Usman Muhammed
Federal University Of Technology Minna-Nigeria, Nigeria
E-mail: ussymamin4real@yahoo.com
Emmanuel Chidebere Eze
Federal University Of Technology Minna-Nigeria, Nigeria
E-mail: emmanueleze001@gmail.com
John Abel Tsado
Federal University Of Technology Minna-Nigeria, Nigeria
E-mail: gutsadoabelj@gmail.com
Blessing Okokun
Federal University Of Technology Minna-Nigeria, Nigeria
E-mail: blezy2003@yahoo.com
Submission: 12/08/2018
Revision: 2/08/2019
Accept: 2/27/2019
ABSTRACT
Default by contractors in
meeting the time and cost performance of a project is usually
counterproductive. Considering safety from the high financial burden of
construction projects, clients are compelled to seek a level of guarantee in
bonds to safeguard them from financial problems and provide an incentive for
proper and timely completion of the project by the contractor, thus, minimising
failures and risks. Therefore, the study assessed the level of bond utilisation
in the Nigerian construction industry, with a view to examining the benefits of
its utilisation in construction projects. A survey method was adopted in which
questionnaires were used to collect data from respondents. With a response rate
of 45.30% (164 of 362), the collected data were analysed using descriptive and
analytical scientific method. It was found that the level of bond utilisation
in the construction contract is high, with a performance bond and Advance payment
bond being the most commonly used construction bond types. Assurance of
performance and financial security are the major benefits of bond utilisation.
The study recommends that there is a need for more enlightenment of
construction participants on the various types of bond used in construction
contracts.
Keywords: Bond, Construction Industry, Construction
Professionals, Financial Experts, Insurance Experts, Nigeria
1. INTRODUCTION
The construction industry is
the cornerstone of the socio-economic development of nations of the world. It
drives infrastructural provisions such as roads, schools, hospitals and other
basic facilities (SAIDU; SHAKANTU, 2016); and the industry is adjudged the
leading sector in any country (ADEWUYI; ODESOLA, 2015).
Thus, the industry is
responsible for the physical transformation and development of the environment
(OKE at al., 2013). In spite of the enormous benefits of the construction
activities, construction projects are facing some challenges from failures,
which results to project abandonment, delay in project delivery, cost
inflation, poor quality of work and a high initial cost of the project
(OGUNSEMI; AJE, 2006). In order to guide against these challenges be-devilling
the construction industry of Nigeria, bond was introduced (OJO, 2011; OKE et
al., 2015).
A construction bond is an
instrument introduced to protect and/or indemnify its recipients against such
negative occurrence; and for its benefits to be fully enjoyed, there must be
practical implementation and enforcement of the bonding provisions and/or
conditions. (OKE et al., 2015). Although, bond in construction contract was
seen as a mere formality in the course of negotiating contractual terms and
conditions by both clients and contractors (OJO, 2011).
Bond is an essential
feature of the construction industry, and the first known record of contract
bond evolved from the Mesopotamian region around 2750BC and has been part of
the construction industry (SWEET, 2000). Bond was addressed in the first known
written legal code and the oldest surviving written surety contract,
recognizing the need to protect the taxpayer from contractor's failure. Most
standard form of building contact requires the provision of bonds by the main
contractor to the project owner (MCLYNTRE; STRISACHEK, 2005).
Contract bonds, used
seriously in the construction industry are a guarantee from a surety company to
the project owner (obligee) that the general contractor (principal) will stick
firmly to the provisions of the contract (KANGRI; BARKHEET, 2001).
The bond system is
essential in construction projects, commonly perceived to provide a level of
financial protection and incentive for proper and timely performance of the
project (HARRELL, 2003). However, in spite of the benefits of bonds, its usage
has its own problems such as increased cost to the contractor and reduces the
profitability of the project (MUHAMMED, 2012). The money that would have been
used in improving the financial position, cash flow etc., of the contractor, is
been used to obtain bonds to the client (HENRY; AMMAR, 2005).
