Review Insurances, Bonds & Warranties

Section 1

Purpose

Note on JCT editions: JCT has published the 2024 Edition. This guidance cites JCT SBC/Q 2016 clause references; the commercial and payment mechanisms are substantively unchanged in the 2024 edition, but specific clause references should be verified against the contract edition in use on any given project.

Before a building contract can be safely executed, the QS must confirm that all required insurance, bond and warranty documents are in place or will be provided within the contractually specified timescale. These documents protect the employer against the financial consequences of contractor default, insolvency, defective workmanship, third-party liability and design failure. Proceeding to construction without confirmed insurance and security arrangements is a significant risk management failure that may leave the employer unprotected.

RICS Construction Security and Performance Documents (1st edition, 2013) identifies six categories of construction security document: performance bonds, advance payment bonds, retention bonds, parent company guarantees, collateral warranties, and payment security methods (escrow accounts, project bank accounts). Each serves a distinct purpose in the security framework, and the combination required for any project depends on the contract type, the client's risk appetite, and the contractor's financial standing.

Insurances — particularly the contractor's All Risks policy, public liability cover, and (for D&B) professional indemnity insurance — must be in force from the date of contract execution. Failure by the contractor to maintain required insurances is a breach of contract entitling the employer to take out insurance at the contractor's cost under most standard forms.

Section 2

Key Principles

RICS Construction Security and Performance Documents (1st edition, 2013): defines and explains performance bonds, advance payment bonds, retention bonds, parent company guarantees, collateral warranties, third-party rights, direct agreements and payment security methods.
JCT SBC/Q 2016, Schedule 3 — Insurance Options: three insurance options — Option A (contractor insures all risks); Option B (employer insures all risks); Option C (existing structures — employer insures). Most new-build contracts use Option A.
Performance bonds: conditional/default bond; financial limit typically up to 10% of the contract sum; payable on proven contractor default. On-demand bonds (more common in international/PPP projects) are payable without proof of default.
Collateral warranties: provide third-party beneficiaries (funders, purchasers, tenants) with a direct contractual right against design consultants and the main contractor. Each warranty must be executed before the beneficiary's interest is at risk (typically before practical completion for purchaser/tenant warranties; before drawdown for funder warranties).
Contracts (Rights of Third Parties) Act 1999: alternative to collateral warranties; allows beneficiaries named in the contract to enforce specific provisions without a separate warranty; increasingly adopted in NEC4 contracts.
Project bank accounts (PBAs): joint employer/contractor account; employer pays construction certificates directly into the PBA; funds distributed to supply chain on payment due dates; monies held on trust, protected against contractor insolvency; increasingly required on public sector contracts.

Section 3

Practical Application

Step 1

Compile the insurance and security requirements schedule from the contract particulars and appendices. List all required documents: (i) contractor's All Risks insurance — minimum sum insured; (ii) public liability insurance — typically £5m–£10m per occurrence; (iii) employer's liability insurance (contractor's obligation — minimum £5m per statutory requirement); (iv) professional indemnity insurance (for D&B contracts — confirm level and retroactive date); (v) performance bond — confirm percentage and form; (vi) collateral warranties — confirm beneficiaries and forms required.

Step 2

Review the contractor's insurance certificates before contract execution. Confirm: the policy is with an approved insurer (FSA/FCA regulated); the sum insured meets the contract requirement; the policy covers the required risks; the policy period extends to at least practical completion (or the end of the rectification period for defects); and the employer is noted as an additional insured where applicable.

Step 3

Review the performance bond. Confirm: the bond is issued by an approved financial institution; the bond wording is consistent with the form appended to the tender documents; the bond amount (typically 10% of the contract sum) is correct; and the bond is dated on or before the contract execution date.

Step 4

Where a parent company guarantee (PCG) is required, review the guarantee wording. Confirm: the guarantor is the contractor's ultimate parent company (not a subsidiary); the guarantee is unlimited as to amount (or capped at the contract sum); the guarantee survives contractor insolvency; and it is executed as a deed.

Step 5

Coordinate collateral warranty execution. For each required beneficiary (funder, purchaser, tenant): confirm the form of warranty is agreed; arrange for the warrantor (contractor, architect, structural engineer, M&E engineer) to execute the warranty; confirm PI insurance and net contribution clause provisions are acceptable to the beneficiary.

Step 6

Where a project bank account is specified (public sector or NEC4 contracts): set up the PBA with the contractor before construction commences; confirm the trust deed is executed; set up the payment distribution schedule for named supply chain members.

