Adequacy of Indemnity Afforded by Performance Bonds Used in State Sector Construction Projects

In an effort to ease off the financial burden on contractors, a government policy was enacted on first November 1997, to reduce the existing ten percent penal sum of the performance bond to five percent. There was no overall justification for this decision. The primary aim of this study is to explore the adequacy of indemnity afforded by the penal sum of five percent, for the performance bond used in construction contracts. The sample of the study has been confined to 25 state sector building projects. These projects were either completed with the same contractor with a time extension or with a new contractor after terminating the former. The main contribution of the study is the construction of several confidence intervals for the population mean of 'total loss to the client as a percentage of the contract sum'. The study reveals a more pragmatic and compromising penal sum of seven and half percent when a conducive environment prevails to procure performance bonds. Still contractors do not have cheaper and easier ways of obtaining performance bonds. Further, performance bonds are seldom called on. Hence, the study recommends that the prevailing five percent penal sum remain the same. The study also has highlighted the problems the contractors encounter in procuring performance bonds from bond providers (sureties) such as banks, insurance companies and the Construction Guarantee Fund.