Construction Bond conundrums

Construction Bonds are often an essential part of meeting contract obligations for construction projects abroad. The problem is that many bond providers are often reluctant to offer bonds in high-risk regions, and alternative bank solutions such as Bank Guarantees impose conditions that impact your cashflow. What’s the answer to the Construction Bond Conundrum?

When you bid for major projects in developing countries – perhaps building roads, a new hospital or power plant – it’s not unusual for the contract principal to insist on a Bid Bond or Performance and Payment Bond.

The principal, which might be the government, international donor or a major contractor, is effectively asking for a guarantee that they will be compensated if you fail to fulfil the bid or deliver the project to contract terms.

If your company simply doesn’t have the resources to complete the contract, pulls out of their country, abandons the project, or doesn’t meet the agreed standards, they want a pot of money so that they can reassign the work and get the project finished.

The problem for you is that your bank may be reluctant to support you in a high-risk country or high-risk activity. Even if they are willing to do so, they will demand collateral for the Bond value. That means you have to retain that level of liquidity on your books for the duration of the contract.

With required security even on smaller projects in the USD 5m – USD 20m bracket, that’s a big restriction on your cashflow.

What’s the answer?

Instead of turning to the banks, one option is to consider Construction Bonds in international insurance markets instead.

The benefit of this approach is that there is a better understanding among some specialist underwriters of the risk profiles of these countries, which means they may have more appetite for
the business. Crucially, because this is an insurance product, you won’t be asked for a charge over the business, so there is no negative impact on your cashflow.

How do you organise insurance-based Construction Bonds?

Construction Bonds are a specialist area of cover, especially if you are operating in high-risk regions or are involved in a high-risk activity, like offshore exploration for example.

Adrian Henry, Senior Broker at Bellwood Prestbury, explains:

“We’re working with a number of construction clients who are operating in places like Somalia, East and Sub-Saharan Africa and Afghanistan. We place the business through our London office in international markets, including Lloyd’s – but also specialist providers in other jurisdictions.

“Appetite changes across insurers, so it’s often a matter of talking to multiple international insurers. With larger Bonds, in excess of say USD 20m, you might need multiple facilities to support annual requirements.”