BONDS, SURETY AND SCEURITY

(Mid Sept 15)

 PERFORMANCE BONDS?

PERFORMANCE BONDS GUARANTEE FOR THE SATISFACTORY

COMPLETION OF A PROJECT.
THIS WILL REQUIRE HAVING A COLLATERAL PROPERTY OR
INVESTMENT TO BACK UP THE REQUIREMENTS OF THE SURETY
AGENCY.
A PERFORMANCE BOND IS USUALLY ISSUED BY A BANK OR
AN INSURANCE COMPANY,
PERFORMANCE BOND REQUIREMENTS
SURETY AND FINANCIAL INSTITUTIONS HAVE DIFFERENT
REQUIREMENTS DEPENDING ON THE CAPACITY OF THE CONTRACTOR,
THE VOLUME OF THE PROJECT BEING INSURED AND THE PROJECTS
CHALLENGES.
USUALLY THEY ASK FOR THE FOLLOWING:
AT LEAST TWO YEARS OF CPA PREPARED FINANCIAL STATEMENTS.
COPY OF THE CONTRACT THAT IS BEING AWARDED.
APPLICATION OF THE SURETY.
IF YOU OWN REAL ESTATE, IT WILL HELP YOU AND WILL ACCELERATE
THE PROCESS.
HOW DO THEY WORK?
GOVERNMENT REQUIRES PERFORMANCE BONDS AND PAYMENT
BONDS FOR PROJECTS TO PROTECT THE TAX PAYERS INVESTMENT.
THE PRIVATE SECTOR ALSO REQUIRES THE ISSUANCE OF
PERFORMANCE BONDS. COMMON PERFORMANCE AND PAYMENTS
BONDS FOR GOVERNMENT PROJECTS CONSIST OF
BUILDING BRIDGES AND ROADS.
IF THE CONTRACTOR DOES NOT COMPLETE THE PROJECT SPECIFIED
IN THE CONTRACT THE SURETY BONDING COMPANY WILL EITHER
PAY FOR THE COMPLETION OF THE PROJECT OR HIRE A
CONTRACTING FIRM TO COMPLETE THE PROJECT.
 WHY THE PERFORMANCE BONDS ARE NEEDED?

A PERFORMANCE BOND WILL PROTECT THE OWNER AGAINST

POSSIBLE LOSSES IN A CASE A CONTRACTOR FAILS TO PERFORM, OR
IS UNABLE TO DELIVER THE PROJECT AS PER ESTABLISHED AND
THE CONTRACT PROVISIONS.
SOMETIMES THE CONTRACTOR DEFAULTS OR DECLARES HIMSELF IN
BANKRUPTCY, AND THEN IN THOSE SITUATIONS THE SURETY IS
RESPONSIBLE TO COMPENSATE THE OWNER FOR THE LOSSES.
SUCH COMPENSATION IS DEFINED AS THE AMOUNT COVERED UNDER
THE PERFORMANCE BOND.
 HOW PAYMENT CAN BE GIVEN TO OFFSET DEFAULT?

