|
|
By Charles Sampson, business development manager, Contractors Bonding
The argument made is that by tendering for a contract and being vetted and approved by a municipal authority the contractor has shown that they have the capability and experience to do the job – so why the bond? The requirement to put up this form of security can be frustrating and in the case of retentions, can prove to be financially crippling for some. When times are tight the thought of having 10 percent of a contract payment held for 12 months or more after completion can make the eyes water. The other side of the argument though is that these ‘bureaucrats’ have a responsibility to ensure that contracts are completed as required and in a manner that ensures that there are no liability issues for them. You have the choice of putting up the bond value yourself, obtaining a bank guarantee or obtaining a bond from an underwriting company. For contractors, the usual bonds required are for performance, advance payment and retentions. Attitudes to bonds vary from authority to authority. Some councils are reluctant to accept bonds for retentions and prefer to hold cash back themselves, logically this is a cash management benefit for themselves however for you the contractor, this can be a painful experience. Only occasionally are bonds called, usually if an issue arises it is resolved between the contractor and the contracting party, but from time to time things do go wrong to the point that the bond must be called and if this happens the underwriting company must make payment almost immediately. Typically a bond is for 10 percent of the contract value and the vast majority issued are performance bonds. Obtaining a bond is a relatively simple process, Application is made to an underwriter and you will be asked to provide recent financial accounts plus statements of position from the directors. Whilst the financials are examined, the underwriting is not based purely upon your financial strength, like everyone else, contractors have their good and bad years and what is really important is that you are competent in what you do. If you are taking on a very large project or getting into a new area of work the underwriter will certainly ask a few questions. A recent example seen was where a small contractor with annual revenue of less than $400,000 was awarded a contract in excess of $2 million, some investigation was required and a bond was provided. The statements of position are requested because personal guarantees may be required to support the bond. The reasoning here is that if the underwriter is going to back you, you should be confident enough to back yourself as well. The alternative to obtaining a bond from a surety company, other than putting up the cash bond yourself, is to obtain a bank guarantee. For some contractors this works, for others it can be a challenge. Normally a guarantee effectively freezes the value of the bond in your bank account meaning the funds cannot be utilised. Additionally there is the cost of the guarantee. However, how your bank handles these depends very much upon your relationship with the bank, and of course the bigger you are, the easier it all is. The advantage of a bond from a surety company is that there is no cheaper way to fund this and the process is very simple and quick. Typically a bond can be issued within 48 hours and where a contractor has a history with the surety company, within a matter of hours. Contractor Vol.32 No.3 April 2008 |
Bonds, what a pain they are, just another bureaucratic impediment to doing business – at least that’s the reaction from some contractors.