Surety bonds growing in popularity with construction firms

2nd September 2011

Performance bonds are becoming increasingly more popular with firms working in the construction industry, according to research carried out by national law firm Gateley.

The collateral deposit – issued by an insurance company or bank to guarantee the satisfactory completion of a project – typically covers 10 per cent of a contract’s value.

According to its research, Gateley found that two thirds of respondents reported the bonds they had issued in the last two years had been increasing in value. Ninety per cent of those surveyed also believed that companies are more likely to require a bond following the financial crash of 2008.

Karen Spencer, partner in the construction division at Gateley's Manchester office, said: “Many companies have long seen the benefits of using surety bonds, but the demand for them has certainly increased over the last two years. The bond can provide extra security for businesses engaged in long-term projects and they can also release more capital into development schemes.”

The survey also revealed that 60 per cent of underwriters and brokers surveyed said the value of performance bonds they had issued to clients over the last two years had been between £50 million and £250 million, with values increasing significantly during that time.

Dave Mackie, group business development director at CBG Group – the independent insurance broker and financial services intermediary, added: “We’ve seen a marked increase in enquiries regarding performance bonds since 2008. Developers have become more sensitive to potential contractor failures and underwriters are more selective with the contractors they will provide a bond for.

“Both these factors have caused an increase in bond requirements, coupled with an increase in the price of applicable bonds, as all parties continue to feel apprehensive about the financial climate.”