Surety bonds are undertakings issued on behalf of a contractor to cover the contractor's performance obligations. The recipient of the bond is the principal client (contract owner) who requires the bond as protection in the event of the contractor's inability to fulfill its performance obligations.

Typically, the contract security regimes in Australia and New Zealand require bonds of 10% to 15% of the total contract value. Bonds are issued prior to commencement of the contract and expire on achievement of a specified milestone, such as; the issue by the principal client of the Certificate of Practical/ Final Completion (after the maintenance/ latent defects period), Handover Certificate or equivalent.

Before agreeing to issue a bond, Australian Pacific Surety's underwriters (Risk Analysts) undertake a comprehensive review of the contractor's performance capabilities. This includes an assessment of the contractor's financial status, management strength and track record. (Please refer to the surety information checklist)

Surety bonds may be issued on a 'one-off' basis or through a multi-bond facility to meet the contractor's on-going contract surety needs.

The pricing of bonds depends upon the risk profile of the contractor, as determined by the underwriting process. Fees are calculated for the duration of the bond and are payable prior to the issue of the bond.

Should a bonded contractor default or not perform under the contract, the principal client may seek a payout under the bond. In such cases, the Surety (bond issuer) seeks immediate recovery of the claimed amount from the contractor. Bond recoveries are facilitated through indemnities and/or guarantees given by the contractor to the Surety.

"The use of surety bonds as an accepted form of contract security, has grown considerably over the past 15 years. Contractors recognise the need to free working capital to fund day-to-day operations. Principal clients can rely on the security of strongly rated bond 'paper' and the knowledge that our surety underwriters have examined the contractor's performance capabilities."

Jason Sutherland, Managing Director, New Zealand