Ground Floor, Building C, Sunnyside Office Park 2 Carse O Gowrie Road, Parktown, 2193 P.O.

Box 2740, Parklands, 2121 Phone: +27 (0)861 551 0600 Fax: +27 (0)11 551 0603 www.lombardins.com

Construction Guarantee Toolkit

Construction Bond / Guarantee

The Beneficiary the person in whose favour the guarantee has been issued, who requires security against the risk of the Principal Debtors non-performance or default under the primary contractual obligation.

A guarantee is a written undertaking issued by a bank or insurance company (Lombard) in favour of the receiver (Employer / Beneficiary), whereby the bank or insurance company pledges to make certain payments on behalf of its client (Contractor), if the latter fails to make payment or to carry out specific functions in terms of a construction contract.

The Principal Debtor applies for the issue of a guarantee which covers a particular performance by him.

Parties to a Guarantee
Guarantees usually involve a minimum of three parties:

The Guarantor the bank or insurance company that issues the guarantee on behalf of the Principal Debtor.

(see Figure 1 below)

Employer / Beneciary Creditor

Public & private enterprises

Advance payment Performance Retention Tender / bid bonds

Gu

ll f or T ac en tend t (P de ers rin r cip al De bt)

ar t an ee

JBCC GCC NEC etc

Ca

/S et ur

ntr

Co

Main contractor(s) Joint venture PPP Subcontractor(s) Supplier(s)

Contractor (Principal Debtor)

Indemnity & securities Guarantee facility

Guarantor / Surety (Co-principal Debtor)

Figure 1: Graphical explanation of Construction Bonding

Lombard Insurance Group offers you a variety of Construction Bonds: 

What we stipulate
A limit of facility A fee rate Security documents (see Indemnities and securities)   Collateral cash like assets, bond over fixed property, etc.)

Bid / Tender bond   This guarantees the Beneficiary that the Principal Debtor will honor its bid and will sign all contract documents if awarded the contract. Performance bond   This offers limited protection to the Employer for costs incurred. The guarantor undertakes to pay a specified sum of money to the beneficiary if the contractor does not fulfill the contractual obligations. Most common form of bond, normally 10% or 12,5% of the total contract sum, but can be as low as 1%. Retention bond  Under the primary contract the beneficiary is permitted to retain a certain percentage of the payment due to the contractor, normally 5% to 10%, as a safeguard against latent defects. In order to secure the release of these retention monies, the contractor will apply for a retention guarantee. Advance payment bond   This guarantee protects the beneficiary, who makes an advance payment to the contractor. A refund of the advance payment is guaranteed if the contractor does not fulfil the terms of the contract.

This is discretionary and in tangible form (cash /

Indemnities and Securities

Indemnity  This legal document entitles the Guarantor (Lombard) recovery of damages incurred from the Principal Debtor in the event of Lombard having to pay a claim to the Beneficiary / Principal  There are different forms of Indemnity for different purposes

Deed of Suretyship  This legal document should be offered by an entity / individual who will stand as surety and co-principal debtor on behalf of the Contractor (Principal Debtor) in case of default  Mandatory from the owners / shareholders, unless it is a public company traded on the stock exchange Documents required from Lombards attorneys  Company registrations, ID of members / shareholders (and spouses if married in c.o.p), and any other documents at their discretion Signing of legal document  Documents must be signed at the designated attorneys office in Johannesburg or a corresponding office in other locations

We cater for

  All Contractors (Principal Debtors) guarantee requirements, provided that we are comfortable with the risk as well as the stated period

  Normal and SMME clients (through an SD facility for SMMEs with up to R10m turnover)

Application process
Application for our Construction Bond / Guarantee facility can take between 6 to 15 days. However, once this facility is in place, it can take approximately 48 hours to issue a further guarantee, provided all documentation is submitted (this is also applicable to existing clients provided facility is up-to-date and designated underwriter is comfortable with risk).

Figure 2: Construction Bond / Guarantee facility application process and estimated completion times

Receipt of application for guarantee facility

Estimated completion time: Total process can take up to

15 Days