By Charles Sampson
Business development manager
Contractors Bonding
One thing that you can count on when times get tough, is that bureaucrats think up even more ways to make things tougher. A number of municipal authorities are looking to change the core requirements of NZS 3910-2003 and from a bonding point of view, some of them have quite wide ramifications.
The first is the idea that bonds should be ‘on demand’ – probably not a change that leaps out at a contractor, but one that could be quite onerous. So what exactly does it mean?
Under present wording a bond cannot be called by the beneficiary (council or whoever) until certain conditions have been met. Usually there is a requirement that the beneficiary must endeavour to resolve any issues with a contractor before calling a bond. The logical result is that by negotiation any issues are resolved to the satisfaction of the beneficiary.
By moving to an ‘on demand’ scenario there is no requirement to negotiate or endeavour to resolve issues. The beneficiary can demand and receive payment at any time without co-operative consultation between the parties.
What this can do is allow the unreasonable calling of a bond, without giving the contractor the chance to attend to any rectification himself, and resulting in a financial loss.
The beneficiary may decide that they will do any rectification work themselves, or bring in another contractor at your expense. And don’t forget that if a bond is called, it is you, the contractor, who pays for this, as your bond provider will seek recovery from you.
To be fair, a number of organisations require on-demand bonds and demonstrate very reasonable behaviour when there are rectification or repair issues, without going for the bond. But you are relying upon their goodwill here, rather than a contractual agreement.
Which really brings us back to the whole intent of NZS 3910: To have a workable standardised agreement between contractors and municipal authorities.
An additional concern is that many insurers are reluctant to provide on-demand bonds. This could force contractors to rely upon bank guarantees. This is something that will impact financially by restricting access to funds, as normally, by providing this form of bond, a bank requires that you place the value of the bond on deposit with them.
The second issue to consider is the requirement for performance bonds to extend to cover maintenance periods. This obviously delays the release of the bond for up to two years and will have financial implications for you, particularly if you are using bank guarantees as bonds.
As a bond underwriter there is a benefit to us, as we can charge a higher fee for the longer bond period. But in reality it is bureaucratic nonsense, a belt and braces approach where it is not required. It can be argued that the beneficiary must ensure that they are protected against any eventuality, but a dose of pragmatism would not be out of order here.
Very few bonds are called. In almost every case, where there are issues regarding completion or non performance, the parties sit down and resolve them without drama. No contractor wants to be in a position where they are unable to receive further work from a council, particularly now as the cold winds of economic change begin to stir.
Contractor Vol.32 No.5 June 2008
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