PAYMENT FROM THE PERFORMANCE BOND IS AVAILABLE ONLY TO

THE PROJECT/PROPERTY OWNER. NO ONE ELSE CAN MAKE CLAIMS
AGAINST IT.
IN ORDER FOR A PERFORMANCE BOND TO BE EFFECTIVE, THE
CONTRACT MUST BE SPECIFIC ABOUT THE WORK TO BE DONE.
A CONTRACTOR CANNOT BE HELD ACCOUNTABLE FOR VAGUE
DESCRIPTIONS THAT ARE OPEN TO INTERPRETATION.
MERITS/DEMERITS OF PERFORMANCE BONDS
MERITS
OWNER OF A PROJECT IS ASSURED OF THE COMPLETION OF THE PROJECT.
OWNER DOES NOT NEED TO INCUR ADDITIONAL COSTS.
DEMERITS
THE SURETY TRIES TO ESTABLISH-OWNER DID NOT COMPLY WITH THE
TECHNICAL CONDITIONS OF A BOND TO AVOID PAYING THE COMPENSATION.
SURETY WILL TRY TO PROVE-OWNER MAY HAVE TO SETTLE FOR THE LEAST
EXPENSIVE REMEDY TO THE PROBLEM.
THE OWNER NEEDS TO QUANTIFY THE LOSSES THAT MIGHT HAVE BEEN
SUFFERED WHEN A TRADER OR CONTRACTOR FAILS IN THEIR PERFORMANCE.
IF THE OWNER UNDERESTIMATES THE LOSSES AND THE FUTURE COST OF THE
COMPLETION OF THE PROJECT IS HIGHER, THE OWNER MAY NOT BE ABLE TO
RECOVER THE SHORTFALL FROM THE SURETY.
 COLLATERAL SECURITY
DEFINITION: COLLATERAL
SECONDARY, SUBORDINATE, OR SUPPLEMENTARY ITEM ACCOMPANYING
A PRIMARY ITEM.
EXAMPLE:
1. SPECIFIC ASSET (SUCH AS LAND OR BUILDING) PLEDGED AS A SECONDARY (AND
SUBORDINATE) SECURITY BY A BORROWER OR GUARANTOR.
2. THE PRINCIPAL SECURITY IS USUALLY THE BORROWER'S PERSONAL GUARANTY,
OR THE CASH FLOW OF A BUSINESS.
3. EXCEPT FOR HIGHLY CREDITWORTHY CUSTOMERS (WHO CAN
GET LOANS AGAINST ONLY THEIR SIGNATURES) LENDERS ALWAYS DEMAND A
COLLATERAL IF THE PRIMARY SECURITY IS NOT CONSIDERED TO BE RELIABLE OR
SUFFICIENT ENOUGH TO RECOVER THE LOAN IN CASE OF A DEFAULT.
HOW IT WORKS?
A LIEN IS CREATED WHEN THE COLLATERAL IS REGISTERED IN
THE PUBLIC RECORDS OFFICE, GIVING THE REGISTERED
LENDER PRIORITY OVER OTHER LENDERS ON THE SAME ASSET
OR PROPERTY.
LENDERS HAVE THE LEGAL RIGHT TO SEIZE AND SELL A COLLATERAL IF
THE BORROWER CANNOT PAY BACK THE LOAN AS AGREED.
SOMETIMES THE ASSET BEING FINANCED (SUCH AS ACCOUNTS
RECEIVABLE, INVENTORY, MACHINERY) IS ITSELF USED AS A
COLLATERAL;
IN HOME MORTGAGES THE PROPERTY BEING BOUGHT SERVES AS A
COLLATERAL.
TYPES OF COLLATERAL
WHAT TYPES OF COLLATERAL ARE AVAILABLE?
ALL FORMS OF PROPERTY, WHETHER TANGIBLE OR INTANGIBLE,
INCLUDING:
IMMOVEABLE PROPERTY
MOVEABLE PROPERTIES, EQUIPMENT/MACHINES/MATEIALS, SHARES
AND OTHER SECURITIES, BANK ACCOUNTS, CONTRACTUAL RIGHTS,
RECEIVABLES AND INTELLECTUAL PROPERTY
CAN BE USED AS COLLATERAL IN INDIA, SUBJECT TO APPLICABLE LAWS
AND CONTRACTUAL ARRANGEMENTS.
ADVANCE PAYMENT BONDS:WHEN?
1. IF THE CLIENT AGREES TO MAKE AN ADVANCE PAYMENT
(SOMETIMES REFERRED TO AS A DOWN PAYMENT) TO A
SUPPLIER, A BOND MAY BE REQUIRED TO SECURE THE
PAYMENT AGAINST DEFAULT BY THECONTRACTOR. THIS IS
REFERRED TO AS AN ADVANCE PAYMENT BOND (APB),
ADVANCE PAYMENT GUARANTEE OR ADVANCE STAGE
PAYMENT.
NATURE?
2. AN ADVANCE PAYMENT BOND WILL NORMALLY BE AN ON-DEMAND
BOND, MEANING THAT THE BONDSMAN PAYS THE AMOUNT OF
MONEY SET OUT IN THE BOND IMMEDIATELY ON DEMAND,
WITHOUT ANY PRECONDITIONS HAVING TO BE MET.
THIS IS AS OPPOSED TO A A CONDITIONAL BOND (OR
DEFAULT BOND) WHERE THE BONDSMAN IS ONLY LIABLE IF IT HAS
BEEN ESTABLISHED THAT THERE HAS BEEN A BREACH OF CONTRACT.
TO MEET HIGH PROCUREMENT COSTS
3. TYPICALLY ON A CONSTRUCTION PROJECT AN ADVANCED
PAYMENT BOND WILL BE REQUIRED BY THE CLIENT IF
THE CONTRACTOR REQUESTS ADVANCE PAYMENT TO HELP THEM
MEET SIGNIFICANT START UP ORPROCUREMENT COSTS THAT MAY
HAVE TO BE INCURRED BEFORE CONSTRUCTION BEGINS.
FOR EXAMPLE WHERE THE CONTRACTOR HAS HAD TO PURCHASE
HIGH-VALUE PLANT, EQUIPMENT OR MATERIALS SPECIFICALLY FOR
THE PROJECT.
CIRCUMSTANCES AND MODE?
THE BOND WILL PROTECT THE CLIENT IN THE EVENT THAT
THE CONTRACTOR FAILS TO FULFIL ITS CONTRACTUAL OBLIGATIONS,
FOR EXAMPLE IF THE CONTRACTOR BECOMES INSOLVENT.

