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Performance Bonds: How you can Keep away from Collateral
This is a nasty subject. Not because collateral for surety bonds is inherently bad, but because it is a subject of great angst for contractors and their insurance / bond agents. For instance:
Why is the bonding firm taking money from me once they can see I am in a weak money position? I need it to efficiently perform the new project.
You do not pay me interest on the cash? Why not?
When the job is half completed, you will not release a part of the collateral?
You will not release the collateral upon acceptance / completion of the contract?
You will not release the collateral until the warranty period ends?
Etc. Loads of aggravating phone calls and emails.
With all this aggravation ahead, why do some bonding firms require collateral? The reason is to protect themselves within the occasion of a bond claim.
When a contract surety loss happens, the claims department hopes to have dependable resources for monetary recovery:
The unpaid balance of the contract goes to the surety as they complete the work
The surety sues the applicant / company and its owners to recover the loss
Collateral necessities arise when the surety needs to have certainty. If a problem develops, they do not want to find that the client has no money left, or they declared bankruptcy... or left the country. If they are to write the bond, they need a assured way of having monetary recovery.
Bearing in mind that collateral is a pricey value to pay for a bond, let's look at another approach that helps the surety, however would not take a big bite out of the contractor!
"Retainage" is cash the project owner hold back (retains) to assure the ultimate completion of the project and payment of related bills. If the retainage is 10%, the contractor receives ninety% of the funds they're owed because the job progresses. On the end, the contract owner / obligee will still be holding 10% to keep the contractor excited by reaching total, satisfactory completion. In this manner, the retainage money protects each the obligee and the surety - making a bond claim less likely.
"Surety Consent to Launch of Final Payment" is a voluntary procedure obligees may use as a courtesy to the surety. The final bit of contract funds could also be useful leverage to get the contractor moving for the ultimate contract adjustments. There could also be building cracks, broken glass, defective lights, painting errors - small stuff that the obligee cares about but the contractor could find annoying to correct. The Surety Consent is another way for the bonding firm the avoid a claim. "Fix this problem or we won't comply with launch your ultimate payment."
How can these two helpful tools be incorporated to ensure they will assist the surety, and therefore replace the need for collateral?
The answer is to add a condition to the bond (mandatory compliance required by the obligee) stating that there may be no release or reduction of retainage or closing payment without the prior written consent of the surety. Now the bonding firm is guaranteed to have a financial resource available and the amount is known in advance - just like collateral. However the contractor did not have to drain the company bank account to accomplish it: Win-win!
What if the contract phrases do not provide for a retainage procedure? One may be added by contract amendment. If Funds Control (an escrow agent) is in use to deal with the contract disbursements, a retainage procedure might be added to the funds management agreement.
Website: https://suretybondsandguarantees.co.uk/surety_bonds/default.aspx
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