Bonding & Credit
The concept of suretyship is very old and is referred to in Roman times where there was a requirement for surety in respect of the construction of buildings, walls and roads.
A surety bond is a tripartite agreement where one party (The Surety), guarantees or promises a second party (The Obligee), the successful performance of a third party (The Obligor).
A surety bond is an agreement in writing which usually provides monetary compensation should there be a failure to perform specified acts within a stated period.
Banks can offer bonds as an alternative source, but the Obligor's borrowing ability from the bank will be reduced by the bond amount. In the event of a bond being called, the surety company will seek recovery from the Obligor.
The main types of bond needed in the construction industry are:
These are often required to accompany formal contract tenders. They provide the future employer with a two-fold guarantee:
The contractor will honour its tender.
Provide a performance bond, should the bid be successful.
Performance Bonds are a guarantee, up to the amount of the bond, which protects the employer against any losses and / or damages sustained as a result of the contractor failing to perform its contractual obligations.
Advance Payment Bonds
A contractor may be advanced money to purchase materials. This bond will secure the return of the monies advanced should there be a default under the contract, where the contractor has not actually earned the amount advanced.
A bond may be for a pre-determined period or can be unlimited in time. In the latter case, it is in force until the actual bond is returned by the Obligee to the Surety.
A company will insure its physical assets such as buildings, plant, machinery, etc., but it is probable their second largest asset, as shown on the balance sheet, remains uninsured, this being their Debtors. In view of the present financial climate, serious consideration should be given to purchasing this form of insurance cover.
Credit insurers not only provide cover for the failure of customers to pay legally enforceable debts arising out of insolvency or significantly delayed payments (known as protracted default), but they can also provide advance warning of a potential problem relating to a customer by withdrawing credit limits. For overseas customers an element of Political Risks is provided.
Credit insurance is frequently offered by specialist insurers and the more advanced policies can provide information about your customers via their websites.
In order for terms to be obtained from the insurance market it is necessary to complete an application form. For more information or to request an application form for Bid, Advance Payment, or Performance Bonds and Credit Insurance, contact Howard Burgess at RJ Langman on 020 7538 0959. Alternatively, you can send an email request here.