Performance Bond
Performance Bond
UK contractors are increasingly being asked to provide a Performance Bond when they undertake development projects. BJP can help source the right cover for you.
A number of things can go wrong in any construction project, and property developers are more and more unwilling to take risks that might land them in financial trouble. One way in which contractors can prove good faith is by taking out a performance bond.
At BJP we have nearly 20 years’ experience working with developers and contractors alike. We can help our clients to find Surety Bond solutions to make sure they can negotiate contracts with complete peace of mind.
What is a Performance Bond?
Sometimes referred to as a Surety Bond, a Performance Bond is a form of security provided by a contractor to a developer. It consists of an undertaking by a bank or insurance company to make a payment to the employer in circumstances where the contractor has failed to fulfill the contract.
There are two types of performance bond – On Demand and Conditional.
On Demand Bonds
While rarely used in the UK construction industry, On Demand Bonds are a standard requirement in many international contracts, as well as in the petroleum and power industries within the UK. On Demand Bonds are usually provided by banks. As the name suggests, the bank is required to make a payment under the bond whenever this is demanded.
Conditional Bonds
A Conditional Bond is, by contrast, common within the UK construction industry. Such a bond is usually issued by an insurance company, and payment is usually conditional upon the employer, who makes the call proving the amount of loss which he or she has suffered. A Conditional Bond may require litigation before any payment can be obtained.
How much is a Performance Bond worth?
The value of a Performance Bond is usually expressed as a percentage of the contract price, usually between five and 20% – with 10% being the most common figure. A bond issued under English law is usually executed as a deed.
Who needs a Performance Bond?
A Performance Bond is usually issued to contractors undertaking development projects. They help the contractor convince their client that, if the worst should happen and they are unable to finish the job for any reason, the developer will suffer minimal financial loss.
While a Performance Bond protects the developer, it is arranged by the contractor, generally right after winning a bid.
Who can supply a Performance Bond?
The two main suppliers of Performance Bonds are banks and surety companies.
Banks – will generally take 100% cash collateral security for the duration of the contract. If you have that amount of cash in credit, this is a great option, as the bank will pay interest on the cash amount, which will probably pay for the bond itself.
The downside to this arrangement could be a serious affect on your business’ cash flow for the duration of the contract. An overdraft facility can often be set up to resolve this but these usually need to be secured with personal guarantees or property. As such, using a bank could end up being more expensive and prohibitive.
Surety companies – will usually mean cash flow will not be affected, and the cost of the bond will therefore stand apart from company banked finances.
The surety market, however, is international, so care should be taken with the details. You should be especially aware where personal guarantees are requested. Should the product pay out, surety companies will seek recovery from individuals. We would always recommend you get specialist advice on any surety product before purchase. As with most financial products, the devil is in the detail.
Why arrange a Performance Bond with BJP?
With nearly 20 years’ experience helping our clients to place performance bonds, we are perfectly positioned to make sure you’re looked after by a surety specialist, whatever the nature of your project.
Did you know we also provide Property Developers Insurance? Whether you are professional developer running multiple projects or a house owner in the process of refurbishing or extending your house, BJP can assess your situation and offer a collection of covers best suited to your needs under a Property Developers Insurance.
We can help you find a Performance Bond to suit the unique needs of your contract.