ADVANCE PAYMENT BONDS MUST BE VERY CAREFULLY DRAFTED TO

SET OUT THE CIRCUMSTANCES FOR PAYMENT AND TO MAKE CLEAR
THAT THEY ARE ON-DEMAND BONDS.
 RETENTION MONEY AND DEFECT LIABILITY PERIOD.
WHAT? RETENTION MONEY- A SUM DEDUCTED AT EACH MONTHLY
PAYMENT NOTICE.
WHY? TO PROVIDE THE CLIENT WITH SOME SECURITY THAT THE
CONTRACTOR/SUB-CONTRACTOR WILL RETURN TO CORRECT ANY
DEFECTS DURING THE DEFECTS LIABILITY PERIOD, OR DEFECTS
LIABILITY PERIOD.
WHAT IF? THE CONTRACTOR/SUB-CONTRACTOR DOES NOT RETURN
TO CORRECT THE DEFECTS THEN THE RETENTION HELD MAY BE USED
TO FUND THE PAYMENT OF OTHERS TO CORRECT THE DEFECTS.
SO WHAT? IT IS ADVISABLE TO CHECK THE CONTRACT ON THE
ABILITY TO DO THIS, AND THE RELEVANT NOTICES THAT SHOULD BE
GIVEN TO THE INCUMBENT CONTRACTOR PRIOR TO APPOINTING
OTHERS TO UNDERTAKE THE WORKS.
 AMOUNTS OF RETENTION MONEY

THE LEVEL OF RETENTION HELD IS USUALLY A PERCENTAGE OF THE

VALUE OF THE CONTRACT WORKS.

IT IS GENERALLY APPLIED TO THE VALUE OF THE CONTRACT WORKS,

INCLUDING VARIATIONS AND CHANGES, NOT JUST TO THE
CONTRACT SUM.

SOME CONTRACTS ALSO CONTAIN RETENTION FREE AMOUNTS AND

THEREFORE THE CONTRACTOR CAN BE PAID UP TO A CERTAIN SUM PRIOR
TO THE RETENTION BEING DEDUCTED.
 CAP?

SOMETIMES CONTRACTS WILL PLACE A CAP ON THE

MAXIMUM LEVEL OF RETENTION THAT CAN BE DEDUCTED. FOR
EXAMPLE, THIS COULD BE THREE TO SIX PER CENT OF THE
CONTRACT PRICE/LUMP SUM.