Step 7

For D&B contracts: confirm the contractor's PI insurance covers their design obligations from the base date of the contract to the retroactive date (which must pre-date the earliest design liability). Confirm the annual renewal obligation and the right of the employer to request evidence of renewal annually.

Step 8

Document the status of all insurance and security requirements in a schedule. Only proceed to contract execution when all required documents are confirmed in place (or a clear programme for provision is agreed and documented). Retain all originals securely — insurance certificates, bond originals, PCG originals, executed warranties.

Section 4

Common Mistakes to Avoid

Executing the contract before performance bond and insurance certificates are received — the contract may require these to be provided before or on execution; failure to obtain them leaves the employer unprotected from day one.
Accepting a performance bond from an unrated or non-FCA regulated insurer — a bond is only as good as the financial strength of the bondsman; an unrated bondsman's bond may be worthless in the event of contractor default.
Not confirming the retroactive date on D&B contractor's PI insurance — a policy without an adequate retroactive date will not cover design work carried out before the policy inception date, creating an uninsured design liability gap.
Forgetting to execute collateral warranties for funders before the first drawdown — a funder whose security interest precedes the practical completion date needs warranties executed before their funds are at risk, not after.
Not retaining original executed warranty documents — originals are essential evidence of the warranty's existence and terms; copies are insufficient for enforcement purposes.
Accepting insurance certificates at face value without verification — where any doubt exists about a policy's validity, scope of cover, sum insured or renewal status, verify directly with the insurer rather than relying on the contractor's broker summary. Forged, lapsed or under-limit certificates are a recurrent source of professional liability exposure.

Section 5

APC Competency & Quick Reference

APC Competencies: Legal & Regulatory Compliance (L2) | Cost Management (L1) | Procurement & Tendering (L2) | Contract Administration (L1)

What is a performance bond and what are the two main types?

A performance bond is a financial guarantee provided by a third party (bondsman) that the contractor will perform the building contract. Two types: (1) Conditional/default bond — the bondsman pays the employer's proven losses up to the bond sum (typically 10% of contract sum) only if the contractor is in proven default; the employer must demonstrate breach and loss. (2) On-demand bond — the bondsman pays on demand, without proof of contractor default; common in PPP/PFI and international projects but relatively unusual in domestic UK construction.

What is a collateral warranty and who are the typical beneficiaries?

A collateral warranty is a separate agreement between a professional consultant (or contractor) and a third party who has an interest in the project but is not party to the main contract. Typical beneficiaries: funders (banks/lenders who need direct rights against the design team and contractor); purchasers (who buy the property after completion); tenants (who occupy under a lease). The warranty gives the beneficiary the right to sue for defects that would otherwise be barred by the privity of contract rule.

What is a project bank account and why is it used?

A project bank account (PBA) is a joint employer/contractor bank account into which the employer pays interim certificates. Funds are held on trust and distributed directly to named supply chain members on payment due dates. The trust status protects supply chain payments against contractor insolvency — funds in a PBA are ring-fenced and cannot be seized by the contractor's liquidator. PBAs are increasingly required on public sector and NEC4 contracts as a means of supporting payment down the supply chain.

Section 6

Insurances, Bonds & Warranties Checklist

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Insurance and security requirements schedule compiled from contract particulars

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Contractor's All Risks insurance certificate reviewed (sum insured, risks, policy period, approved insurer)

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Public liability insurance confirmed (minimum £5m–£10m; employer noted as additional insured)

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Employer's liability insurance confirmed (statutory minimum £5m)

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Professional indemnity insurance confirmed (D&B only; level, retroactive date, annual renewal obligation)

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Performance bond reviewed (10% of contract sum; approved bondsman; wording per tender form; dated)

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Parent company guarantee reviewed (executed as a deed; guarantor is ultimate parent; survives insolvency)

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Collateral warranties coordinated for all required beneficiaries (funder, purchaser, tenant)

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Project bank account established (where specified; trust deed executed; supply chain distribution schedule)

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All originals retained securely; insurance/security status schedule confirmed before contract execution

Section 7

CPD Learning Outcomes

Review and confirm the insurance, bond, and warranty requirements for a building contract against the RICS Construction Security and Performance Documents framework, identifying the purpose and legal structure of each document type.
Distinguish between conditional/default performance bonds and on-demand bonds, and between collateral warranties and third-party rights under the Contracts (Rights of Third Parties) Act 1999, advising clients on the appropriate protection for each project context.
Describe the operation of a project bank account, its trust status, and its role in protecting supply chain payments against contractor insolvency.

Section 8