Government, council, infrastructure and commercial contracts may require a contractor to provide security for its contractual obligations. Security is often provided through cash retention or a bank guarantee, but a surety bond may be an alternative where the contract permits and the project owner accepts it.
What Is a Surety Bond?
A surety bond is a three-party arrangement involving the contractor, the project owner or beneficiary, and the surety provider. The bond gives the beneficiary financial protection if the contractor defaults on obligations covered by the bond. If the surety pays a valid demand or claim, the contractor will generally be required to reimburse the surety under an indemnity.
Common Contract and Commercial Bonds
Performance Bonds
Support the contractor’s performance of its contractual obligations.
Retention Bonds
May allow progress payments to be paid without cash retention, while securing the amount that would otherwise be withheld.
Maintenance Bonds
Provide security during the maintenance or defects liability period.
Bid Bonds
Support a bidder’s commitment to enter into the contract if selected.
Advance Payment Bonds
Secure an advance payment made to the contractor for project costs.
Off-Site Materials Bonds
Secure payments for project materials stored away from the construction site.
Why Contractors Consider Surety Facilities
- Preserve working capital and support cash flow
- Reduce reliance on bank guarantee facilities
- Release cash that may otherwise be retained
- Support tendering and project capacity
- Meet contract security requirements where the bond is accepted
Who May Use Contract Bonds?
- General builders
- Civil, heavy and specialist engineering contractors
- Infrastructure and maintenance contractors
- Manufacturing businesses
- Mining businesses
How CGIB Can Assist
CGIB can approach suitable surety providers, coordinate the application process and assist with the contractor’s broader project insurance needs. Depending on the risk and contract, this may include:
- Performance, retention, maintenance and bid bonds
- Advance payment and off-site materials bonds
- Contract and tender insurance reviews
- Contract Works and Liability
- Plant, machinery and equipment insurance
- Commercial motor and fleet
- Professional Indemnity, Management Liability and other financial lines
Important Considerations
Bond availability, facility limits and terms are subject to the provider’s underwriting and financial assessment, review of the contract and bond wording, and acceptance by the project owner or beneficiary. A surety bond is not a substitute for the contractor performing its obligations and is not the same as traditional insurance protection for the contractor.
Speak With CGIB
If your business is tendering for or undertaking government, council or commercial projects, contact CGIB for a confidential discussion about contract security and insurance requirements.
