bond insurance / insurance guarantee

An Insurance Bond is basically a contract of guarantee given by an insurance company (the surety). The contract guarantees one party (the principal) that the insured will fulfil his obligations (to pay an amount of money or to perform a contract). The most common types of bonds in use in connection with the construction industry are :- 

Bid or Tender Bond 

This is a guarantee required in connection with the submission of tenders for contract jobs with Public Authorities or Private Principals where relevant. The bond value is usually a fixed amount determined by the Principal. The main objective of this bond is to guarantee that the contractor who is awarded the contract will accept the Contract at the terms that was submitted by him to the Principal. If he is unable to maintain his quotation, the Bond will be liquidated and the principal will request the surety to pay for the damages sustained up to the amount of the bond. 

Performance Bond 

This type of bond is usually required by the Principal to ensure that the Contractor fulfills his contractual obligations e.g. within the period specified or in accordance with the conditions of the contract. The bond value is usually 2.5% to 5% of the contract value but this may vary. If the Contractor does not complete the contract within the time specified and if no extension in the period is allowed, then the Bond or Guarantee is liquidated. 

Advance Payment Bond 

This type of bond is only allowed for Government Contracts under the PIAM’s Bond Underwriting Guidelines. This is required in the event a Contractor is applying for an advance payment from the Principal to help funding the preliminary costs and mobilization works of the contract. The bond value is usually ranging from 15% to 25% of the total contract value. The value of the bond decreases in accordance with the proportion of the total value performed. Such advance payment will be repaid in stages by the contractor out of the progress payments for works executed, the quantum of which is determined by the Principal. However, if the contractor absconded with the money before work commences or abandoned the project midway before the Principal could fully recoup its advance payment out of the progress payment, the Principal has the right to invoke the bond.