T017 Contract Practice - Bonds & Guarantees Rics Apc

Front 1

What are the main sources of guarantee that can be sought in construction?

Back 1

Bond

Parent company guarantee

Front 2

What is a bond?

Back 2

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

Front 3

What form must a bond be in?

Back 3

It must be in writing, it is common for it to be a deed

It will contain a duration and a financial limit

Front 4

Who normally provides a bond?

Back 4

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

Front 5

What is a parent company guarantee?

Back 5

An arrangement where the contractual performance of one company in a corporate group is underwritten by the other members of that corporate group

Front 6

What is an on demand bond?

Back 6

Where the beneficiary can call upon the surety for payment whether or not there has been a default under the main contract, as long as the call is not fraudulent

Front 7

What is a conditional bond?

Back 7

Where the surety will only pay out if certain specified conditions have been met e.g. a default under the main contract

Front 8

What are the disadvantages of on demand bonds?

Back 8

1) Negatively affects the contractor’s cashflow
2) Added to the contract sum so the employer pays for something that is not really necessary
3) There is therefore no disincentive to call on it

Front 9

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

Back 9

1) Performance bond
2) Retention bond
3) Materials off site bond
4) Advance payment bond
5) Tender bond
6) Payment bond

Front 10

Which is the most common type in the construction industry? What does this do?

Back 10

Performance bond

Guarantees the satisfactory performance of one party’s contractual obligations

Front 11

What is the standard value of a performance bond?

Back 11

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

Front 12

How can the employer call for payment?

Back 12

They have to prove that the contractor has defaulted in their obligations under the main contract and that loss has been suffered

Front 13

What is the purpose of a tender bond?

Back 13

1) Covers the party inviting the tender if the lowest tenderer refuses to enter into a contract
2) Can be important if the inviting party is in turn tendering for work on the basis of that tender
3) To prevent idle tendering – incentive to put in a serious price

Front 14

What is the standard value?

Back 14

1-5% of the tender sum

Front 15

What is the purpose of a retention bond?

Back 15

Instead of deducting retention from each interim payment

Front 16

What is the value of a retention bond?

Back 16

Should be the same as if retention were deducted e.g. 3% of the contract sum

Front 17

What is the purpose of a payment bond?

Back 17

Where the contractor has significant early costs e.g. purchasing high-value plant, equipment or materials specifically for the project. The bond may be required to secure the payment against default by the contractor.

Front 18

What is the purpose of a materials off site bond?

Back 18

Covers the employer against loss or damage to materials already paid for (through interim valuations) before the materials are delivered to site

Front 19

What standard forms of bond does the JCT standard form provide? Where?

Back 19

Retention bond
Advance payment bond
Materials off site bond

Schedule 6

Front 20

What are the arguments against requesting bonds?

Back 20

1) Shouldn’t really be needed – tenderer selection process should ensure only reliable and capable contractors are selected
2) Unnecessary premiums are added to the contract sum, which are unlikely to be called on
3) If the developer is a regular builder this may add a lot of money to their project costs

Front 21

Where might bonds be appropriate?

Back 21

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