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There have been tough lessons and knocks for a range of construction contractors over the past five years. Picture: 123RF/SNVV
There have been tough lessons and knocks for a range of construction contractors over the past five years. Picture: 123RF/SNVV

Uncertainty about the future has highlighted the need for construction contractors to provide employers with the security of a performance guarantee.

There have been tough lessons and knocks for a range of contractors over the past five years. For those who survived the pre-Covid-19 economic meltdown, the pandemic may have been the final straw, causing many defaults of contracts relating to construction work.

These disruptions have challenged project execution and changed attitudes towards the acquisition of performance guarantees, which have generally been considered a grudge purchase.

Clinton Spence, head of Santam Guarantees, says: “Unlike with traditional insurance, here, a third party is involved. Construction projects are based on an agreement between a contractor (the principal debtor), working on behalf of a beneficiary (employer/owner/creditor). Should a contractor fail to meet its obligation in fulfilling that contract, the project is at risk.

“This is where a performance guarantee comes in. It indemnifies the beneficiary of the project against default or non-performance by a contractor, which puts an obligation on a guarantor (the insurer) to make payment should a specific event occur.

“Though contractors facilitate and pay for the premium on a guarantee, they don’t realise any direct financial benefit should there be a claim.”

The construction sector comprises 90% of Santam Guarantees’ underwriting, 70% of which is performance-based. “It’s a highly specialised and technical, risky business,” says Spence. “A guarantee issued today pushes our resources because the underwriting is made far more intensive. For example, we can’t judge how a company will be performing in a year’s time, let alone in six.”

Full-spectrum offering

There are three types of guarantees that together contribute to most business within the Santam Guarantees product suite: Performance, which covers elements of quality, specification and scheduling; Advance, which covers the expenses incurred to create the facilities that a site requires, and addresses initial negative cash flows relating to the procurement of capital goods; and Retention, which comes into play at the end of the construction period, and addresses employer risk associated with defects.

“This full-spectrum offering makes it difficult for underwriters. They have to consider whether the contractor has the financial and technical means to complete a job, and not fail. We’re guaranteeing non-failure,” says Spence.

Insurance good and proper

Underwriters have to consider a complicated list of checkboxes, including contractor liquidity, performance over the previous five years, application of building standards, risk ratings, as well technological and financial audits, to name but a few.

Time frames vary, but generally, the process from the day the application is submitted to when the guarantee is issued can take up to a month. However, this only applies to the local market; foreign clients can expect the process to take up to three months because of the varying security checks and compliances.

At present, 40% of the business Santam Guarantees underwrites is local; the balance is foreign. “At any one time, we have about 30 foreign guarantees in play, and only 25% of those are motivated through SA companies looking for support of their projects in other nations.”

Spence says: “There is always a point in processing this insurance where you hold your breath because the risks are so great and complicated. But ultimately, we abide by our decades-old mantra: to provide insurance good and proper. And we believe we do that well.”

For more information, call Santam Guarantees on +27 (0) 11-912-8478/8354/812 or send an e-mail to surety@santam.co.za.  

Santam is an authorised financial services provider (licence number 3416).

This article was paid for by Santam.

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