Blog 020 - Performance Bonds

As the country continues to construct its way out of the coronavirus induced recession, we are now starting to see some of the market related changes that will shape the immediate future of our industry. One such change witnessed this week is the insurance sectors reluctance to write performance bonds or to charge extortionate fees for them.

With bleak fears of liquidity and ability to perform on contracts due to changes working arrangements, possible loss of labour and materials shortages, the bondsman industry is becoming quite shy in their issuing of Performance Bonds. Limiting their availability is driving their cost up, a cost which someone will have to pay for. Specialist Contractors, ensure you have an up to date price for the furnishing of a Performance Bond prior to entering into any contract that requires you to provide one otherwise you could get caught out with a big bill with the current rising costs.

With the availability decreasing and the costs increasing, here are some practical tips for Performance Bonds:

1. Always agree a longstop date for the bond with the Employer and the Bond provider. Providing this longstop means that if the contract over runs, the requirement to provide the bond ceases on the specified date. This prevents you needing to extend the bond, typically at a disproportionate cost

2. Consider a Parent Company Guarantee. If you are part of a group of companies, the Parent Company can provide the operational assurance of fulfilment of contract to the Employer if so required

3. Negotiate them out! – Whilst this does have little success, if you have been through the appropriate pre-qualification for Employment, it is highly unlikely that you are the type of Specialist that will under perform to such an extent that the Employer would need to make a claim on a bond. Typically, those types of Contractors can’t get bonds from the market anyway!

4. Return of the SubGuard Insurance. Launched in the US 1996 and the UK in 2008 Zurich offered Main Contractors an insurance policy to cover them against Subcontractor default. A quick google search whilst writing this post didn’t bear much fruit for this insurance suggesting it is no longer available are sufficiently hard enough to find that Zurich are not that keen on offering it. Maybe a Government backed scheme that insured Main Contractors against qualifying SME’s would be a good “kickstart” measure?

5. Consider carefully before providing a bond. There will be an upper limit to the amount you can bond across your business at any one point, providing a bond where a bond isn’t appropriate may prevent your business from winning a key contract that does require a bond.

6. Never provide On Demand bonds. Always stipulate that any bond will be an “on default” type bond and that the wording will be agreed with the provider. Too often Specialists will sign a contract that has pro-forma wording for a bond in the contract and will then be obliged to furnish that exact bond but will struggle to find anyone to accept it. Either agree wording upfront or caveat that wording is to be later agreed by the bond provider.

Ultimately, as the market loses confidence with rising insolvencies, the requirements for bond will increase and no doubt with ever more demanding stipulations. However, to avoid putting a red tape chokehold on the industry, the leaders need to take steps to ensure that bonds are only used in appropriate situations where the Specialist is part of a high risk activity or the risk of failure is substantial enough that it necessitates the need for the bond. The current craze for including in all Trade Contracts as a standard provision is driving up the cost of construction, down the liquidity of the Specialists and increasing market uncertainty from the bond providers. Let’s not use big hefty performance bonds when more appropriate measures are available.

If you want to know more about performance bonds or help agreeing wording with your clients or bond providers, drop me an email.