Various bonds are demanded in a purchasing process. Many buyers and bidders unfortunately confuse them.
Report by Nyasha Chizu
Buying organisations, due to ignorance, may demand a wrong type of bond with an intension to cover specific risk at the danger of receiving unrelated covers in a procurement process.
The matter is critical in that a bond is a document binding one party to pay a sum to another party, or to perform — or not to perform — some action or deed.
Bonds, in contrast to supply, are a deed by which a person binds himself to pay a sum of money at a certain time, or under certain conditions.
This article is meant to enlighten both buyers and suppliers about various bonds and their application in a procurement process.
Bonds are normally requested in long- term contracts and construction projects where sellers and contractors make some undertaking to perform or pay for specific actions.
Bid bond, performance bond, advance payment bond, maintenance bond and retention bond shall be discussed.
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Bid bond or tender bond assures the buyer that the bid is a reasonable one and is guaranteed by a bank, and that the bidder will not withdraw his bid, or depart from conditions set out in the tender. Bid bond is meant to compel the supplier to put his mind on a critical tendering process and abide by his submissions until the procurement process has been concluded.
This implies that offers supported by bid bonds issued by commercial banks are both technically and commercially sound such that if chosen, performance is imminent.
The value of a bid bond is set as a percentage of the bid price. In the event that a bid is withdrawn before expiry of the bond validity period or the supplier departs from original submissions, the bank that issued the bond will be expected to compensate buyers with the agreed bid bond value.
Performance bond is demanded after contract signature. It is obtained from a supplier and guaranteed by a bank so that in case of performance default on the contract to which the bond is applied, funds will be available from the guarantor to compensate for the buyer’s loss.
The underwriter guarantees that supply of the goods or service will be in accordance with the terms and conditions of the contract. The onus is therefore, placed on the buyer to prove non-performance of the supplier.
The buyer can only be compensated with value, normally an agreed percentage sum of the contract. Advance payment bond gives the buyer comfort that the monies advanced will not be lost through default or poor performance by the seller.
This is a 100% insurance cover underwritten by a bank that a supplier advanced with some cash will deliver as promised.
Maintenance bond is applicable in construction projects that require that a contractor fixes all defects that will have been identified in a specific time frame.
This is also a guarantee undertaken by a bank that the supplier will maintain the works in the specified maintenance period. Retention bond is used by a contractor as a means of financing contracts rather than as a guarantee of performance and in lieu of retention money or against early release of retention money, or of monthly progress payments.
It is therefore important to request for the right type of bond at the appropriate time so that appropriate risk is mitigated in business transactions.
Nyasha Chizu is a fellow of CIPS and CIPS Zimbabwe branch chairman writing in his personal capacity. Feedback: [email protected]
