TODAY we continue the topic on bonds which we started last week.
There are several types of bonds available in the market and the list we will look at in this article is not exhaustive.
The first type of bond in our discussion is called Bid bond or a Bid security which is where the guarantor is giving an undertaking for the offered price by the principal.
The purpose of the bid bond is to provide assurance to the project owner that the bidder or contractor has the capacity to take on and implement the job if selected during the bidding process.
In so doing provision of this bond eliminates unserious or frivolous bidders because bonds are issued to bidders with capacity to fulfill their obligations.
As a rule of the thumb a bid bond is usually 10 percent of the contract value.
A Performance bond is another type of bond where the guarantor is giving an undertaking for the fulfillment of all obligations in the contract.
This follows after a bidder successfully awarded the contract.
Under this bond the guarantor gives an undertaking for the fulfillment of obligations by the principal as per contract conditions.
A performance bond will protect the beneficially against possible losses in a case where a contractor fails to perform, or is unable to deliver the project as per contract provisions.
Sometimes the contractor may default or declares themselves bankrupt, and then in those situations the guarantor is responsible to compensate the beneficiary for the losses.
Because of this inherent risk and like with many other bonds the guarantor will require collateral such that in the event of default the asset used as collateral can be disposed of.
There is nothing that stops the project owner or beneficiary from asking for such collateral directly from the contractor.
However, the issues of the length it may take the beneficiary to dispose such a property let alone the fact that selling such properties is not their main business, arranging a bond that would pay immediately is a smarter option.
The third type of bond is a Customs or Excise bond.
This is where the guarantor is giving an undertaking to cover payment of customs and excise duty to the government.
If for some reason the importer fails to pay the duty then the guarantor is obliged to pay the government but can use legal means to recover from the importer.
Therefore the main purpose of a customs bond is to guarantee the payment of applicable import taxes and duty.
Another type of bond is known as Advance Payment Bond (APB) which is where the guarantor is giving an undertaking for the advance payment released by the principal.
It provides assurance that the advanced sum will be used for the intended purpose and should the contractor fail to fulfil those obligations then the advanced payment will be returned.
A warehouse bond is where the guarantor is giving an undertaking to cover the amount of custom duty payable on imported goods kept in a bonded warehouse.
The goods stored in the warehouse may be manipulated or undergo manufacturing operations without payment of duty.
There is also a Retention bond.
This is where the guarantor is giving an undertaking for release of retained money to the principal.
The purpose of retention is to ensure the contractor properly completes the activities required of them under the contract.
Retention is a percentage, usually five per cent of the amount certified as due to the contractor on an interim certificate that is retained by the client.
Maintenance bond is a type of bond where the guarantor is giving an undertaking for the maintenance obligations.
It is basically provided to make sure a contractor will either correct any defects that arise or that the owner is compensated for thosedefects.
Other types of bond include;
IATA guarantee: where the guarantor is giving an undertaking to International Air Transport Association(IATA) on behalf of travel agents for air-tickets sales.
Unsecured guarantee: where the guarantee is given without taking any collateral.
Secured guarantee: where the guarantee is supported by collateral.
Continuing guarantee: where the guarantee has no expiry date but notice of revocation/cancellation period is mentioned.
Fixed guarantee: where the guarantee is given for certain fixed period e.g. 60days or 90 days or 180days etc.
Payment/Credit guarantee: where guarantee is given for payment of outright purchase of property/goods/services.
For more furtherinformation on bonds please refer to my book titled Basics of Insurance, The Zambian Experience found in leading bookstores or via the contacts below.
Comments: email@example.com or firstname.lastname@example.org or on face book
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[The Author is a Chartered Insurer with more than 13 years industry experience]