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Why bonds & Guarantees?
In a variety of industries, construction being one of the most common examples, securing a surety bond as a guarantee that you will be fulfilling your contractual obligations towards a project that you have been contracted to complete is an absolute necessity.
A bond is a contract whereby the surety agrees to make good in the event of the default of another. It guarantees against unforeseen financial challenges that may arise with the principal. The guarantor or surety (insurance company) offers guarantee to a beneficiary (the obligee – government or corporate client) that an agreed sum of money will be payable to the beneficiary in the event that a company (the principal or supplier) fails to deliver on its contractual obligations.
Economic downturn, labour difficulties, material shortages, equipment problems, and a host of many other problems can cause a contractor’s business to fail leaving projects at a standstill. Bonds and Guarantees address this risk by providing contractual and financial guarantee that the project will be delivered as expected.
They are often mandatory for large-scale projects and are used for assurance in projects, terms of commercial licences or permits and to guarantee payments. At Assurein Insurance, we understand that these bonds are critical in meeting contractual obligations and strive to secure the bonds you need to keep your projects moving.
Bonds demonstrate a company’ commitment to a project, and its capability to deliver, thus enhancing its chances of winning tenders. They provide assurance to subcontractors, labourers and suppliers that they will get work and be paid for it. They guarantee that the bonded project will be completed according to the terms of the contract and at the determined contract price. They also reduce the possibility of a contractor diverting funds from the project.
WHAT YOU NEED TO KNOW
TENDER OR SECURITY BONDS
This is applicable if the contract is by tender and not mutually negotiated. The bond guarantees that the party tendering for the contract will not withdraw once the job is accepted and will therefore take full responsibility for the work in accordance with its offer and specifications. It gives the beneficiary the right to call the bond on demand within a specified period and for a maximum specified amount.
Performance Bonds
This is a document that the principal under a contract demands from a contractor for him to perform the contract as agreed but where the contractor fails to perform the contract as agreed, the principal may call for the bond and the surety (insurer or bank) will be liable to pay the bond value to the principal. The bond guarantees the contractor’s competence to perform a contract given to him using quality materials needed to meet up with the standard.
ADVANCE PAYMENT GUARANTEES
This is a type of bond that the principal of a contract request for before releasing a particular percentage of contract value to the contractor in advance for mobilization of the contract. If the contractor fails in performing the contract as agreed, the principal has the right to call for the bond from the insurer or bank who will reimburse the principal against any monies that is lost through the default of the contractor.
CUSTOMS BONDS
This is a guarantee from a surety to the government that the principal will faithfully abide by all laws and regulations governing the payment of customs revenue together with the proper carrying on of business in dutiable articles (Imported goods)
IMMIGRATION BONDS
This is a legal authorization which allows a person to take up employment in a country where one does not hold citizenship. The first surety is usually the firm employing such a person. The second surety is the Insurance Company. It is the responsibility of the first surety to write to immigration when such persons leave the organization for the bond to be cancelled. It is renewable in Kenya after every two years.