Construction Bonds

Bonds are legally binding agreements issued by a guarantor (usually a bank or specialized surety company) on behalf of the contractor to the project owner. They serve as a financial guarantee that the contractor will fulfill their contractual obligations.

Bid Bond (or Tender Bond)[1][2][3]

Description:

  • A Bid Bond (or Tender Bond) is a written guarantee that the contractor gives with his tender to assure the project owner that he is serious, will keep his offered price, and will sign the contract and provide the required performance/payment bonds if he is awarded the job. If the contractor wins the tender but then refuses to sign the contract or cannot provide the next bonds, the owner can claim money from the bid bond (usually a percentage like 5–10% of the bid amount) to cover extra costs such as going to the next lowest bidder.
  • Additionally, a bid bond protects owners from the cost and delays that come from a contractor backing out. If the selected bidder fails to sign the contract or provide required bonds, the bid bond can be used to offset the owner’s resulting costs. With a bid bond in place, owners reduce risk and keep the project moving forward. 

Example:

  • For example, a contractor submits a bid of 10,000,000 SAR for a new school project, and the tender documents require a bid bond of 10% of the bid value, so the contractor submits a bid bond of 1,000,000 SAR from a surety/insurance company together with his offer. If this contractor is selected but then refuses to sign the contract or asks for a higher price, the owner can reject him and claim up to 1,000,000 SAR under the bid bond to cover the difference between his price and the next lowest bidder, and to compensate for delay and re‑tendering costs.


Performance Bond (Performance Security)[4][5][6]

Description:

  • A Performance Bond (also called Performance Security) is a financial guarantee provided by a contractor’s bank or surety company to the project owner, promising that the contractor will complete the works according to the contract terms, including quality, time, and scope; if the contractor fails or becomes insolvent, the owner can claim under the bond to get money (usually around 10% of the contract value) or support to finish the project with another contractor.

Example:

  • For example, imagine a contractor signs a contract to build a school for 50 million SAR and submits a performance bond for 5 million SAR (10%) from a bank; if the contractor stops work halfway and cannot continue, the employer can call the bond and receive up to 5 million SAR to cover extra costs of hiring a new contractor and completing the school without bearing all the loss themselves.

Advance Payment Bond (AGP)[7][8]

Description:

  • An Advance Payment Bond (also called Advance Payment Guarantee, APG or APB) is a security issued by a bank or surety company in favor of the employer when the employer pays the contractor part of the contract price in advance, usually 10–30%, to help with mobilization and purchasing materials. This bond promises that if the contractor misuses the advance money, fails to start the works, or becomes insolvent, the bank/surety will repay the employer up to the bond amount. In many construction contracts, including FIDIC-based contracts, the value of the bond is equal to the advance payment and is reduced gradually as the advance is recovered through interim payments

Example:

  • For example, assume a building contract with a price of 10,000,000 SAR, and the employer agrees to give the contractor a 20% advance payment (2,000,000 SAR) after signing the contract to buy formwork, steel, and special equipment for the project. Before releasing this amount, the employer asks the contractor to provide an Advance Payment Bond from a bank for 2,000,000 SAR, so if the contractor takes the advance and then fails to mobilize or stops work, the employer can call the bond and recover the unpaid portion of the advance. During the project, each interim payment certificate deducts part of the advance from the contractor’s earnings, and the bond value decreases accordingly until the full advance is recovered and the bond is cancelled.

Retention Bond (or Warranty/Maintenance Bond)[9][10]

Description:

  • A Retention Bond (also called Warranty or Maintenance Bond) is a promise from a bank or surety company that it will pay the client if the contractor does not fix defects or finish minor remaining works after completion. Instead of the client holding 5–10% cash retention from each payment, the contractor gives this bond as security that he will correct any problems during the defects or maintenance period.

Example:

  • For example, suppose a building contract value is 10,000,000 and the normal retention is 5%. Instead of the client holding 500,000, the contractor gets a retention bond from a bank for 500,000 and receives full payment. If, during the 12‑month defects liability period, some waterproofing fails and the contractor refuses to repair, the client can claim on the bond and use that money to repair the defects.


Parent Company Guarantee[11][12][13]

Description:

  • A Parent Company Guarantee in construction is a simple written promise from the contractor’s parent company that it will stand behind its subsidiary’s duties under the construction contract if the subsidiary fails to perform or pay. It gives the employer extra financial security, because if the contractor becomes insolvent or does not complete the work, the employer can ask the parent company to either fix the problem, finish the project, or pay the losses, up to the same obligations the contractor had under the main contract.

Example:

  • For example, imagine an employer awards a large building project to “ABC Contracting LLC,” which is a small company owned by a big international group called “ABC Holdings.” Because ABC Contracting’s financial strength is limited, the employer asks for a Parent Company Guarantee from ABC Holdings. Later, if ABC Contracting stops work due to financial problems and cannot finish the building, the employer can call on ABC Holdings under the guarantee to arrange another group company to complete the works or to pay the extra cost needed to hire a new contractor, so the project can still be completed without full loss to the employer.


References

  1. https://www.autodesk.com/blogs/construction/bid-bonds/ ↩
  2. https://www.procore.com/library/bid-bonds ↩
  3. https://www.investopedia.com/terms/b/bid-bond.asp ↩
  4. https://www.procore.com/library/construction-performance-bond ↩
  5. https://www.investopedia.com/terms/p/performancebond.asp ↩
  6. https://www.getvergo.com/define/performance-security ↩
  7. https://www.creditglorious.com/post/advance-payment-bond-construction-projects ↩
  8. https://www.cgbonds.co.uk/what-is-an-advanced-payment-bond/ ↩
  9. https://www.designingbuildings.co.uk/wiki/Retention_bond ↩
  10. https://bowen-law.com/what-are-retainage-bonds/ ↩
  11. https://www.lexisnexis.co.uk/legal/glossary/parent-company-guarantee-pcg ↩
  12. https://en.wikipedia.org/wiki/Parent_company_guarantee ↩
  13. https://books.google.com.sa/books?id=FTHCnx9xzKIC&pg=PA173&redir_esc=y#v=onepage&q&f=false ↩