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Contract Bond Guarantee

The Contract Bond Guarantee is available for export transactions where the exporter must provide a bond in favour of the buyer.

The NZECO does not issue the bond itself but will be guaranteeing the performance of the exporter to the bond issuer (either a bank, NZ bond provider or an overseas surety provider).  The Contract Bond Guarantee provides 100% indemnity for up to 100% of the bond value and supports a specific export contract rather than a facility.

The Contract Bond Guarantee can assist exporters when:

  • the exporter’s bank is not prepared to issue the bond because the exporter lacks sufficient security for the bond in addition to the working capital required; or
  • their buyer requires the bond to be provided by a bond provider and the exporter doesn’t have a history with that bond provider or has insufficient security; and
  • the export contract to which the bond(s) relate to contains at least 30% New Zealand value added content.

How does it work?

An exporter and their bank or bond provider will submit an application and assessment fee to the NZECO seeking a Contract Bond Guarantee.  When reviewing an application for a Contract Bond Guarantee, the NZECO will assess:

  • The exporter’s ability to perform the contract: the exporter must show a proven export trading history and that it has the managerial, technical and financial capability to perform the proposed contract;
  • The acceptability of the form and terms of the export contract and bond: including the tenor and terms of the bond, the contractual payment and delivery terms, how delays and disputes will be settled, termination rights, jurisdiction and applicable law; 
  • Buyer: the exporter’s history with the buyer, and the commercial practices or business reputation of the buyer (in part, to assess the likelihood of unfair calling of the bond).
  • Country:  the current conditions and economic outlook in the destination country.
  • NZECO criteria: whether the application fits with the NZECO’s delegation, including the NZECO’s requirement to operate in accordance with commercial principles and be self-sustaining over the longer term.

If the NZECO approves the application, it will then provide a 100% indemnity to the bank, bond provider or surety bond provider who will then issue a bond on the exporter’s behalf.  In some cases the NZECO may risk-share the level of the bond with the bank or bond provider.

As a condition of cover, the NZECO will also enter into a separate agreement with the exporter that provides the NZECO with the right to seek recourse.

How the Contract Bond Guarantee works is summarised in the diagram below:

Contract Bond Guarantee Process


Types of Bonds Covered

The Contract Bond Guarantee provides cover for the following types of bond:

  • Bid bond – a bond which protects the buyer against loss from re-tendering work when an exporter is unwilling or unable to take on a contract after being awarded the work by the exporter.  NZECO will only guarantee these bonds if the contract requires a subsequent performance and/or labour and material payment bond that also requires a NZECO guarantee.
  • Advance payment bond – a bond which protects the buyer against loss when the buyer advances funds to the exporter and the exporter does not meet their contractual obligations. 
  • Performance bond – a bond which protects the buyer from loss if the exporter does not perform under the contract.
  • Labour and material payment bond – a bond which protects the buyer from loss if the exporter does not pay the subcontractors, labourers and material suppliers who have performed under their contract.
  • Warranty / maintenance bond – a bond which protects the buyer from loss if the exporter fails to comply with their contractual obligations to rectify faults and failures after completing the contract.   NZECO will only guarantee these bonds in conjunction with a performance bond and/or labour and material payment bond that NZECO is guaranteeing.
  • Retention bond – a bond which protects the buyer from defects in work discovered after the completion of the contract even if full payment has been made to the exporter.  NZECO will only guarantee these bonds in conjunction with a performance bond and/or labour and material payment bond that NZECO is guaranteeing.

The duration of the bond will depend on the overseas buyers’ requirements and NZECO does not have a minimum or maximum term for the bond.  It is likely, however, that most contracts and the associated bonds will have duration of between 1-3 years.

The NZECO will review the terms of each bond, and will only cover bonds that have either a fixed or clearly defined tenor.

Benefits of the Contract Bond Guarantee

Benefits for a New Zealand exporter include:

  • the opportunity to secure larger contracts or unexpected orders with overseas buyers;
  • reduces the complexity of overseas bonding rules and regulations;
  • minimal security required; and
  • frees up the exporter’s working capital;
  • The NZECO can also offer the exporter unfair calling of the bond insurance.

How do I apply and what do I need?

To apply for a Contract Bond Guarantee you and your bank or bond provider need to complete the application form and pay the non-refundable assessment fee of $1,000 NZD. 

The application form outlines the information the NZECO needs to assess your application for a Contract Bond Guarantee.  As part of this assessment, the NZECO will meet with you and your bank or bond provider.

We recommend that you discuss your bonding requirements with your bank or bond provider and the NZECO as early as possible.

Premium

A premium will be charged for the Contract Bond Guarantee.  Pricing is based on a number of variables including NZECO’s exporter assessment, duration of cover, buyer risks, and contract-specific risk factors.  This pricing is fixed on a case-by-case basis and is intended to cover the risk that the NZECO is taking.

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