Insurance For Business

Construction Bonds

A bond is not an insurance product, although it does provide financial protection. It is a form of financial guarantee.

We have been helping our bank of construction clients with their bond requirements for over 45 years. We have built up a good relationship with specialist insurers who write bonds

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Construction bonds explained

A bond is a written obligation provided by a guarantor (typically a bank or insurer) covering the beneficiary (such as an employer on a construction contract) against the contractor or service provider not being able to fulfil their contractual obligations, usually as the result of a financial failure or technical problems. There are many different kinds of construction bonds used for differing purposes.

Construction bonds explained

A bond is a written obligation provided by a guarantor (typically a bank or insurer) covering the beneficiary (such as an employer on a construction contract) against the contractor or service provider not being able to fulfil their contractual obligations, usually as the result of a financial failure or technical problems. There are many different kinds of construction bonds used for differing purposes.

Examples of bonds

Performance – Employers often ask for performance bonds so that they will receive compensation in the event of a contractor defaulting under contract. These bonds are normally issued for an amount equal to 10% of the contract amount and finish at Practical completion or end of maintenance period. Percentages can range between 5% – 20% of the contract price.

Retention/Maintenance These enable a client to receive the retention monies (common in construction projects) normally held by the employer for a specified period after completion, typically for the defect’s liability period, although not necessarily. The bond is provided in lieu of the retention monies. Retention bonds can be a significant aid to cash flow releasing typical retentions of 2.5% or 5% of the contract value.

Advance Payment -These provide the security for the repayment of advance payments or payments made in account. Typically, these are requested if an advance payment has been requested under the contract in respect of any materials or goods that need to be pre-ordered. These bonds are usually for 100% of the advance made.

Highways and Sewers – Sometimes referred to as a Section 38 / 278 (Highways Act) or Section 104 (Water Industry Act) bond respectively.

These essentially provide security to the relevant authority in place of a cash deposit, guaranteeing the client will complete the road, footpath, street lighting or sewer system to a standard which they can adopt.

Payment Guarantee/Letters of Credit Replacement – In order to release working capital and avoid the need for security, it may be possible for you to obtain a Letter of Credit Alternative or Payment Guarantee from an insurance or specialist surety company.

Letters of Credit are commonplace in commercial and international transactions and companies with high deductibles listed on their insurance policies may be asked to provide their insurer with a Letter of Credit from the bank in the event that they are unable to meet the cost of the deductible. However, a Deductible Payment Guarantee can be arranged instead of a Letter of Credit.

Bid/Tender – These are typically used in public works tenders and provide security that the contractor the work is awarded to will actually sign the contract and undertake to perform the work as contracted.

To discuss any aspect of your insurance requirements with us, please contact us and one of our dedicated Account Executives will be in touch to assist you further.

“We’ve used R K Henshall to assist us with placement of construction bonds for over 10 years. Not many brokers specialise in bonds in addition to general insurance, so it’s good to have a relationship with a broker who acts as a one stop shop for all our requirements.”

Karl Parker, Pioneer Design and Build Ltd
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R K Henshall & Co Ltd are Independent Intermediaries and are authorised and regulated by the Financial Conduct Authority. Directors: J.R. Henshall B.A.(Hons) ACII Cert CII (FS), A.J.Simpson ACII, T.R.Dredge DIP CII, A.Brown FCCA. Director/Company Secretary R.K. Henshall ACII. Registered No. 1285024

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