Credit Controller Requiring Enlightenment

[Aisling35]

I am engaged as a credit controller for a fairly large scaffolding firm. They have recently been approached to sub-contract to a construction company in a job for the public sector. We have obtained a credit status report on the company and it doesn't make for good reading. It has recommended a zero monthly trade credit limit and suggested that we obtain performance/ indemnity bonding for the contract which would be for around £150,000. We have approached the dept within the public sector to see if they would consider paying us direct but it looks as if this is not possible and we will have to be paid by the construction company. My knowledge on the subject of indemnity/ performance bonding is very limited and I am hoping that someone can offer some advice on this subject. I should also mention that at the present we do not have trade credit insurance.

[BondLaw]

Based upon your reference to the contract price in “Pounds,” I assume the project is located in the UK. If this is the case, it is doubtful that there is a bond solution for your dilemma. The surety system is completely different in the UK. They do not use the same type of performance and payment bonds that are common in the U.S. Instead, the instrument commonly used in the UK is an on-first-demand bond, which may be referred to as a performance bond, but really responds more like a letter of credit (although the proper interpretation is the subject of some controversy in light of the ABI Model Guarantee introduced a couple of years back). As a rule, this bond is provided to the project owner by the prime contractor. To the best of my knowledge, the bond does not make provision for the payment of subcontractors. Thus, even if the public agency is requiring such a bond, it would be of little value to your concern.

Further, if the contractor’s credit is as poor as you report, it is highly unlikely that it can qualify for a bond running directly your company. Given the forfeiture nature of these bonds, they are, to say the least, conservatively underwritten.

You might inquire as to whether the public agency recognizes a stop notice or affidavit of lien. This is a device that allows a subcontractor to place a lien against the contract funds if the prime fails to make progress payments.

Ultimately, however, I would suggest that you speak with a solicitor who has some background in construction. He or she will be much better qualified to explain your options than a yank with only passing knowledge of the system in the UK. You might also consult the Society of Construction Law at www.scl.org.uk

[Aisling35]

Thanks for getting back to me. Your advice is much appreciated, despite perhaps not being your forte, i.e U K business practice.

Regards

Aisling35

[Admin]

Based upon your reference to the contract price in “Pounds,” I assume the project is located in the UK. If this is the case, it is doubtful that there is a bond solution for your dilemma. The surety system is completely different in the UK. They do not use the same type of performance and payment bonds that are common in the U.S. Instead, the instrument commonly used in the UK is an on-first-demand bond, which may be referred to as a performance bond, but really responds more like a letter of credit (although the proper interpretation is the subject of some controversy in light of the ABI Model Guarantee introduced a couple of years back). As a rule, this bond is provided to the project owner by the prime contractor. To the best of my knowledge, the bond does not make provision for the payment of subcontractors. Thus, even if the public agency is requiring such a bond, it would be of little value to your concern.

Further, if the contractor’s credit is as poor as you report, it is highly unlikely that it can qualify for a bond running directly your company. Given the forfeiture nature of these bonds, they are, to say the least, conservatively underwritten.

You might inquire as to whether the public agency recognizes a stop notice or affidavit of lien. This is a device that allows a subcontractor to place a lien against the contract funds if the prime fails to make progress payments.

Ultimately, however, I would suggest that you speak with a solicitor who has some background in construction. He or she will be much better qualified to explain your options than a yank with only passing knowledge of the system in the UK. You might also consult the Society of Construction Law at www.scl.org.uk

Great post BondLaw! Your surety knowledge is always welcome here.