These bonds are required when responding to public or private bids, for works, supplies, services and maintenance, and guarantee the subsequent underwriting of the Contract and the observance of the obligations taken on by the Contractor in the event that they win the bid.
The Parties participating in the bid are often asked to include the cost of such a bond in the price of their offer.The amount requested to be guaranteed is usually between 1% and 5% of the total value of the contract, but may in some situations be higher.
These bonds constitute the most commonly requested form of bond, and they guarantee the performance of the contract by the bid-winning Company. They define the payment of a claim in favour of the Beneficiary in the event that the Contractor does not observe the contractual obligations in whole or in part.
In most cases, the calling of the bond by the Beneficiary will be the result of the insolvency of the contractor; they are rarely called due to badly executed works. The amount to be guaranteed is typically 10% of the total contract value, but, in certain cases, this can be increased to 15% or even to 25%; usually due to circumstances in which the Beneficiary has a greater interest in the completion of a particular contract. The request for performance bonds is very common in contracts; in the absence of such a guarantee the alternative is that of depositing liquid funds; in many cases this can have a considerable impact on the cash-flow or on the financial forecasts of the Contractor.
ADVANCED PAYMENT BONDS
These bonds protect the Beneficiary against losses when there have been advance or pre-payments typically used for the purchase of materials to begin the works.
The amounts requested to be guaranteed compulsorily will equal the advance payments made, and the risk will reduce in line with the progress of the contract. In a series of contracts for the supply of goods or services in which the Beneficiary has made an advance payment to the Contractor, the same Beneficiary requests this type of bond which gives the Contractor the possibility of access to the advance requested.
These bonds allow any sums that would have been retained to be released in advance of the completion of the works against a guarantee of the proper completion of the contract, whether for the amount of work or on the revised price agreed.
The amounts requested to be guaranteed will be equal to the payments made and received, usually around 2.5% to 3% of the contract value.
This particular type of bond is requested to guarantee any damage which might arise during the maintenance period following labour issues or caused by the materials used during construction.
The amounts to be guaranteed are usually around 5% or 8% of the contract value and the duration of such bonds varies between one and five years.
TRADE CREDIT BONDS
This type of instrument can provide an additional guarantee together with a stronger negotiating power helping a Company which is growing to increase its credit for the supply of goods and services from its own suppliers.
These also allow them to extend their credit both in terms of amount and repayment period reducing the lack of their own liquidity for Companies which are continually developing their turnover, avoiding long and frustrating negotiations with the Banks, subsequent overdraft costs and the associated restriction on credit limits. Commercial credit guarantees therefore offer the simplest and fastest solution.