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Talking Point with Mark Perkins

While the main risks for geotechnics come from the ground itself the industry needs to consider commercial risks more carefully too.

With 631 construction companies reportedly disappearing in the last quarter, commercial risk is a real issue for the industry. Surety bonds are a way of guaranteeing - beyond any contract - that companies will keep their promises and avoid lengthy and expensive litigation. Nonetheless, getting the right bond is essential.

Richard Price from surety provider HCC International says that early advice and avoiding onerous wording is key but adds that it is important for the bond to expire either at completion of the client’s works, or at a fixed date. According to Price, it is not uncommon for a bond for, say, an eight week piling contract to expire at the end of the defects period for the whole of the job. Not only could this be two or three years down the line, but release of the bond will be at the mercy of finishing trades completing their defects.

One alternative is for the contractor to negotiate the release of the retention in return for providing a ‘retention bond’. While the contractor will incur the cost of the premium, this may be preferable to having a retention tied up for a long (and indeterminable) period.

“Surety bonds are not insurance - they are binding guarantees, albeit insurance-backed.”

The expiration of the bond can have an impact on other parts of the business. According to Gateley lawyer Nick Warrington, all bond providers have a finite capacity to provide for a client so it is important to keep capacity free by achieving quick release of bonds.

Another Gateley lawyer Gemma Wilson told me that the most common form of bond on construction projects is a ‘conditional’ performance bond, where the bond amount is usually only payable after the works have been completed and the employer’s losses have been established and ascertained. But she has also seen ‘on demand’ bonds used in civil engineering, where the surety will be called to pay out on demand before the works have been completed.

A clear danger is signing up to those ‘on demand’ bonds, which are, effectively, undated cheques, and typically issued by banks. The wider surety market favours ‘conditional’ bonds. Furthermore, bank bonds absorb a company’s overdraft limit, whereas bonds sourced from insurance companies do not.

However, surety bonds are not insurance - they are binding guarantees, albeit insurance-backed. Providers will seek to recoup any payout under the bond from their client.

Securing the right bond can be complicated but when fully utilised, different bonds can assist both contractor and employer in a range of situations. Warrington underlined this when he told me that as with a retention bond, an advance payment bond is provided in return for payment from the employer where there are significant costs incurred at the early stages - for instance, procurement of materials.

Well-planned geotechnical work can minimise construction risks - well-sourced surety bonds can do the same for the commercial risk.

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