OTHER LIMITS OR CAPS MAY BE SET AS TO THE MAXIMUM AMOUNT

OF RETENTION THAT MAY BE DEDUCTED FROM PAYMENTS. THE FIDIC
AND NEC FORMS OF CONTRACT DEMONSTRATE THIS.
RELEASE OF RETENTION MONEY?
IT IS ADVISABLE TO CHECK THE DETAILS OF THE INDIVIDUAL
CONTRACTS AS RELEASE IS SLIGHTLY DIFFERENT IN EACH.
THE RELEASE OF RETENTION IS DIFFERENT IF THERE IS SECTIONAL
COMPLETION, PARTIAL POSSESSION OR THE LIKE UNDER THE
CONTRACT.
 PART RELEASE OF RETENTION MONEY
GENERALLY, PART RETENTION RELEASED UPON COMPLETION OF
THE WORKS.
REMAINDER RELEASED WHEN RECTIFICATION PERIOD OR
DEFECTS LIABILITY PERIOD EXPIRES AND THE RELEVANT
CERTIFICATION UNDER THE CONTRACT HAS BEEN ISSUED TO
CONFIRM THIS.
MAJORITY OF CONTRACTS ALLOW FOR PARTIAL RELEASE OF THE
RETENTION AT EACH SECTIONAL COMPLETION.
MAJORITY OF CONTRACTS ALSO ALLOW FOR PARTIAL RELEASE
OF RETENTION UPON PARTIAL POSSESSION BY THE
CLIENT/EMPLOYER.
 FINAL RELEASE OF RETENTION MONEY
THE FINAL RELEASE WILL VARY BETWEEN CONTRACTS. MAY BE
RELEASED EITHER:
AT THE EXPIRY OF THE DEFECTS LIABILITY PERIOD FOR EACH
SECTION OR
THE EXPIRY OF THE DEFECTS LIABILITY PERIOD FOR THE WORKS AS
A WHOLE.
SUB-CONTRACTORS SHOULD REVIEW CONTRACTS TO DETERMINE
WHEN THE RELEASE IS TRIGGERED. THIS MAY BE BY:
COMPLETION OF THE SUB-CONTRACTOR'S WORKS OR
THE MAIN CONTRACTOR'S WORKS.
 IF CONTRACT TERMINATED?
CONTRACT BE REVIEWED FOR THE EFFECT UPON
RETENTION IN THE EVENT THE CONTRACT IS
TERMINATED.

GENERALLY CLAUSES-RELEASE OF RETENTION CEASE

DO APPLY IN EVENT OF TERMINATION BUT MAY
VARY DEPENDENT ON THE REASON FOR
TERMINATION AND THE CONDITIONS OF CONTRACT.
 TIMELY RELEASE OF RETENTION MONEY
FOR QUANTITY SURVEYORS OR PROJECT MANAGERS RUNNING
MULTIPLE CONTRACTS OR PROGRAMMES OF WORK- ADVISABLE TO
SET UP A TRACKING PROCESS OF RETENTION FOR CLIENTS AND
CONTRACTORS/SUB-CONTRACTORS.
AVOID LATE RELEASE OF RETENTION OR A SURPRISE PAYMENT
REQUIRED BY A CLIENT/EMPLOYER.
INTEREST WILL BECOME DUE FOR LATE RELEASE OF RETENTION
MONIES, ONCE CONTRACTUAL PREREQUISITES HAVE BEEN
COMPLETED.
 ALTERNATIVES TO RETENTION MONEY.
OPPOSITION FROM CONTRACTORS AND
SUBCONTRACTORS TO THE USE OF RETENTION
IN MANY AREAS AS THERE IS A VIEW THAT THIS
IMPACTS UPON CASH FLOW.

RECENT MOVEMENT FROM CLIENTS AND

EMPLOYERS, PARTICULARLY IN THE PUBLIC
SECTOR, TO SUPPORT THIS.
ALTERNATIVES TO RETENTION MONEY.
REMOVAL OF RETENTION PROVISIONS
WITHOUT THE USE OF AN APPROPRIATE BOND
IS NOT A DECISION TO BE TAKEN LIGHTLY.

