The best way to protect yourself as “project owners” is to demand for some “typical” Guarantee or Bond from potential service providers, contractors or vendors against the risk of non-performance or undue delay in project completion. These guarantees and bonds are purchased before contract is given to the SELLER.
The execution of GUARANTEES or BONDS creates three parties as follows:
Buyer = Project owners (Beneficiary)
Seller = Contractors, Vendors, Suppliers, exporter (Primary Obligor)
Surety/Guarantor = Bank or Insurance Companies
These “typical” Guarantees or Bonds are issued by the Surety/Guarantor at the request of the SELLER upon payment of Premium (%) of Contract Value.
The Project owners can demand for any of the financial guarantee and bonds listed below for their protection in case of delay or non-performance from service providers, contractors or vendors
(1) Bid or Tender Bond
(2) Performance Bond or Guarantee
(3) Advance Payment Bond or Guarantee
(4) Warrantee or Maintenance Bond
(5) Counter Guarantee
(1) BID OR TENDER BOND
This is an assurance to the BUYER that SELLER will not withdraw its bid before conclusion of the bidding process and that SELLER is financially Capable to undertake the project should it be awarded to them and that SELLER will be able to get a performance bond if chosen to do the job. These bonds are usually between a Premium of 2% and 5% of the total contract value. The Premiums may be lower for projects with higher values or SELLERS who have good credit scores.
If a bid or tender bond is in place however, in the event of the contractor falling through, the supplier would be awarded the value of the bond as a penalty against the contractor.
(2) PERFORMANCE BOND OR GUARANTEE
Issued to a Project owners as a condition precedent for execution of a Contract needed after successful acceptance of bid and may raise the need for Advance Payment Guarantee (APG)
This is an assurance to the BUYER should there be delay of failure to PERFORM, the SELLER will take over the responsibility to PERFORM by engaging another SELLER
Performance Bond value is usually a Premium of 10% of the Contract Sum (this is not sacrosanct and may vary in accordance with the Contract Particulars). The Premiums may be lower for projects with higher values or SELLERS who have good credit scores.
If it’s a Bond, the BUYER will demand for Financial Compensation from the Bank that issued the BOND irrespective of whether there is performance or not. If it’s a Guarantee, the BUYER will have to present a case of NON-PERFORMANCE before the Bank can pay,
In a standard BID Process where emphasis on Performance is made, Performance Bond will take-over from a Tender Bond where such exist. The Two cannot be in existent at same time.
A performance bond are introduced as security for job completion and is usually issued by thee bank or insurance company of the SELLER.
Perform = Satisfactory completion of a project
(3) ADVANCE PAYMENT BONDS OR GUARANTEE
Issued to a Project owners as a condition precedent to payment.
An assurance that the SELLER will refund any advance payments that have been made to the BUYER in the event that the product/project is unsatisfactory. APG enables the SELLER to recover Advance Payment already paid to BUYER in the event the SELLER is unable to perform or fulfill obligations under Contract
This will provide protection to the Buyer when an advance or progress payment is made to the Seller prior to completion of the contract
(4) WARRANTY OR MAINTENANCE BONDS
An assurance that SELLER will pay to the BUYER an amount of money in case the warranty obligations for products that are provided are not met. This means, the such payment received by BUYER will serve as a substitute for a filed warranty.
The bond is returned by the buyer at the end of the warranty period if the product that is provided has met the specifications.
(5) COUNTER GUARANTEE
This is similar to Performance Guarantee except that it is only needed when bidding for project in foreign countries In involve two banks: The local and foreign banks.
A cross country guarantee in the form of guarantee for guarantee given by another Bank
NOTE. A Bond can either be On-Demand or Conditioner
On-demand bonds :
Value set out in the bond is immediately paid on a demand
Conditional bond :
There is only liability if there is a breach of contract (or certain event has occurred as set out in the bond)
*Knowledge presented here are useful to The Procurement Unit of an organization or any individual assuming such role