The head of Laing O’Rourke’s Middle East business said he would like to construction bonds eliminated in the Middle East, labeling their use as an “archaic principle” that burdens contractors in the region with noticeably higher costs when contracting.
Speaking to Construction Week, Mark Andrews, managing director of the UK-headquartered contractor, noted there are primarily four types of construction bonds used in the Middle East – advanced payment bonds, performance bonds, retention bonds, and bid bonds.
"I’d like to see the elimination of bonds, period," he said. "I see that going on in other parts of the world and for me it’s an archaic practice. And if the contracts were done and there was an efficient legal regime that could solve disputes rapidly then there’s no reason for bonds to be used."
Advanced payment bonds cause problems for contractors in the region, the contracting expert added, noting their use is "absolutely standard practice in the Middle East.
"Generally in a contract here there are advanced payment bonds, let’s say for example 10% of the contract value that comes when a contract is awarded or very shortly thereafter. It is a means of insurance for clients; to protect themselves should a contractor pocket the money and disappear."
However, he said, the minute that parties enter into a contract, "there should be legal mechanisms that ensure contractors perform".
Performance bonds are too generally supplied by the contractor at the beginning of the contract, normally for about 10% of the contract value, Andrews said.
"Typically it means that when you enter into contract a contractor has to raise a 10% advance payment bond against cash payment and you’ve got to put in a 10% performance bond."
With this in mind, he stressed, contractors can sometimes be bonded for 20% of the contract value – sometimes a significant amount of capital given the scale of some projects in the region.
Clients typically hold 10% of the contract value in retention bonds too, which are held more often than not “for the defect liability period, along with the performance bond”.
Andrews added: "Difficulty arises because in order to take on new work you need to be able to raise new bonds. And that means you need to get the old bonds back.
“However, because there are so many contracts where the final accounts, or claims etc, don’t get resolved in a timely manner here, these bonds just ‘hang out’ for a long time after a job. And you can’t recover them so you can’t use that part of your facility to bond new work.
"In the UK market for example, we have not seen a bond requirement from any of our clients for the best part of the past 2 years. In $6.4bn (£5bn) of new work there has not been a bond requirement."