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Performance Bonds: Find out how to Avoid Collateral
This is a nasty subject. Not because collateral for surety bonds is inherently bad, but because it is a topic of nice angst for contractors and their insurance / bond agents. For example:
Why is the bonding company taking cash from me after they can see I'm in a weak cash position? I need it to efficiently perform the new project.
You do not pay me curiosity on the money? Why not?
When the job is half accomplished, you will not launch part of the collateral?
You will not release the collateral upon acceptance / completion of the contract?
You'll not release the collateral till the warranty interval ends?
Etc. Plenty of aggravating phone calls and emails.
With all this aggravation ahead, why do some bonding corporations 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 two relyable resources for monetary 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 come up when the surety wants to have certainty. If a problem develops, they do not need to discover that the client has no money left, or they declared bankruptcy... or left the country. If they're to write the bond, they need a guaranteed way of getting monetary recovery.
Bearing in mind that collateral is a pricey worth to pay for a bond, let's look at another 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 assure the final completion of the project and payment of related bills. If the retainage is 10%, the contractor receives 90% of the funds they are owed because the job progresses. On the finish, the contract owner / obligee will nonetheless be holding 10% to keep the contractor excited about reaching total, satisfactory completion. In this method, the retainage cash protects both the obligee and the surety - making a bond declare less likely.
"Surety Consent to Launch of Final Payment" is a voluntary procedure obligees could use as a courtesy to the surety. The last bit of contract funds may be helpful 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 however the contractor could find annoying to correct. The Surety Consent is another way for the bonding company the avoid a claim. "Fix this problem or we is not going to agree to release your ultimate payment."
How can these useful instruments be incorporated to guarantee they are going to assist the surety, and subsequently change the necessity for collateral?
The answer is to add a condition to the bond (obligatory compliance required by the obligee) stating that there may be no release or reduction of retainage or last payment without the prior written consent of the surety. Now the bonding firm is guaranteed to have a monetary resource available and the quantity is known in advance - just like collateral. But the contractor did not have to drain the corporate bank account to accomplish it: Win-win!
What if the contract terms do not provide for a retainage procedure? One will be added by contract amendment. If Funds Control (an escrow agent) is in use to handle the contract disbursements, a retainage procedure may be added to the funds control agreement.
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Website: https://www.suretybondsandguarantees.co.uk/
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