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Coverage schemes vary from one market to another. Some countries require standardized contracts, while others allow for customized solutions.
In general, this coverage comes in two main plans depending on the nature of the commitment: the performance bond, also known as a contractual bond, and the statutory bond.
The contract or contractual bond
The contract bond or contractual bond is used in the context of the performance of commercial contracts or tenders. It is specifically designed to guarantee the completion of work, the delivery of products, or the reimbursement of down payments.
This type of bond is closely tied to a specific project or contract and generally expires upon fulfillment of the primary obligation, hence its contractual nature.
It is not required by law, but rather by the parties involved who wish to protect themselves against potential default by the company. This type of bond is used in many sectors such as construction and public works, the food industry, and the automotive sector.
The contract bond takes various forms depending on the project’s progress or the type of commitment:
- The bid bond guarantees the validity and seriousness of the bid. It is submitted by the company during a bidding process. This bond generally accounts for between 1% and 5% of the bidder’s offer amount.
- The down payment refund bond ranges from 5% to 20% of the commitment amount. It ensures the reimbursement of advance payments in the event of non-performance of the contract.
- The performance bond is one of the most common contractual guarantees in international trade. It is systematically required in international tenders for construction contracts. The amount of this guarantee ranges from 10% to 30% of the contract price. It covers the risk of partial or total non-performance of the work.
- The retention bond covers post-delivery defects and protects the project owner or buyer against potential defects after the project or product has been delivered. It ensures that the work/products meet the requirements and that the contractor will repair any defects after delivery. The retention amount is often between 5% and 10% of the bond amount.
Statutory bond
A statutory bond is a guarantee required by law in strictly regulated industries. It is mandatory for the practice of certain regulated professions, such as customs transit operations, travel agencies, real estate professionals, and polluting industries.
Entities operating in these fields must demonstrate their ability to financially meet certain obligations. The bond is, therefore, used as a guarantee of security for their partners or customers, whether in the public or private sector.
There are different types of statutory bonds depending on the country and the nature of the company’s business. The most common statutory bonds are:
- Customs and tax bonds for freight forwarders and importers. These ensure the payment of duties and taxes to government agencies.
- Environmental bonds for industrial or agricultural facilities. These guarantee the restoration of sites in the event of pollution or failure to comply with environmental obligations.
- The developer/builder bond is a mandatory financial guarantee for real estate professionals to protect funds deposited by their clients and ensure that the project be delivered on time and in accordance with the agreed terms.
- The commercial lease bond replaces the security deposit and covers unpaid rent.
- The financial guarantee protects client funds in regulated sectors: travel agencies, subcontracting, etc.
