Owners of projects, private companies or government bodies, usually require surety bonds from their contractors to protect themselves from the enormous cost of contractor failure. No construction project owner, public or private, can afford to take the risk in awarding a contractor whose responsibility is uncertain or who may go into liquidation halfway through the job. Thus, in order to seal a contract with an owner, a contractor needs a surety company’s financial resources to back the contractor’s commitment to completing the contract. Sub-contractors may also be required to obtain surety bonds to help the main contractor manage risk, particularly if the sub-contractor holds a significant part of the job or is a specialized contractor that is difficult to replace. Chartis Singapore Insurance Pte. Ltd. rigorous prequalification measures include ensuring that the contractor has a good track record of experience in completing similar contracts, it has the necessary management expertise and resources to complete the works and that it has established lines of credit with reputable banks.
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Chartis Singapore Insurance Pte. Ltd.
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Surety Bond
A surety bond is a three-party agreement whereby the surety company (Chartis Singapore Insurance Pte. Ltd.) guarantees to the obligee (the owner of project) that the principal (the contractor) will perform a contract according to the agreed terms and conditions of the contract, and within the allocated time and budget. Thus, the risks of project completion are shifted from the owner to the surety company.
Surety bonds used in construction are called contract surety bonds. Chartis Singapore Insurance Pte. Ltd. generally issues surety bonds on behalf of contractors engaged in main construction of buildings, ships, shipyards and oil rigs amongst others. There are three primary types of contract surety bonds:
• Bid bond
Bid bond guarantees project owner that the bid has been submitted in good faith and that the contractor intends to enter the contract at the price bid and provide the required bonds (example, Performance bond, Advance Payment Bond) if awarded the contract.
• Performance bond
Performance bond guarantees the faithful performance of the contract by the contractor in accordance with the terms and conditions laid on the contract. The project owner is the obligee of a performance bond.
• Payment / Advance Payment bond
Payment bond guarantees that the contractor will pay certain workers, subcontractors, and suppliers. Advance Payment bond guarantees the repayment of a cash advance to a project owner, when the owner has advanced funds ahead of scheduled project milestones (in the case of a construction contract), or scheduled product deliveries (in the case of a supply contract). The bond form usually stipulates that the cash advanced will be used in conjunction with the terms and conditions in the underlying construction or supply contract. This type of bond provides protection to an owner that the funds advanced will be used towards for their intended purpose.