SHOULD BE THOROUGHLY REVIEWED WITH THE

CLIENT/EMPLOYER WITH A CLEAR
EXPLANATION OF THE RISKS PRIOR TO
PURSUING THIS ROUTE.
 ALTERNATIVES TO RETENTION MONEY
RATHER THAN DEDUCT A PHYSICAL SUM FROM A
CONTRACTOR'S INTERIM PAYMENT, POSSIBLE TO PROCURE A
RETENTION BOND TO COVER RETENTION THAT WOULD
OTHERWISE HAVE BEEN DEDUCTED.
RETENTION BONDS GENERALLY ISSUED IN FAVOUR OF
CLIENT/EMPLOYER WHO HAS WAIVED HIS RIGHTS, UNDER
THE CONTRACT, TO DEDUCTION OF CASH RETENTION
AMOUNTS. BONDS GENERALLY SET TO THE STANDARD
LEVELS OF RETENTION WHICH WOULD OTHERWISE BE
CONTAINED IN THE CONTRACT.
MODULE III - DISPUTES AND CLAIMS
Salient Contract clauses.
Form of Consent and Agreement
Possession of site & RFA
Condition of Project Site
Documentation and Compliance
Drawings
Contract Duration
Milestones
Salient Contract clauses
Taxes & Duties
Changes
Valuation of variations
Procedure of claims
Suspension
Events of Default and Termination
Salient Contract clauses
Construction Programme
Payment Schedule / BOQ
Certificates and payment
Electricity and Water
Testing
Contd.
Salient Contract clauses
Mediation Rules
Works Delay Damages
Extension of Time
Defects Liability
Change in legislation
Guarantees & Insurance
Force Majeure
 NEED FOR DISPUTE AVOIDANCE ?
HIGH CONSTRUCTION LITIGATION
COSTS.
DISPUTES & ADVERSARIAL
RELATIONSHIP CAN KILL A PROJECT
LITIGANT CONTRACTORS ARE
UNWELCOME
NON PRODUCTIVE
 ROOT CAUSE ANALYSIS OF DISPUTES
1. BIDDING/CONTRACT STRUCTURE/TYPE/ DOCUMENTS
2. SCOPE ILL DEFINED
3. UNCERTINTIES-SITE, SOIL, NATURAL CAUSES, UNFORESEEN
OBSTRUCTIONS, DESIGNS, CHANGES
4. TOUGH COMPETITION
5. NON FULFILMENT OF OBLIGATIONS
6. NON ADHERENCE TO CONTRACT
7. INEXPERIENCED STAFF & POOR CONTRACT MANAGEMENT
8. DELAYS & LOSSES
 FACTORS PERTINENT TO CLIENTS
FINANCIAL ABILITY/ FINANCIAL ARRANGEMENT
FOR THE PROJECT
PREVIOUS WORKING RELATIONSHIP
CATEGORY ( PUBLIC, PRIVATE)
PRIORITY TO CONSTRUCTION TIME
SPECIFIED SEQUENCE OF COMPLETION
POSSIBLE CHANGES TO INITIAL DESIGN/SCOPE
 FACTORS PERTINENT TO CONSULTANTS

COMPLETENESS AND TIMELINESS OF PROJECT

INFORMATION
BUILD-ABILITY OF DESIGN
PROVISION FOR EASE OF COMMUNICATION
PREVIOUS WORKING RELATIONSHIPS
PRIORITY ON CONSTRUCTION TIME
 FACTORS PERTINENT TO CONTRACTORS

AVAILABILITY OF SUITABLE MANAGEMENT

TEAM/EQUIPMENT GIVEN FIRM'S CURRENT
WORK LOAD.
PROGRAMMING CONSTRUCTION WORK.
PREVIOUS PERFORMANCE OF SITE
MANAGEMENT TEAM
NO OF SUB-CONTRACTORS
 EXTERNAL FACTORS
WEATHER
REGULATIONS
STATUTORY UNDERTAKES ( WATER,
GAS, ENVIRONMENTAL ETC..)
UNFORESEEN CONDITIONS
EXTERNAL FACTORS, MISHAPS, OTHER
ACTS OF GOD
 INTERNAL FACTORS
HANDING OVER OF SITE FREE OF ENCUMBRANCES
CLEARANCES FROM STATUORY BODIES
ISSUE OF GOOD FOR CONSTRUCTION DRG
POWER PERMITS AND NOC
FINALISATION-DESIGN MIX, MATERIALS/SAMPLES,
METHOD STATMENT
TIMELY SURVEY , LAYOUT AND WORKING DRAWINGS
POOR & UNFAIR DOCUMENTATION IN GENERAL, DESIGN-
DRAWINGS & SPECS.
CASHFLOW/FUNDS-INADEQUATE OR IMPROPER
RESOURCES..?
 INTERNAL FACTORS
TIMELY DECISIONS/APPROVALS
BILLS CERTIFICATION
VARIATIONS-SETTLEMENT OF RATES, EXTRA ITEMS,
QUANTITIES, ESCALATION ETC.
OTHER SUB CONTRACTORS/AGENCIES
POOR PROJECT MANAGEMENT
 DISPUTE AVOIDANCE PRACTICES

