28th October 2024 - Overrunning bonds cause capacity bottleneck

The largest single issue in surety at the moment is bonds that overrun.

When the deposit premium for a bond is calculated, absent a fixed expiry date as most are, the cost is typically linked to the issuance of the Practical Completion Certificate.

If the works overrun, the bond, which runs in parallel with the contract begins to accrue additional costs, known as overrun premiums.

A few days over is not a big issue, a month even but when the job is delayed by 45 days or more, in addition to the overrun cost, bond capacity is tied up, which cannot be recycled for new jobs.

Although the effects of COVID-19 and the Ukraine war on cost inflation are largely behind us, construction professionals know that numerous factors can cause delays. From unpredictable weather to supply chain insolvencies and variation orders from employers, build programmes can easily slip.

Surety capacity is finite and even widening the surety panel to include additional capacity providers does not change that.

There is of course a need for balance between accelerating the issuance of PC without turning the job loss making.

Surety remains a sellers market for your surety panel. DRS takes a proactive approach with our clients in helping to manage exposures and monitoring job performance against build programme.

If you are experiencing capacity challenges, please feel free to get in touch.

 

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