Why do I need a construction bond now?

Construction bonds are a long-standing feature of the construction market, but the demand for this protection has risen exponentially during the last 12 months.

The current economic climate has led many employers to include bonds as a contractual requirement for bidding contractors – this was previously only the case on public sector contracts to protect taxpayer funding. The challenging economic climate and rising insolvencies within the construction sector have led many to write bonds into contracts. There’s no doubt that securing a bond is an influential factor during the construction contract bid selection process, and some contractors now consider bonds an essential new business acquisition tool.

Harsh economic conditions have led to bonds being used to protect against insolvencies within the industry and the construction supply chain. However, they are also being driven by the need for fairer payment practices and the abolition of retentions, reducing the financial risks for employers.

Selecting the right bond

Bonds provide employers instantaneous access to funds and guarantee the completion of work. The construction sector uses a wide range of bonds, including performance bonds, advance payment bonds, retention bonds, section bonds (mainly used for local authority works such as highways and sewers), bid bonds, NHBC bonds for new homes, and warranty bonds.

Performance bonds, surety bonds or contract guarantees are the most commonly used bonds in the construction sector. Performance bonds guarantee the contractor’s obligations under the contract and insolvency, reducing the risks for the employer who employs them to do the work.

Risk management

When placing a bond, contractors can take several steps that will enable them to present a favourable risk to surety companies. A thorough understanding of subcontractors’ solvency, their experience, and ensuring professional indemnity cover is in place (and checking limits) is recommended.

Risk management measures, such as checking copies of the contracts from each party, will help contractors understand contractual and insurance requirements.

The future

As bonds are used more frequently in the future, all parties need to have a solid understanding of the bond options available to them and the circumstances in which they may be used. Using a construction bond broker is a vital first step in organising a bond and can help remove the administrative burden from contractors. It also provides essential reassurance that an expert is arranging their cover and minimises unnecessary delays that could jeopardise new business contracts and potential future financial or legal exposures.