Before entering into a new contract, it is imperative for an employer to undertake due diligence on a contractor. Whilst it is tempting for employers to go with the lowest bid, in reality, an employer should look at the financial stability of the contractor otherwise an employer could potentially end up spending more if it needs to pursue a claim as against the bond or guarantee as it would have done if it went with the highest bidder at the outset.
Among other things, the cost of a bond is linked to the contract sum and duration, the cost of such is passed onto the employer. Therefore, for either, a bond for 10% of the contract sum (the standard), if it cannot be obtained or is to considered too costly, the employer might consider a bond for a lesser amount for a shorter duration.
Increasing the rate of the retention, is another alternative, where a bond is unavailable or too costly or consideration to place monies in escrow or a combination of both. Consideration must be given however as to the impact of the contractor’s cash flow.
Whilst not a true substitute for a bond or guarantee, collateral warranties from key sub-contractors and sub-consultants can be used to provide a form of security for the employer and can enable the employer to build out a project where the collateral warranty contains step in provisions. Similarly, to a bond or guarantee, it is necessary for a collateral warranty to be obtained at the outset of a contract or as soon as possible thereafter. A method to facilitate this is to withhold an amount for the non-provision of a warranty.
Depending on the nature of the project, it might be an option to obtain latent defects insurance which can provide cover for the contactor’s insolvency during the development. If insurance is obtained it must be looked at in detail as it is only as good as the underlying underwriter.
Lastly, be commercial! Identify other options that maybe available, such as the contractor obtaining a bond for a lesser amount than the standard 10% with the remainder in an escrow account. For example, a bond for 7% of the contract sum with the remaining 3% in an escrow account either until practical completion or until such time as the contractor is able to get a bond for the full 10% maintainable to practical completion only. Parties must work together with the intention of finding a commercial viable decision to address both party’s needs.
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