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In most construction-related projects, clients typically will retain 5-10% of the contract sum, in order to ensure contractors will make good on any potential defect liabilities. Retention Bonds allow contractors to be paid their full contract sum, in exchange for a small insurance premium. This quickly increases your cash flow so that you can take on more jobs, and grow your business better.
At Provide, we offer affordable Retention Bonds to help improve your cash position. Our expert brokers will work quickly with you to get the most competitive quotes available. Speak with us today for a quote!
A Retention Bond is an insurance policy that allows you to be paid 100% of your contract value, with no retained sum withheld by your client.Â
If you perform a construction, installation, or servicing project (or something similar), the client will likely retain some amount (usually 5-10%) of the total contract value. This retained amount will only be released after the contractor fulfills all their responsibilities under the defect liability period. Defect liability periods typically last between 3 to 24 months, depending on the exact project. Some major projects can have defect liability periods of between 5 to 10 years. Since the defect liability period can stretch on for a fair amount of time, contractors won’t be able to access the retained contract sum until quite some time later. This is not particularly healthy for cash flow. With a Retention Bond, you no longer have to wait for retained sums to be paid out. You don’t have to go through the hassle of chasing your client to release the remaining sum.
Let’s say you are a contactor, and you purchase a retention bond from an insurance company. The insurance company will guarantee the retained sum. Since you have a retention bond backed by an insurer, your client will have no need to impose a retained sum on the contract value, and can instead pay you 100% of your contract sum. If you don’t make good on any potential defects during the warranty period, the insurer will compensate your client. The insurer will seek to recover the claim amount from the contractor.
This arrangement prevents conflicts of interest by ensuring that the contractor continues to make good on their defect liability responsibilities. At the same time, it rewards contractors who uphold their warranty period duties by allowing them to access the full value of their contract sum. It also helps to keep the client’s mind at ease, since the client knows an insurer is backing the retention bond.
Retention Bonds are useful for contractors who want to improve their cash flow during projects.
Typically, coverage amounts will equal the size of the retained amount that the client intends to withhold until you complete the defect liability period.
 | Retention Bond | Performance Bond |
Purpose | Allow contractor to gain access to full contract sum, with no retained sum | Protect client against contractor failing to meet contract requirements (e.g. performing shoddy work, providing faulty designs, etc.) |
Common use cases | ·      Construction projects ·      Installation projects ·      Upgrading projects ·      Servicing projects | ·      Construction projects ·      Installation projects ·      Upgrading projects ·      Servicing projects |
Bond structure | Usually on-demand | Either on-demand or conditional |
Premiums for Retention Bonds typically vary between 1-3% of your retained amount. The exact premium that each applicant will pay can vary quite significantly, because bonds are underwritten across a variety of factors. The important qualities that affect Retention Bond premiums include: your company’s financial health, your client’s financial health, what your project involves and the degree of risk, whether you’ve filed any bond claims before, and who your company directors are.
With Provide, you save up to 25% on your premiums. Our digital operating model creates lower overheads, and we pass every dollar saved back to our clients.