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Surety Bonds: a Watertight Guarantee?

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Surety Bonds: a Watertight Guarantee? RISK FINANCING > In partnership with: from delays in projects or damage to equipment. Insurance is a two-party contract between the insured Surety bonds: a and the insurance company. As with insurance, there are several varieties of bonds. Below, Atradius Bonding director Pietro watertight guarantee? Lanzillotta helps us uncover the benefits of surety bonds by answering readers’ frequently asked questions. WHAT BONDS DO I NEED TO CONSIDER? There are number of bonds, including: ● Bid bonds: If you are a construction contractor and Given the complexity and cost involved in large-scale want to participate in a government project to build or refurbish a bridge, for example, you will first need infrastructure projects, surety bonds promise a new level of a bid bond in order to enter the tender process. A bid bond insures the original bid, guaranteeing the protection for all parties involved. Atradius Bonding director project owner that you are able to enter the contract at the bid price stated and to provide the required THE BENEFITS OF BONDS Pietro Lanzillotta guides us through the benefits performance and payment bonds if you are awarded the contract. Bonds are a valuable alternative to bank guarantees and ● Performance bonds: Upon winning the tender, cash retention, as well as an effective way to increase urope’s construction industry may not In each of these areas will be significant risks – you need a performance bond to secure the your capital base. attract the same level of attention as labour difficulties, material shortages, equipment contractual obligations of your performance as it China or the Gulf Co-operation Council, problems, contract breaches, failures from service relates to agreed conditions – for example, price, but the sector is made up of mega providers – all of which could bring projects to a timeline and quality. They secure your performance without requiring infrastructure projects worth hundreds standstill. And, in extreme cases, contractor insolvency ● Payment bonds: These assure the subcontractors, you to provide tangible collaterals, thus of billions of euros. High-speed railways, could cause severe financial loss. labourers and suppliers of the project will be paid. enhancing your liquidity. Etunnels, airport extensions, new roads and power Indeed, the demise of UK-based construction ● Advance payment bonds: In addition, you might stations are being built right now. services company Carillion served as a stern reminder need to request some funds in advance to meet your Among these projects is the 21km Stockholm of the financial consequences of contractor bankruptcy start-up or procurement costs. An advance payment “OUR GOAL IS bypass. Set to be completed in 2025, the €3.1bn project – the company owes approximately £1bn (about bond guarantees a refund to the project owner if They raise your credibility and improve your relationship TO SECURE THE will be the largest tunnel near a city. It will connect the €1.1bn) to some 30,000 subcontractors and suppliers. delivery or performance does not take place. with your partners. PERFORMANCE OF southern and northern parts of the Stockholm county, So, with such huge sums of money at stake, how ● Maintenance bonds: This ensures project quality OUR CUSTOMERS aiming to significantly reduce traffic in the city. can project owners ensure the quality, commitment and protects against problems with defective AND SUPPORT Elsewhere, France’s Grand Paris Express is set to and solvency of a contractor? materials or workmanship. ● THEIR BUSINESS optimise transportation in the capital. Estimated to cost Surety bonds offer a watertight guarantee, Tax duties bonds: This covers the failure to pay Surety bonding increases your liquidity and €25bn, the new transport system will comprise 200km according to Atradius Bonding. While a number excise taxes or custom duties on materials to the flexibility – there is no impact on your bank limits. DEVELOPMENT” of metro lines and 68 stations, which will reduce travel of insurance policies protect against some of the government and local authorities. Director, Atradius Bonding time and carry about two million passengers a day. risks, there are key differences between bonds and Bid, performance and advance payment bonds are Pietro Lanzillotta Norway’s plans to build the first underwater floating insurance. mandatory for all publicly owned construction projects tunnel is also worth a mention. Predicted to cost Surety bonds protect against disruptions or and often required by private owners. $25bn (about €21bn), the tunnel will lie beneath the financial loss resulting from a contractor’s or service Typically there is no need to provide tangible security. Sognefjord, the largest and deepest fjord in Norway, provider’s failure to complete the project or fulfil WHY SHOULD I BUY BONDS FROM AN This can free up your working capital and allow you to and link two disparate regions. It will be the first of its contractual obligations. They are a tripartite agreement INSURANCE COMPANY RATHER THAN A BANK? undertake new projects. kind in the world. between the surety bond provider, the principal and Surety bonds from an insurance company are a valuable These construction projects are no mean feat and the third-party recipient of a contractual obligation, alternative to bank guarantees and cash retention and demonstrate the scale and sheer complexity of today’s known as the obligee. can ensure the performance of a contractor or service infrastructure market. They comprise The bond guarantees that the principal (the provider. Insurers are well placed to understand the several moving parts – tender, contract contractor) will complete projects as per the contracts financial risks arising from a large-scale and complex and budget agreements; supply agreed with the obligee (the project owner). If contracts construction project. For this reason, they typically offer ATRADIUS BONDING IN NUMBERS chain and material overviews; are in breach, the obligee will be able to recover losses the value-added service in assessing and reviewing and quality assurance. from the surety provider. contracts. In other words, they provide an informed More than 50 years of experience in the surety market There will be a huge team Also from the perspective of the contractor (the second eye on contracts, with the view of identifying Support more than 55,000 customers of stakeholders and service surety’s customer) a bond provides protection. With a risks that may be embedded in the agreement. And, providers, including clear reference to his obligation under the underlying where necessary, insurers can offer advice on other risk- Issue more than 400 types of bonds contractors, sub- contract, it enables defence against an unjustified call transfer options. Issue more than 140,000 new bonds per year contractors and project in payment by the beneficiary. Here, sureties typically It is also wise for risk managers to diversify their risk managers. assist customers by evaluating any call in payment on transfer and not place all their risks with one provider, the basis of the commitment in the individual bond. whether that is a bank or an insurer. Insurance, on the other hand, will compensate contracts. Our goal is to help our customers secure their insureds in the event of a covered loss only – for IN A COMPETITIVE MARKET, HOW DOES performance and support their business development. example, if policies have been ATRADIUS STAND OUT? But we can help our customers do more than just purchased to cover losses arising Atradius Bonding strives to be a bond underwriter and manage risks and protect against worst-case scenarios. not a capacity underwriter. What I mean by this is that We provide tailor-made products and solutions that fit we issue bonds willingly based on our assessments of their needs and strategy. SR 28 StrategicRISK EUROPE EDITION Q3 2018 > www.strategic-risk-europe.com www.strategic-risk-europe.com < EUROPE EDITION Q3 2018 StrategicRISK 29.
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