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Why bid bonds, performance bonds and advance payment guarantees?

Edited on December 20, 2016

Big projects and supply jobs usually require guarantees. A guarantee is a unilateral contract in which the bank (guarantor) undertakes to make a payment to a specified beneficiary within certain limits of a stated sum of money when the third party (contractor / supplier) fails to perform an obligation as per the terms of the contract.
There are over 10 different types of guarantees and bonds available but the three main ones that are purchased on projects are bid bonds, performance bonds and payment guarantees. Each of these bonds serve very distinct purposes within the project’s lifecycle but we have realized that in some instances, people confuse these bond covers. This brief article will attempt to explain the differences

Bid Bonds

Bid bonds are applicable during the tendering / bidding stage. For example, a project owner has advertised a request for proposals for the supply of material X. Suppliers / Contractors interested in the job must prepare to submit bids to perform the advertised job. For the tender to be acceptable to the project owner the supplier / contractor must submit bid bonds along with their bid. These bid bonds effectively protect the project owner in the event the supplier awarded the job fails to sign the contract as per the terms submitted in the bid.
Depending on the value of the bid bond, most financial institutions do not require any collateral to be able to issue a bid bond on behalf of a client. Bid Bonds are easily processed within hours and the conditions set therein must be in line with the terms of the contract that the supplier intends to bid for.

Performance Bonds

Performance Bonds are applicable once a tender has been awarded and the project owner would like the assurance the project / job will be done satisfactorily as per the terms of the contract engaged.  In the event a supplier is unable to perform a certain responsibility or delivers at subpar, the project owner has the power to invoke the performance bond by up to the value of the unfinished / unsupplied items or to the cost of re-doing the subpar work.
For most financial institutions, the conditions of the performance bond must be in line with the contract awarded and collateral will be required to be able to issue a performance bond on behalf of a client. In addition, the business seeking the guarantee must have been in operation for a minimum period of at least 1 year.

Payment Bonds

The most common payment guarantee in Kenya is known as the Advance Payment Guarantee. This is a guarantee issued to enable the contractor / supplier collect mobilization fees for the contract won. Here the bank becomes liable if after collection of the advance monies, the contractor / supplier fails to deliver the project as per the laid terms of contract.

As with performance bonds, the conditions of the advance payment guarantees must be in line with the contract awarded and collateral will be required to be able to issue an advance payment guarantee on behalf of a client.

At Credit Bank, we work very closely with businesses to ensure they meet their business objectives by taking advantage of all the potential business opportunities out there. These guarantees are an indicator of the bank’s confidence in your businesses and at the same time protect the project owners’ interests.

Do you have any questions regarding any of the guarantees above? Have you seen an opportunity your business can explore? Email us at mcc@creditbankltd.co.ke and let’s talk business.

Categories : Business Advice

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