Page 26 - Banking Finance March 2019

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to enter into the contract at the price bid and that the which frees up working capital saving the client money,
contractor will provide the required performance bonds, strengthening their ability to complete projects and
as well as labour and material bonds. giving them options to grow and develop their business.

 The performance bond is the best known surety bond.  With more working capital back in the hands of the
This bond assures that the contractor will perform the contractors and projects being completed on time will
contract as specified. If the contractor fails to meet enhance government's effort backed by the security of
the obligations of the contract, the surety company will the sureties and guarantees.
see that the project is completed.

 The labour and materials bond ( payment bond) Redemption and claim process:
guarantees that the contractor will pay specific When a claim is made on a bond, the surety must investigate
subcontractors, labourers and material supplies the allegation of contractor default. The principal must co-
associated with the project. operate with the surety and provide the information
necessary for the surety to make a decision of whether it
Structure of the Surety Bonds: must perform under the bond. For example, the surety will
Each of the parties has responsibilities related to each other examine the validity of the bond, whether notice of default
party. was proper, whether there were material alterations or
 The principal has the duty to the obligee to perform its changes in the scope of the contract or gross overpayments,
among other information.
contract. The obligee likewise owes a duty to the
principal to uphold its end of the contract, including
If the surety determines that its obligations have not become
payment in accordance with the contract terms.
void, the surety will identify its course of action, which may
 The surety has a duty to the obligee to take action under include as under.
the terms of the bond if the principal defaults under the
 Providing financial or technical assistance to the
contract. But the obligee has a duty to fulfil its bargain contractor
under the contract, again, including payment of any
sums due under the contract, but this time to surety  Arranging for replacing of the contractor.
that performs.  Re-building the project for completion

 The surety and the principal also have duties to each  Paying the penal sum of the bond.
other. The surety has the duty to determine whether
the principal is in default and abide by the terms of the
bond and any agreement of indemnity. The principal
must co-operate with any investigation of an allegation
of default and reimburse the surety for any losses
incurred due to the default of the principal on its
promise.

Few key benefits of this Suerty Bonds are as
under.

 An option and an alternate to Bank Guarantees.
 Don't require margin / cash collateral or liquid assets

26 | 2019 | MARCH | BANKING FINANCE