Thursday 4th July
Strong market capacity for construction bonds
Recent news stories about QBE exiting the construction bonds market has caused a bit of a stir in the bonds market, but the capacity for construction bonds remains strong. Surety broking specialist, Kerry London explains the options for contractors looking to arrange a bond for their next construction project.
Over the last few years there’s been a surge in demand for construction bonds. Employers want to safeguard their investments by ensuring project completion is protected against issues such as insolvencies, defaults on the contract and supply chain delays.
Capacity in the bonds market
Bonds for larger construction projects are a more significant financial commitment for surety providers, who often spread that risk across several sureties. Many other providers continue to serve larger construction projects and organisations, so capacity in this market remains strong. Kerry London has good relationships with a panel of A-rated, UK-based surety companies that offer bonds for the full range of construction projects – small, medium, and large.
How does the economy influence construction bonds?
Performance bonds guarantee a contractor’s obligations under the contract and protects the employer against insolvency and any contractual disputes, reducing the risks for the employer. The increased risks presented by challenging economic conditions means surety providers are more cautious leads to greater scrutiny of a contractor’s company financials. Company performance and ability to complete project commitments are critical considerations when offering a bond. Sureties require contractors to provide detailed company financials. A bonds broker helps streamline submissions to a panel of surety companies, reducing unnecessary back-and-forth questions and enabling you to meet project deadlines.
While your broker can find alternative providers for multiple construction projects, some contractors prefer to work with specific bond providers where they’ve built a relationship. Building relationships with sureties can reduce additional administration of setting up bonds for new projects because that company has the necessary indemnities in place.
Surety bonds vs. bank bonds – what’s the difference?
Bonds arranged via banks are often ‘on demand’ bonds and require the contractor to deposit the full bond amount as security into a bank account (an escrow account) until the project is completed. This can be challenging for construction companies because the bond deposit represents a significant chunk of their cashflow and therefore may affect their ability to secure additional finance from the bank.
Surety bonds require a Deed of Indemnity document as security, which is a commitment from all parties that the surety company can recoup their funds if there’s a claim on the bond.
The financial strength of the company is the main consideration for surety companies when arranging construction bonds. The financial strength of the company drives the rate charged. Sureties also provide conditional bond wordings (as opposed to the ‘on demand’ wording issued by banks).
Essential protection for the construction industry
Kerry London’s experts specialise in construction industry bonds, including performance, advance payment, retention and highways bonds. There are zero costs for setting up a bonds facility with Kerry London, our experts simply find the best surety to guarantee your contractual obligations.
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Kerry London is authorised and regulated by the Financial Conduct Authority. The company is a leading UK independent and Lloyd’s accredited broker, which means that we work with a wide range of niche and major insurers.
This note is not intended to give legal or financial advice, and, accordingly, it should not be relied upon for such or regarded as a comprehensive statement of the law and/or market practice in this area. In preparing this note, we have relied on information sourced from third parties, and we make no claims as to the completeness or accuracy of the information contained herein. You should not act upon information in this bulletin nor determine not to act without first seeking specific legal and/or specialist advice. We and our officers, employees or agents shall not be responsible for any loss whatsoever arising from the recipient’s reliance upon any information we provide herein and exclude liability for the content to the fullest extent permitted by law.
Categories: Bonds, Construction,