SELECTION OF KEY PERSONNEL (CONTRACTOR,

CONSULTANT AND CLIENT)
TEAM APPROACH ULTIMATE GOAL-TIMELY DELIVERY,
GOOD QUALITY & REASONABLE PROFIT TO CONTRACTOR
STAGES: PRE AWARD AND POST AWARD
MACRO AND MICRO PLANNING AND CONTROL
GOOD CONTRACT ADMINISTRATION
DISPUTE AVOIDANCE PRACTICES-PRE AWARD-PRE TENDER
STAGE
1. SURVEY & INVESTIGATIONS
2. DESIGN & SPECS
3. SITE
4. TENDER PROCESS
5. CONTRACT DOCUMENTS
6. STANDARD CONDITIONS OF CONTRACT
7. RISK MANAGEMENT
8. DISPUTE RESOLUTION ARRANGEMENTS
9. BUDGET ESTIMATES
DISPUTE AVOIDANCE PRACTICES-PRE AWARD

REALISTIC TIME OF COMPLETION

REALISTIC COST OF PROJECT
ADEQUATE TIME FOR SUBMISSION OF BIDS
DETAILED SITE INVESTIGATIONS BY CONTRACTORS
OWNERS REQUIREMENTS UNAMBIGOUS
WELL DEFINED BASE LINE REQUIREMENTS
CAPABILITY MATCHING BY CONTRACTORS: RESOURCES
FOR THE DURATION, TECHNICAL SPECS, DESIGNS, SCOPE,
LEGAL AND ADMIN ISSUES
 DISPUTE AVOIDANCE PRACTICES-POST AWARD

SITE MANAGEMENT BY CONTRACTOR

ENGINEERS TIMELY TECHNICAL AND CONTRACTUAL
DECISIONS/APPROVALS
PROJECT DIRECTOR/MANAGER OF CLIENT TO FOLLOW UP
APPROVALS FROM STATUORY AUTHORITIES AND
VARIATIONS ADDITIONAL ITEMS/FRESH RATES/TIME
EXTENSION
TEAM WORK
HOW?

WORK PROGRAMME-THE KEY TO AVOIDING DELAYS AND

DISPUTES
CHANGES AND VARIATIONS
TIMELY PAYMENTS
GOOD COMMUNICATION PRACTICES
PERIODIC REVIEW
TRUST GOODWILL AND COOPERATION
 IMPACT OF DELAY AND DISRUPTIONS
CURRENT TIGHT MARKET CONDITIONS,
THIN MARGINS, AND STRAINED PROJECT
BUDGETS.

ALL STAKEHOLDERS FACE INCREASING

PRESSURE TO COMPLETE PROJECTS ON-
TIME AND ON-BUDGET.
 IMPACT OF DELAY AND DISRUPTIONS
DEMANDING CONTRACT TERMS, ONEROUS
GOVERNMENT REQUIREMENTS/FINANCIAL
INSTITUTIONS AND LEGAL ISSUES IN
DEALING WITH THE RISKS OF PROJECT
DELAYS.
 IMPACT OF DELAY AND DISRUPTIONS
SUCCESSFUL PROJECT MANAGEMENT
DEMANDS MORE CLOSELY PLAN,
MONITOR, AND ANALYZE CONSTRUCTION
PROGRESS, THE IMPACT OF DESIGN
CHANGES, WEATHER ISSUES ETC. INCREASE
RISK OF DELAYS AND UNEXPECTED COSTS.
 STRATEGY DEALING WITH DELAYS AND
DISRUPTIONS
UNDERSTANDING CRITICAL CONTRACT
REQUIREMENTS RELATED TO PLANNING
AND SCHEDULING SCHEDULE
MANAGEMENT.
ANALYZING AND IDENTIFYING THE CAUSE
OF ACTUAL OR POTENTIAL DELAYS.