Purpose of Bonds and Guarantees of Contract

Purpose of Bonds and Guarantees of Construction Contract

why we need bond and guarantees
The cost of the construction projects are the responsibility of the employer. If any failure occur in construction period may effect to the client as well as contractor also.

— The failure of the sub contractor may effect to the main contractors works.Where main contractor not deliver the project as agreed. To avoid these type of situations provide the guarantees and bonds for construction contracts.

purpose of bonds and guarantees of construction contract

The Purpose of bonds and Guarantees

—The guarantees and bods are arrangements where by the obligations that one party promise to another party  under the agreement by third party.

—Third party usually a bank or an insurance company.

—The guarantees and bods are arrangements where by the obligations that one party promise to another party  under the agreement by third party.

—Third party usually a bank or an insurance company.

Performance bond/ guarantee

• Amount of performance bond is10% to 5% of initial contract sum

• Duration of performance bond = construction period + maintenance period(6 months to one year) +28 days

• Performance bond in SBD 01, Page 33, clause 52.1

• Form of Performance bond in page 27



— In the event of non performance the guarantor or bondsman provide financial compensation to the contractor. The limit of compensation is as for the relevant clause is in the contract 5% to 10% of initial contract sum.

— Initial contract sum may be change due to variations, day works or fluctuations.

Advance bond / Guarantee

Advance bond is having excluding provisional sum and contingencies of initial contract sum.

Duration= construction period + 28 days

The employer shell be make an advance payment of 20% of the initial contract sum, excluding provisional sum and contingencies (SBD 01 page 52, clause no. 51.1,51.2,51.3)

— The duration of the bond effective to the construction period or until the advance payment has been paid contractor shall use this payment to pay for plant and equipment , material and mobilization expenses(lighting,  fencing, security, temporary huts)

Tender bond/ bid bond

— There are obtain to ensure that successful tenderer will enter into the value varied from 1% to 3% of engineers estimate.

— The purpose of tender bond is to provide financial compensation for the associated with the refused by bidder 0r tenderer to honour the tender to bid.

— This is requesting sub contracting agreement also.

— A tender or bid bond may discourage withdrawal by a contractor

— Validity of this bond may be 91 days or more according to the project construction period and the complexity of the project

— The unsuccessful bidders shell be withdrawal their bid bond once after the letter of award.

Use of Bonds and Guarantees.

• There is no definition or situation where a bond should be used and a decision will need to be made for each project.

• In some circumstances(locations/situations) a client may insert or consultant may advise that a contractor provide a performance bond available in a contract situations where a bond may be particularly appropriate would include.

· To protect the interest of client/ investor/ developer

· To where a new or un approved contractor involved to the project

· There is a bond is through out appropriate for the risk of the project

If the bond will be requested it should be clearly stated in the tender documents . The terms of the bond should include the financial limits, details regarding the release of bonds etc.

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