What Is A Surety Contract Bonds
Surety Contract Bonds provide protection to the Principal of a Contract against the default of the Contractor. A Surety Contract 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 Contract Bond is a three-party Contract. The Contractor requests the Surety to issue the Surety Contract Bond in favour of the Principal. The Contractor pays the premium for the Surety Contract Bond but is not the beneficiary of the Surety Contract Bond.
Parties to a Surety Contract Bond:
- Beneficiary/Principal: The party requiring a guarantee that work will be performed according to the Contract.
- Contractor: The business that is contracted to perform work according to the terms of the Contract.
- Surety/Financial Institution: The entity issuing the Surety Contract Bond and guaranteeing that the Principal/Contractor will meet its obligations. The Surety, typically an insurance company, is financially responsible to the obligee if the Principal/Contractor fails to meet obligations.
Surety Contract Bonds carry an identical wording as a Bank Guarantee and follow the Australian Standards templates, such as AS2124 and AS4000. Surety Contract 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.
Any payment demanded must be made by the Surety on demand, without any assessment as to the amount to be paid. The only assessment that occurs is ensuring the claim is made as per the terms of the bond – a process identical to the payment of a Bank Guarantee.
Types of Surety Contract Bonds
Surety Contract Bonds provide security against non-performance or default. Surety 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.
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 contractor’s 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
Legislation is changing requiring mining companies to provide a greater level of financial assurance by increasing reserves and capital, which is an onerous financial commitment and may adversely affect the economic feasibility of the project. To help mining companies comply with individual state legislation in a manner that mitigates the risk of early closure, whilst at the same time allowing the company to optimise its cash management and capital strategy, is an innovative and flexible mining rehabilitation product that:
- Complies with current state legislation;
- Provides the mining company with financial flexibility with less onerous security requirements than those required by banks;
- Enables the mine to potentially access surplus free cash or cash, previously tied up by banks or state governments, to facilitate growth and investment.
Benefits of Surety Contract Bonds
- Surety Contract 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;
- Surety Contract 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.