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PERFORMANCE BOND & ADVANCE PAYMENT BOND FOR FOREIGN BIDDER

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Re: PERFORMANCE BOND & ADVANCE PAYMENT BOND FOR FOREIGN BIDDER

Post  RJM on Tue Jun 26, 2012 12:31 am

CGM-''Ng'wigi'

I think before we go into details, we need to distinguish between the “bond” and “guarantee” as far as securities are concern. I have seen cases where the two are using interchangeably to refer the same thing although sometime not necessarily they mean the same thing. However, in some jurisdiction they could mean the same thing and in some they couldn’t depend on the interpretation one attach to them. The Standard Bidding Documents issued by PPRA recognize both bonds and guarantees and to some extent try to distinguish the two especially on the tendering process [Bid Security] but not when the contract has entered into force. Simply, bonds are issued by insurance companies (surety – normally conditions are attached on demand) while guarantees are issued banks or financial institutions (on demand - unconditional). Sometimes Banks do issue conditional guarantees. The bottom-line both are securities to protect the client in case of non-performance of supplier, contractor or service provider.

Applicability: Surety bonds are typically conditional on demand whereas bank guarantees are not conditional on demand. Normal advance payment securities are not bonds but rather guarantees as they contains optional wording for the value of the guarantee to reduce as interim payments are made under the contract. This is obvious as no one can give you an advance free of interest with guarantee which is conditional. Based on the explanation above, were you referring the bond or guarantee? It is imperative to distinguish the two in order to know what kind of risk you will bear by opting one of them.

In your submission you are talking about Performance and Advance Payment Bonds. For Advance Payment Bond it would be irrelevant if it is surety and I will urge to refer it as an Advance Payment Guarantee for two reasons; (i) guarantee because will be paid on demand by the bank or financial institution - no one can advance payment against bond which is conditional; and (ii) standard bidding documents issued by PPRA and most of the standard bidding documents if not all contain Advance Payment Guarantee forms - in case default to be paid on demand.

If we examine the forms provided in the referred bidding documents, the wordings of the guarantee and bond forms attest the explanation above. Relevant parts of the forms are reproduced below:-

Standard Bidding Documents - Non-consulting Services (Service Provider) - Performance Bank Guarantee (Unconditional)

Now therefore we hereby affirm that we are the Guarantor and responsible to you, on behalf of the Service Provider, up to a total of [amount of Guarantee] [amount in words], such sum being payable in the types and proportions of currencies in which the Contract Price is payable, and we undertake to pay you, upon your first written demand and without cavil or argument, any sum or sums within the limits of [amount of Guarantee] as aforesaid without your needing to prove or to show grounds or reasons for your demand for the sum specified therein.

Advance Payment Bank Guarantee

We, the [Bank or Financial, institution], as instructed by the Service Provider, agree unconditionally and irrevocably to guarantee as primary obligator and not as Surety merely, the payment to [name of Employer] on his first demand without whatsoever right of objection on our part and without his first claim to the Service Provider, in the amount not exceeding [amount of Guarantee] [amount in words].

Performance Bond

Now, therefore, the Condition of this Obligation is such that, if the Contractor shall promptly and faithfully perform the said Contract (including any amendments thereto), then this obligation shall be null and void; otherwise it shall remain in full force and effect. Whenever the Contractor shall be, and declared by the Employer to be, in default under the Contract, the Employer having performed the Employer’s obligations there under, the Surety may promptly remedy the default, or shall promptly:
(1) complete the Contract in accordance with its terms and conditions; or
(2) obtain a Bid or bids from qualified bidders for submission to the Employer for completing the Contract in accordance with its terms and conditions, and upon determination by the Employer and the Surety of the lowest responsive Bidder, arrange for a Contract between such Bidder and Employer and make available as work progresses (even though there should be a default or a succession of defaults under the Contract or Contracts of completion arranged under this paragraph) sufficient funds to pay the cost of completion less the balance of the Contract Price; but not exceeding, including other costs and damages for which the Surety may be liable hereunder, the amount set forth in the first paragraph hereof. The term “Balance of the Contract Price,” as used in this paragraph, shall mean the total amount payable by the Employer to the Contractor under the Contract, less the amount properly paid by the Employer to the Contractor; or
(3) pay the Employer the amount required by the Employer to complete the Contract in accordance with its terms and conditions up to a total not exceeding the amount of this Bond.


That said - now let address your concerns – in other words how do can we mitigate risks??

i.First and foremost measure – Carry out Due Diligence of the submitted securities [either bond or guarantee] - confirm with the guarantor or insurer on the authentic of the documents submitted. By getting the confirmation from the guarantor or insurer at least you are safe in case of default by the supplier, service provider or contractor. One of my friends was telling me that 70% of the securities they received they have never been collected when contracts concluded! Why? Simple – they are manufactured at “Salamander”.

ii.As a way of discouraring bonds [my own perception], client requires an amount of 30% of the contract price for this type of security [World Bank Standard Bidding Documents - Works Contracts].



RJM

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PERFORMANCE BOND & ADVANCE PAYMENT BOND FOR FOREIGN BIDDER

Post  CGM-''Ng'wigi'' on Thu Jun 14, 2012 3:35 pm

Dear Forum Members,
Suppose I have engaged the Service Provider (SP) from abroad through direct sourcing and all procedures in procurement adhered.

The payment arrangement agreed during negotiation between Employer and SP is let say 30% of the project cost upon signing the contract and the remained will be paid as per agreement during negotiation.

In procurement practice, it is required (if so specified in the contract) that before signing the contract the successful bidder to submit the performance bond in any acceptable form as specified in the contract and bidding document in a percentage specified in the contract as well as bidding document. Again it required if there is any advance payment to be paid to SP to submit the advance payment bond in the acceptable form by the Client as specified in the contract/bidding document.

My concern it comes on how the performance bond and advance payment bond will be treated for foreign bidder when and if the foreign bidder is reside ( Principal of Office Business is not in Tanzania)?. How these Bonds will be effective/how the Client can be covered if the SP will not meet his/her contract obligations?
Please help this ongoing issue to me.

CGM-''Ng'wigi''

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