@homerqqg4315
Profile
Registered: 2 years, 2 months ago
Performance Bonds: How you can Avoid 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 cash from me when they can see I'm in a weak cash position? I want it to successfully perform the new project.
You don't pay me interest on the money? Why not?
When the job is half executed, you'll not launch a part of the collateral?
You'll not release the collateral upon acceptance / completion of the contract?
You'll 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 event of a bond claim.
When a contract surety loss happens, the claims division hopes to have dependable resources for financial recovery:
The unpaid balance of the contract goes to the surety as they full the work
The surety sues the applicant / firm and its owners to recover the loss
Collateral requirements arise when the surety needs to have certainty. If a problem develops, they don't want to discover that the shopper has no money left, or they declared bankruptcy... or left the country. If they're to write the bond, they need a assured way of getting monetary recovery.
Bearing in mind that collateral is a pricey worth to pay for a bond, let's look at an alternative approach that helps the surety, but does not take a big bite out of the contractor!
"Retainage" is cash the project owner hold back (retains) to guarantee the ultimate completion of the project and payment of related bills. If the retainage is 10%, the contractor receives 90% of the funds they are owed as the job progresses. On the finish, the contract owner / obligee will still be holding 10% to keep the contractor enthusiastic about reaching total, satisfactory completion. In this method, the retainage money protects each the obligee and the surety - making a bond claim less likely.
"Surety Consent to Release of Final Payment" is a voluntary procedure obligees might use as a courtesy to the surety. The final bit of contract funds may be useful leverage to get the contractor moving for the final contract adjustments. There may be building cracks, broken glass, defective lights, painting errors - small stuff that the obligee cares about but the contractor may find annoying to correct. The Surety Consent is one other way for the bonding company the keep away from a claim. "Fix this problem or we is not going to comply with launch your ultimate payment."
How can these useful tools be incorporated to guarantee they may assist the surety, and subsequently exchange the need for collateral?
The reply is to add a condition to the bond (mandatory compliance required by the obligee) stating that there could also be no launch or reduction of retainage or last payment without the prior written consent of the surety. Now the bonding firm is assured to have a monetary resource available and the quantity is known in advance - just like collateral. But the contractor did not have to empty the corporate bank account to accomplish it: Win-win!
What if the contract phrases do not provide for a retainage procedure? One can be added by contract amendment. If Funds Control (an escrow agent) is in use to handle the contract disbursements, a retainage procedure could be added to the funds control agreement.
If you're ready to read more in regards to Construction Guarantee Bonds have a look at the internet site.
Website: https://suretybondsandguarantees.co.uk/surety_bonds/performance_bonds.aspx
Forums
Topics Started: 0
Replies Created: 0
Forum Role: Participant