Surety bonds provide a flexible alternative to bank guarantees, freeing up capital and improving liquidity. These bonds can offer developers and investors additional protection in case contractors fail to meet their contractual obligations, ensuring that financial compensation is available to complete the project or cover associated losses. Surety bonds play a crucial role in developers maintaining competitiveness and meeting both contractual and regulatory requirements.
Bonds are crucial when contractors face insolvency or liquidation, as seen with ISG, Buckingham Group, and Henry Construction. In such cases, developers and housing associations must manage distressed, part-complete projects, posing complex challenges. Surety bonds provide financial protection to cover completion costs, safeguarding stakeholders’ interests and ensuring project continuity.
London Belgravia Group offers access to a wide range of surety providers who can offer various bond products, including performance bonds, section bonds (S38, S278 agreements, etc.), retention bonds, deposit release bonds and advanced payment, among others.
When it comes to bonds, it’s all about the securities available. As long as the contractor seeking the bond is financially suitable for the contract value, there shouldn’t be any issues securing favourable terms. However, if the financials don’t fully align with the contract value, it may be necessary to explore additional securities such as cross-company indemnities, cash collateral, or personal guarantees.
Matt Percival provides a guide to a range of surety bonds available and the benefits they offer developers and contractors.
Types of Surety Bonds:
These bonds collectively provide protection at various stages of a construction project, ensuring that clients have financial safeguards and access to working capital whether they’re dealing with infrastructure work, staged payments, or advance investments.
Performance Bonds are a financial guarantee provided by a surety (typically an insurance company) to ensure that a contractor fulfils their contractual obligations. In the event the contractor fails to complete the project as agreed—whether due to insolvency, poor performance, or other reasons—the bond issuer compensates the client for the financial losses or funds the project’s completion. Typically, the bond value is set at around 10% of the contract value, offering the client a level of financial security without requiring the full contract amount. Performance bonds are a vital tool in construction projects, offering peace of mind to clients by ensuring project delivery, even in case of contractor default.
Section Bonds (S38, S278), Retention Bonds, and Advanced Payment Bonds provide tailored financial protection for various specific needs during the construction process:
- Section Bonds (S38, S278): These bonds are required for work related to public infrastructure, such as roads or drainage systems. Section 38 bonds cover the adoption of new roads by local authorities, while Section 278 bonds secure the client against the contractor’s failure to carry out necessary roadworks as part of a planning obligation.
- Retention Bonds: These replace the need for clients to withhold a portion of the contractor’s payment as a security for the project’s completion or for rectifying any defects that may arise post-completion. The bond acts as a financial guarantee, ensuring the contractor meets their obligations even after receiving full payment.
- Advanced Payment Bonds: These bonds protect the client when they pay the contractor upfront for work or materials before the project starts. If the contractor fails to deliver, the bond compensates the client, ensuring that advanced payments do not result in financial loss.
Deposit Release Bonds (DRB)
These bonds can provide a developer with a low-interest source of working capital, using funds in escrow for the project’s sales, marketing and even remaining construction costs. As an alternative to obtaining additional capital from traditional funding lines – DRB can offer a substantial saving for the developer. It is most suitable for developers who are paying a perceived higher rate of interest for their senior debt or wish to ‘top-up’ their funding without having to enter the mezzanine and junior debt markets. Once a developer has acquired a deposit release bond, they can then deliver the bond to the appropriate obligee (purchaser) to protect their interests in the project, offering security for the buyer.
ABI Bonds vs. On-Demand Bonds:
ABI (Association of British Insurers) Bonds, otherwise known as conditional bonds, require proof that the contractor has failed to meet the contractual obligations before the bond can be claimed. The process for activating an ABI bond involves legal steps, which include proving the failure, and thus, the bond is typically more favourable to the developer.
- Lower upfront cost compared to on-demand bonds.
- The beneficiary must prove a breach of contract, providing more protection to the developer against premature claims.
- Ideal for lower-risk projects with established contractors and developers.
On-Demand Bonds allow the beneficiary to claim the bond’s full value immediately upon request, without the need to prove a failure or breach of contract. These bonds are typically used in high-risk situations where the client needs a guarantee of financial protection, regardless of the developer’s performance. It is worth noting these are significantly more expensive and can be challenging to place with UK-based sureties.
- Immediate access to funds in case of a claim.
- No need for the beneficiary to prove the contractor’s failure or breach of contract.
- Provides a higher level of security for clients, particularly in high-risk or complex developments.
Why work with LBB
Surety bonds play a crucial role in protecting developers and investors by ensuring financial security if contractors fail to meet their obligations. Whether through performance bonds, section bonds, retention bonds, or advanced payment bonds, these products offer tailored solutions for various stages of a construction project.
Choosing the right type of bond, such as conditional ABI bonds for lower-risk projects or on-demand bonds for higher-risk developments, ensures that clients have the appropriate level of protection. By working with London Belgravia Group, developers can secure favourable terms and access a wide range of surety options to meet their specific project needs.
London Belgravia Group is an FCA-regulated, independent specialist consultancy with a decade-long track record of providing comprehensive advice and solutions for developers, contractors and housing associations. With full market access, we work with a diverse range of warranty and surety providers to ensure our clients receive the most suitable and competitively priced products. Our expertise lies in identifying the most suitable option for the client depending on the nature of the scheme.
For more information on which protections are right for your project, get in touch with Matt Percival today for impartial advice.
