Hills is constantly asked by clients to look for ways to improve value and performance, which we are delighted to do. Yet performance bonds are evidence of less trust, not more! The increasingly onerous requirements for performance bonds imposed upon contractors by clients, typically covering 10% of the contract value, are a costly aspect of this lack of trust between construction and its clients.
Hills Electrical & Mechanical’s annual turnover is now over £80 million, but until recently it was unusual to be required to provide a performance bond and our bonding limit of £3 million was more than adequate. But, as it is almost impossible to get anyone to release a bond – ever – and as more clients are requiring them, that limit is now all too easily breached.
Hills has been forced to put in place provision for another £3 million, but having already absorbed £4 million, this new limit may also soon be exceeded and the company has had to ensure it can secure a further £3 million if necessary. With the premium payable on these bonds typically being 1·5% of the value, and many banks or insurance companies charging arrangement fees, this now represents a significant additional overhead for the company.
As bonds are never released and never in our history been called, they are just making money for bankers and lawyers. Money that could be used to give clients greater value and higher service levels.
Hills has never seen a requirement for a performance bond written into any accepted standard form of contract, but it can be called for any breach of contract, no matter how minor. The bond also has a life beyond the completion of the contract and can only be released by the client.
The worst kind is the ‘on demand’ bond, which basically allows the client to call the bond at any time, for whatever reason, and effectively becomes an optional 10% rebate on the contract value. Because the bond is provided by a bank or insurance company, the contractor would have little say in whether or not the money was paid, leaving it to sort out liability after the event. While the courts don’t like these very general performance bonds, and are unlikely to support an unjustified claim upon them, once the client had the money it would be a long and expensive battle to get it back.
Clients are clearly being instructed by their lawyers and other advisers that they need these bonds. But why are we working against each other in this way, when what we all truly want and what we say is that we want to work together?
Hills has worked hard to build long-term relationships with its key customers. The company feels that it is a pity that it is having to waste money on unnecessary and onerous bonds, instead of being trusted to do the job right first time, every time.
Source
Electrical and Mechanical Contractor
No comments yet