Benefits of Surety Bonds/Surety Bond Facilities

  • Bonds are widely accepted form of contract security and accepted by the private sector, federal, state and local municipalities.
  • Are flexible and operate alongside traditional banking facilities.
  • Bond Facilities are unsecured (no tangible security or collateral is required).
  • Bond Facilities allows Contractors to free up funds and reduce debt and tender for more contracts without being restricted by security requirements.
  • Bonds are an alternative to bank guarantees.
  • Bond Facilities allows the company greater financial flexibility by allowing the company to leverage of its capital base and therefore utilise assets more cost effectively.
  • There is no upfront or establishment fees or ongoing fees payable, apart from legal documentation costs on establishment of Facility. Premiums on Bonds are only payable on usage.
  • There is quick turnaround in issuing Bonds to meet contract deadlines.
  • Provides the company funding flexibility / options by not having to utilise its banking lines.

Misconceptions about Surety Bonds

“A surety bond is an insurance policy.”

Surety Bonds provide protection to the principal of a contract against the default of the contractor. A Surety Bond is an undertaking by an independent third party to the beneficiary that the contractor will perform in accordance with the terms and conditions of the contract; hence a Surety Bond is a three-party contract. The contractor requests the surety to issue the bond in favour of the principal. The contractor pays the premium for the Surety Bond but is not the beneficiary of the bond.

“Surety Bonds don’t have the same obligations as a bank guarantee.”

Surety Bonds carry an identical wording as a bank guarantee and follow the Australian Standards templates, such as AS2124 and AS4000. Surety Bonds carry exactly the same obligations at law as bank guarantees. Sureties cannot call their product a bank guarantee, as they are not a registered bank, otherwise the products are identical.

“Insurance companies aren’t as secure as banks”

Insurance companies offering Surety Bonds carry an A+ Standard & Poor’s Credit Rating and are APRA approved.

“It’s more difficult to make a claim on a bond.”

The payment must be made by the surety on demand, without any assessment as to the amount to be paid. The only assessment occurring is to ensure the claim is made in terms of the bond itself – a process identical to the payment of a bank guarantee.

Bonds and Bank Guarantees

“Surety Bonds and Bank Guarantees are generally identical”

The products are generally identical and have exactly the same obligations, at law when called on for payment. Under an unconditional bank guarantee, the bank’s liability to make a payment to the beneficiary arises immediately upon the beneficiary making a demand without the beneficiary having to satisfy any other condition precedent and irrespective of whether or not there has been a default by the Contractor under the underlying contract.

Exactly the same obligation, at law, applies to Surety Bonds should an unconditional bond be called on for payment.

“Payment must be made by the Surety on Demand”

The general format of an unconditional Surety Bond follows the Australian Standards AS2124/AS4000 document. The payment must be made by the Surety upon demand, without any assessment taking place as to the amount paid.

The payment amount is the amount of the claim up to the face value of the bond in question. The only assessment that will take place is to ensure the claim is made in terms of the bond itself. This again is the identical process involved in the payment of a bank guarantee.

“Identical Wording”

The bank guarantee and the surety bond contain identical wording (generally) which states “it is unconditionally agreed that the financial institution will make the payment or payments to the Principal without reference to the Contractors and notwithstanding any notice given by the Contractor not to pay same”.

Types of Surety Bonds

Contract Bonds provide security against non-performance or default. Contract Bonds include:

  • Retention Release
    Provides security to the beneficiary when the contractor is advanced funds from the retention fund.
  • Off Site Material
    Secures the beneficiary where payment to the contractor for items to be constructed off site has occurred but delivery of the goods has not taken place.
  • Bid/Tender
    Supports a contractor’s bid or tender to ensure that they will enter into a contract if accepted.
  • Performance Bonds
    Provides security to the beneficiary against the contractors non-performance or default during the contract period.
  • Maintenance Bonds
    Secures the contractor’s obligations during the warranty or defects period.
  • Advance Payment
    Secures funds advanced to the contractor for capital purchases or site preparation.

 

Commercial Bonds provide security for a company’s obligations under local, state and federal governments regulation or statute. Commercial Bonds include:

  • Mining Rehabilitation Bonds

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