BONDS, WARRANTIES AND GUARANTEES IN CONSTRUCTION SECTOR

 Bonds are forms of protection against non-performance of a contractor. They’re an undertaking by a surety to make payment to the client in the event of non-performance of the contractor. The cost of the bond is generally borne by the contractor. 

The types include

 Performance bond 

A performance bond is generally used as a means of assuring the client against the threat of a contractor failing to fulfil contractual obligations to the customer. Performance bonds are generally set at 10% of the contract value. Bond can be on demand or tentative. On- Demand Bonds, the devisee, generally the client, can call on the bond without needing substantiation of a breach of contract while for tentative Bonds; the employer must prove that the contractor has defaulted on their scores under the contract before making a claim on the bond.  The compensation can help the customer overcome difficulties caused as a result of perpetration by the contractor similar as chancing a new contractor to complete the project. 

 Advance payment bond 

On a construction design, advance payment bond will be needed by the client if the contractor requests advance payment to help them meet high or significant start up or procurement costs.  This bond will cover the client against bankruptcy of the contractor or if the contractor fails to perform the contractual obligations. An advance payment bond will be an on demand bond, meaning the contractor pays the amount set out without any proof of failure of conditions being met. 

Bid bonds

These are on- demand bonds submitted with a tender to secure the tenderer’s commitment to commence or perform the contract. The bond is completely or incompletely roped if the winning contractor fails to execute the contract or meet other specified conditions.  The presence of a bid bond is intended to give the customer with the assurance that the tenderer has the fiscal capabilities of accepting the contract for the price quoted in their bid.

Off-site materials bond

This bond ensures that if the contractor purchases materials and stores them off-site but has not yet incorporated them into the project, the project owner is protected. Specifically, it guarantees that the materials will be delivered to the project site and incorporated into the work as specified.

If the contractor defaults or fails to deliver the materials to the site, the bond provides financial compensation to the project owner or allows the owner to complete the work. It helps to secure the owner’s investment in materials that have already been purchased but not yet put to use.

Payment Bond

This bond is also called a labour and material payment bond, which is a guarantee that the winning contractor has the fiscal means to compensate their workers, subcontractors, and suppliers of accoutrements.

WARRANTIES

Warranties on the other hand are written agreements made by contractors or a construction company to replace or repair any faulty work after the conclusion of a project. Warranties are typically limited to a predetermined duration and may include exemptions for certain items.

When warranties are found to be breached, the client or project owner may also collect monetary damages based on the value of defective items and other recovery costs.

There are two types of warranties that is implicit and explicit warranties.

 An explicit warranty is written as part of the construction contract documents. Explicit warranties are further divided into material and equipment warranty, design-build warranty and call back warranty.   

An implicit warranty is not formally stated but is implied through common law based on universal expectations. While implicit warranties are divided into habitability, workmanship and vendor literature warranties.

GUARANTEES

When it comes to understanding guarantees it must be noted that there’s a thin line between bonds and guarantees. A guarantee is a promise made by one party to another that certain conditions or terms will be met.

For a guarantee only two parties are involved while for a bond there’s a third party in essence the enforcer.

Key Relationships to the Role of a Quantity Surveyor:

Risk Management: Bonds, warranties, and guarantees are all tools for managing risks. The Quantity Surveyor must assess project risks and advise the client on the appropriate safeguards to implement.

Financial Management: As the individual responsible for cost estimation, budgeting, and financial monitoring, the Quantity Surveyor needs to account for the costs associated with bonds, warranties, and guarantees. This includes any premiums for bonds, the costs of extended warranties, and the potential financial consequences of guarantees.

Contract Administration: The Quantity Surveyor plays a role in drafting and ensuring the correct terms for bonds, warranties, and guarantees in contracts. They must ensure that these terms are clearly defined, and the conditions are met.

Claims Management: In the event that a bond is called upon or a warranty or guarantee needs to be invoked, the Quantity Surveyor will play a crucial role in assisting the client in managing these claims, ensuring that the project is financially protected.

Collaboration with Legal Teams: The Quantity Surveyor often works closely with lawyers to ensure that legal contracts are structured correctly to safeguard the interests of the client. This includes ensuring that the bonds, warranties, and guarantees are enforceable.