Call for legislation to prevent unfair performance bond call-ups in construction sector
While the provision of and reliance upon on-demand performance bonds remains prevalent within the local construction and engineering sectors, recent statistics released by Performance and Customs Bond Services (PCBS), a specialist guarantee construction U
Tunga Changamire, Claims and Risk Management Executive at PCBS, says that ongoing delays in local power projects are seeing more and more employers calling-up demand bonds for what are often considered by insurers as unjustified causes.
“Demand guarantees are in essence a cash obligation and are characterised by the absence of any conditions required to make a call on the bond, other than the making of the call itself. What we are seeing more and more is cash-strapped employers calling-up bonds to correct their negative cash flow positions. This is especially rife on power projects where there are ongoing delays. Here employers are taking advantage of bonds to protect their risks and this has brought about a huge spin-off for insurers issuing construction bonds,” he comments.
Changamire believes the problem is compounded by a lack of local legislation providing safeguards to protect the banks and insurance industry against the unfair calling of on-demand performance bonds in the sector. “Despite the increasing number of call-ups on demand bonds, there is no legislation. Banks and insurers are currently at the mercy of employers and as a result there is a very real possibility of on-demand performance bonds becoming extinct as there is an increasing reluctance to issue them due to the marked increase in unfair call-ups,” he says.
While in many European countries on-demand construction bonds are legislated, Changamire says that within the local construction sector it is left solely to employers to make a judgement as to when to make a call on a bond. “In many instances call-ups are orchestrated where employers withhold from contractors, forcing the contractors to call-up the guarantee. And as there are no conditions specified on the guarantee, the banks and insurers are forced to payout. These withholdings filter down from the main contractors to the sub-contractors and as a result the sub-contractors non-perform due to non-payment. So in effect the entire sector is impacted,” he explains.
On-demand guarantees are currently required by most employers to secure local contract work. Changamire says this leaves the smaller contractors, who are currently scrambling for jobs in the slow and fiercely competitive sector, powerless to negotiate on the terms of the contract.
“Ideally all relevant stakeholders -Joint Building Contracts Committee, Master Builders South Africa, and National Home Builder Registration Council, together with legislators - need to sit down and draw up legislation that allows insurers the opportunity to defend or avoid payout where it is deemed as fraudulent, or when there is an element of illegality in the underlying contract.
“Only through concrete legislation will the ‘sacred cow’ mentality currently surrounding on-demand guarantees be dissipated. It’s critical that legislation be implemented that promotes transparency and looks beyond the contract and considers the cause of non-performance. Without it, all stakeholders in the sector will continue paying the price,” he concludes.
