While Ian Yule’s article focuses mainly on an “on demand” bond and highlights the particular case of Permasteelisa, his opening paragraphs promote myths about performance guarantee bonds
He opens with a reference to credit insurance, then smoothly turns to remarks about performance bonds, which are not a form of insurance, without further explanation of the difference.
Performance guarantee bonds are independent guarantees from a reliable company or bank, outside the contractual relationship, for the obligations of the contractor under its contract. A guarantee bond responds to a breach or default, usually the failure of an insolvent contractor to pay the employer the ascertained debt following completion and the making good of defects in the original works by others.
In an insolvency, which is the reason for 99% of claims, the surety, following any payment, ranks as an unsecured creditor alongside all others and has no higher standing for recovery.
It is true that smaller contractors, and some of the larger ones, are having difficulty obtaining bonds because employers are now waking up to their need and demand for guarantee bonds has increased. This is because the market is taking a long, hard look at risks, and is consolidating its business into the more secure, less risky, areas.
Barry Higgs, BPCS