like to see several applications (for quotes) from the same party. So while with other insurances you might talk to a few different brokers and ask them to get you a price, this is not good practice when it comes to Construction Bonds.
Choose the right Broker: Construction Bonds are a specialist field. You need a knowledgeable broker who has experience in this specific field and will not only find you the right price but can also provide technical assistance and advice.
So why use Titan Insurance?
Most Developers will not accept a Construction Bond from an unregulated company for fear of the bond failing to pay out in the event of something going wrong. Here at Titan Insurance we only deal with regulated surety companies and have unrivalled access to the entire Regulated Surety Market.
We have over 30 years of experience in securing Performance Bonds for our clients and with that comes a wealth of knowledge, expertise and contacts of this sector.
That’s the technical stuff over. If you need help or guidance, or to get things moving, call us on 0207 731 3700 or drop an Email to ask us any questions.