Difference between earnest money deposit and bid bond

The essential commitment of a Consulting Engineer is to serve the interests of his Client as a faithful adviser adhering to his professional standards and putting all the benefits of his experience and expertise at the disposal of his Client.

The relationship between Client and Consultant, though formally set out in the Agreement, depends for its success on the development of mutual trust and co-operation. From such a relationship will develop a joint commitment to achieving the defined goal.

Current Situation Consulting Engineers in many countries are faced with a situation where they are often asked to provide Earnest Money Deposit or Bid Bond or Guarantees while bidding for tenders of consultancy work floated both by public sector and private sector. This is pushing up the costs of the consultant. The decision process gets unduly delayed thus blocking EMD for long time. Sometimes, these EMDs are even converted into security deposit, if the job is awarded.

This issue also needs to be addressed as the Security Deposit gets blocked till the end of project or even after defects liability period. Client Consultant relationship to a large extent depends on trust and mutual co-operation.

Tenderwizard

This yardstick should not be applied to "Consultants" because primarily a consultant is not a "Contractor" as the former provides services based on knowledge and experience.

Procurement of services is different from procurement of goods and works. Bid or Tender bonds In cases where Consultants are required to bid competitively, Clients sometimes require that a Tender Bond accompanies the bid.

Ostensibly the purpose of this bond is twofold. Firstly, to ensure that a bidder does not change his mind and cancel his bid and, secondly, to exclude non-serious bidders. As financial compensation does not help the Client towards his objective of securing a trusted Consultant to work with him on the project. FIDIC is not in favour of Tender Bonds.

It believes that other methods, such as pre-qualifications for a short list, followed by presentations and negotiations are more likely to succeed in securing for the Client a Consultant of integrity and trust.

Advance payment guarantees Agreements may specify that an advance payment shall be made to the Consultant to cover heavy initial costs such as mobilisation, purchase of plant, computer equipment or travel and housing costs for staff. As this type of guarantee is linked to the advance payment, the amount of the guarantee should reduce in step with the repayment of the advance.

Retentions FIDIC does not support the use of Retention of part of the Consultant's fee to supposedly ensure proper performance of the services under a consultancy agreement. On completion of the Agreement there is no further performance to guarantee and the Consultant will be already carrying liability for his performance. Performance bonds Performance Bonds, as their name implies, are designed to guarantee the proper and timely completion of the Consultant's duties under the Agreement.

The wording of such a bond is very important as it will specify the conditions under which the bond may be forfeit. Non-performance has to be established before the bond can be called. The use of Performance Bonds of this type, in Consultancy Agreements, has over the last many years almost disappeared.

They are however occasionally used in connection with Construction contracts, particularly in the United States. Performance Bonds are often issued by Insurance Companies.

FIDIC does not support the use of Performance Bonds. As the name implies an "On-Demand" Bond is given normally by a bank to a Client in a form which allows the Client to call the bond, and thus receive payment to the full value of the bond, whenever he the Client believes there to be lack of performance by the Consultant.

The bank is obliged to honour the Bond as it is payable "On-Demand" and there is no redress. Clearly a Client will normally not take such action until all other means of settling the dispute have been exhausted and the Consultant will take all possible measures to avoid putting his Client into such a position. In addition, no Client will wish to be accused of, or earn a reputation for, unjust calling. FIDIC does not believe that the use of "On-Demand" Bonds will add to the likelihood of high quality performance, and deprecates their use as they create a potentially confrontational situation which militates against successful co-operation between Client and Consultant.

Misuse of such Bonds by delaying their release is counter-productive, as it causes severe problems, and economic difficulty and loss to the Consultant involved.

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Cost It is often overlooked that all bonds, but particularly "On-Demand" Bonds, are costly to acquire and set in place, and will therefore ultimately add to the price the Client pays for the Consultant's services. In exceptional cases the Consultant may also feel that there is additional risk associated with the project and for this reason may add to his price. In general, contract guarantees, such as Earnest Money Deposit, Bid Bonds, Performance Bonds and Retention Funds, serve little useful purpose under a consultancy agreement between a Client and a Consulting Engineer.

They increase the overall cost without influencing the performance of the services.

Earnest Money Deposit (EMD): All you Need to Know

They should be avoided. Advance Payment Bonds are acceptable as they guarantee repayment of funds advanced by the Client. On-Demand Bonds are by their nature, one-sided and confrontational.

FIDIC opposes the use of these bonds. A Client and Consulting Engineer should consider that the interposition of bonds between them is likely to have an adverse effect on the relationship between them which should be based on mutual trust and cooperation. However, if a Client is obliged by local law to require a Bid Bond, the conditions should not make subsequent failure to reach agreement a justification for calling the bond, as both Client and Consulting Engineer should be free to withdraw, if there are considerations that deter either from proceeding.

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