Liga Asuransi – Dear reader, how are you? We are continuing the discussion about risk management and insurance in the construction sector. This time it is about the need for advance payment bond guarantees.
In general, for the smooth construction of a project, contractors need capital to be able to start the work well. The funds can sometimes be provided by contractors themselves with company funds, bank loans, and others.
With regards to the advance money, there is a much better way by requiring a down payment provided by the project owner. A special approach is needed with the project owner to be willing to provide some of the necessary funds such as 20% of the total project value.
Well, if the project owner agrees to provide a down payment for the contractor who won the project, then to secure the funds provided upfront, the project owner asks for guarantees to ensure that the funds are used to carry out project work while also addressing financial risks that may be faced by the contractor during the construction period that could stop the project.
The down payment guarantee requested by the project owner can be provided by the insurance company in the form of a Surety Bond and provided by the bank or Bank Guarantee.
But there is also one better way to get a down payment guarantee, namely with The Contra Bank Guarantee or also known as Counter Bank Guarantee. This is a collaboration between the insurance company and the bank.
If you handle the Payment Bond to the bank directly, then usually the bank will ask you to provide funds equal to the value of the guarantee in the bank account in the form of time deposits. The funds should not be withdrawn until the project is completed.
While with counter bank guarantees, the funds held by the bank are funds belonging to the insurance company and plus guarantees from the insurance company. Not your funds.
Of course, from a cash flow point of view, this is much more interesting, but there are some requirements that are needed besides that you also must match the bank with the insurance company.
As a senior insurance broker, this time we want to discuss more Payment Bond so that all parties understand them better.
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Payment Bond
A payment bond is a type of surety bond issued to contractors which guarantees that all entities involved with the project will be paid. A payment surety bond is a legal contract, a type of bond, that guarantees certain employees, subcontractors, and suppliers are protected against non-payment. Other common names for these include “construction”, and “labor and material”. In government contracting, these bonds are sometimes referred to as “Miller Act Bonds”.
What is an advance payment bond?
An advance payment bond is a guarantee for the buyer/principal (beneficiary of the guarantee) that they will be able to claim back all or part of the advance they have paid you as the supplier/contractor (issuer of the guarantee) in accordance with the commercial contract, in the event of non-performance or incomplete …
Private construction bonds are either conditional or unconditional. Under an unconditional payment surety, an owner is fully protected from having a lien placed on their property. Conditional sureties (“pay when paid” clauses) afford the owner only limited protection, as a construction lien can be placed on the owner’s property, but the owner then has a limited amount of time to transfer the lien from the property to the surety.
Why do you need an advance payment bond?
One of the most significant risks with the advance payment is for customers. They may get into trouble if the seller fails to fulfill the deal. It might be challenging for buyers to get their money back once the company they had invested in is declared to be bankrupt.
Subcontractors, sub-subcontractors, laborers, and material suppliers seek recovery under bonds. In many cases, professionals such as architects also have recourse under the construction payment bond. Claims on surety bonds are made by project owners if the project was not completed in its entirety or at all. Work not completed by agreed-upon dates usually triggers a “liquidated damages” clause, where the contractor must deduct a specified dollar amount per day from the price of the contract. At NFP, we only bond with top-rated carriers.
Understanding Advance Payments
Advance payments are amounts paid before a good or service is received. The balance that is owed, if any, is paid once delivery is made. These types of payments contrast with deferred payments—or payments in arrears. In these cases, goods or services are delivered first, then paid for later. For example, an employee who is paid at the end of each month for that month’s work would be receiving a deferred payment.
Advance payments are recorded as assets on a company’s balance sheet. As these assets are used, they are expended and recorded on the income statement for the period in which they are incurred.
Advance payments are generally made in two situations. They can be applied to a sum of money provided before a contractually agreed-upon due date, or they may be required before the receipt of the requested goods or services.
Payment vs. Performance Bond
Payment bonds are normally issued simultaneously with a performance bond. Payment bonds promise that certain people will be paid, and performance bonds promise that a project will be completed as agreed, including being finished by the completion date. Payment and performance sureties both also assure compliance with applicable laws and regulations.
Why do you need Construction Payment Bond?
If you win a bid for a project that requires a bond, you must obtain it before project commencement. For the most part, a prime contractor on a construction project will need a bond.
Many private contracts, usually construction contracts, require payment sureties to be posted by the primary contractor as well. Private projects requiring sureties will specify the scope of protection and bond amount needed in the body of the contract. Want to learn more… visit our what is a contractor bond page.
How Much Do They Cost?
The price will depend on a variety of factors, including your background, credit, financial strength, and the dollar value of the contract award. They generally range in price from 1% – to 5% of the total bond amount. The total amount of bonding for a government contract is set by the contracting officer and cannot be less than the performance bond amount. A contracting officer does have the authority to lower the coverage needed in the construction payment bond, though.
How to get the best Advance Payment Bond?
Frankly speaking, getting the best payment bond guarantee that suits the demands of the project owner and at an efficient cost is not easy. It requires an understanding of requests, relationships, good communication with the insurance issuer or bank.
One of the challenges of issuing surety bonds is the speed, the accuracy of documents by numbers and legally.
That’s why it requires the help of surety experts who have extensive relationships among insurance and banks.
The right expert is an Insurance Broker who has extensive experience in the field of financial risk. An insurance broker that will help you to arrange the issuance of payment guarantees with some insurance company or bank accurately and faster.
The insurance broker is an insurance expert on your side as the insured while the insurance agent is on the side of the insurance company, he/she represents.
One of the insurance broker companies in Indonesia that has extensive experience and successfully issued thousands of surety bonds is L&G Insurance Broker.
For Payment Bond needs and your entire project insurance needs, please contact L&G right now!
Source:
- https://www.nfp.com/property-and-casualty/surety/blog/what-is-a-payment-bond
- https://www.investopedia.com/terms/a/advance-payment.asp#:~:text=Advance%20payments%20are%20made%20before,assets%20on%20their%20balance%20sheets.
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