'On-demand' bonds make unwelcome comeback

11 March 2011

Clients are seeking “nasty” on-demand bonds from contractors as a defensive response to the economic downturn, Construction News reported.

On-demand bonds require winning bidders to place a sum of money with their bank that can be collected by the client at its discretion, without having to prove through legal action that the sub-contractor had defaulted on its contract. 

Most bonds in use today are “default” bonds, triggered by sub-contractor default such as business failure, failing to complete the project or design problems.

It's thought that high-profile business failures, such as the collapse of Rok Construction and Connaught, and cut-throat tendering, have sparked the revival of on-demand bonds,   a feature of the last recession.

Specialist Engineering Contractors’ Group group chief executive Rudi Klein said the return of the bonds was “wholly unacceptable”.

“Unfortunately on-demand bonds are becoming more common, as part of a stricter performance security regime, and they are nasty stuff,” he said.

Contract notices issued recently by Highlands and Islands Enterprise (HIE) require “an ‘on-demand’ performance bond for 10 per cent of the contract sum, including express cover for contractor insolvency”.

The three contracts were for a £15 m infrastructure project in Inverness, a £7m design and build contract on Raasay House, an outdoor centre on the isle of Skye, and a £7.25m design and build project for the European Marine Science Park. 

The Raasay House job was originally awarded to Rok, and a new contractor is being sought to complete the work. HIE and Rok also signed a £32m four-year deal in October 2010, a month before the contractor's insolvency was announced.

A senior manager at a large English contractor confirmed that on-demand bonds are being revived in England as well.

The manager told Construction News his company had lost out on two recent jobs for which his firm had been shortlisted, specifically because they refused to agree to on-demand bonds.

“We never have and we never would agree to an on-demand bond and the fact that other people are is a really worrying sign,” he said.

“We lost out on two jobs because of it and these were for very different clients, one public and one private.”

One contractor said the collapse of Rok and Connaught had sparked a “fairly radical” change in clients’ approach to procurement.

“It’s not just on-demand bonds - though we are seeing those more. They are putting massive amounts of checks on us now and it’s making it very difficult for some smaller companies to win public sector jobs,” he said.


On Demand Bonds are being mooted in Ireland also. It is a very worrying trend and hopefully Contractors will refuse to undertake Contracts with this type of Bond in place. For financially secure contractors the risk of providing this form of Bond is ridiculously high. The risk far outweights the benefits of taking on such a Contract. Unfortunately, contractors struggling for workload, may well provide such bonds in an effort to remain in business. Ironic really!

Steven McGee, 16 April 2011

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