Surety bonds (provided by an insurance company) are referred to just as bonds in the project management world. Alternately, surety can be provided by bank guaranties. Their purpose is to provide the client with a sum of money in the event that the contractor defaults. The alternative to a bond is for the client to ask for a parent company guarantee.
Bonds and guarantees are so dangerous that this section is limited to the basic information that a project manager needs to know. An expert should be consulted for anything else.
It is safest to think of them as big banknotes that can be cashed by anyone!
There are three parties involved in bonds and guarantees, and each has a different interest:
- The beneficiary (the client) wants to receive a compensatory sum of money if the contractor fails to meet their obligations
- The principal (the contractor) does not want to pay if they have met their obligations.
- The guarantor (or surety) wants to meet their commitment without becoming involved in possible disputes between the beneficiary and the principal concerning correct performance.
In the United Kingdom, the use of financial guarantees issued through banks has traditionally been fairly limited. The reason is, firstly, the financial status of a company can be reasonably well established. Secondly, it has been considered sufficient to rely on the contractual remedies that exist in the contract and trust in the legal system.
A common feature of guarantees ...