Oke and Ogunmola (2014)
assessed the effects of retention bond on the performance of construction
projects executed by the Ministry of works in Ondo state, Nigerian. The study
reported a significant relationship between retention bond and project cost and
time performance. Hassan and Adnan (2018) assessed the problems and abuse of
performance bond in the construction Industry of Malaysia and found that the
lack of uniformity and inconsistency in the contents of guarantee/bond forms
results from the one-sided interpretations found in the contracts.
Oke and Ogunsemi (2016)
carried out a study aimed at examining the effect of stakeholders, project
characteristics and bonding decision factors on the administration of
construction bonding using structural equation modelling within Lagos and Ondo
states; and found that these variables have an effect on the success of bonded
construction projects.
In a similar but separate
study, (OKE, 2016) evaluated the risks that are associated with bonded and
unbonded projects with a view to ascertaining their effects on overall
construction projects success. The study utilised data from construction
participants in Lagos and Ondo states. The study revealed that financial
soundness of the issuer also known as credit risk has a major effect on
projects with bond while for projects without bond, liquidity risk requires the
most attention.
It is obvious that among
the few available studies on bonding especially in Nigeria, there is little or
nonexistence of studies that were carried out in Abuja, the geographical area
of this study. Thus, the need to assess the level of bonds utilisation and its
benefits among the construction companies in Abuja. The aim of this study is to
assess the level of bonds utilisation in the Nigerian construction industry.
The specific objectives of this study are to assess the level of bond
utilisation in construction projects and to examine the benefits of its utilisation
in construction projects.
The outcome of this study
will add to the body of existing knowledge available regarding bonds
utilisation and management in the construction projects. In addition, the level
of awareness of bond utilisation and benefits will improved be among
construction participants and the industry in general.
2. CONSTRUCTION BOND
A construction bond is a
written agreement in which one party (the surety) guarantees that a second
party (the principal) will fulfil its obligations to a third party BOSWELL
(2010). Bonds is a tripartite agreement between the surety, the project owner,
and the contractor on the project. Kangari and Bakheet (2001) opined that even
though the underwriting process of surety bonding is considered as a line of insurance;
it has many similar characteristics to a bank lending process because the
applicant, in either case, is being judged as a credit risk.
OKE et al. (2015) assert
that contractor most often transfers the risk of contractor default to a surety
company through the submittal of contract bonds. Bonds constitute a legal
guarantee that the project will be completed as expected. In instances where a
bonded contractor fails to perform, the bonding company will provide some form
of restitution to the owner (OKE et al., 2015)
A construction bond also is
known as contract bonds is usually undertaken by a bank or other financial
institution and is aimed at making payment to the client/employer up to a
stated aggregate amount (i.e. bond amount) in defined circumstances (NDEKUGRI;
RYCROFT, 2009).
According to Huang (2008),
construction contracts require contractors to furnish performance securities
that serve as fundamental financial management tools for project owners to
transfer contractor default risks to security providers. Were good practice is
followed in the prequalification, selection and appointment of contractors and
sub-contractors/suppliers, there may not be the need for bonds and guarantees utilisation
(JACK et al., 2006).
Bond provisions normally
increase the cost and time of a project, this was confirmed by Oke et al.
(2013) who observed a significant relationship between the cost of the bond and
initial cost; final cost; cost overrun; the number of days to secure bond;
initial time, final time and time overrun.
2.1.
Classification
of Bonds
Deng et al. (2004) pointed
out that the major difference is whether or not there is any condition to be
met before the obligee is entitled to claim the bond. Based on the bonds
condition, bonds are generally classified into two main categories according to
MICHAEL (2003), and they are conditional bond unconditional or on-demand bonds.
a)
Conditional Bonds
Conditional bonds can be
identified as that in which payment was made as conditional upon proof of
breach of underlying contract (as opposed to a mere notice of a breach) by the
contractor. Therefore, in practical
terms, the conditional bonds are considered as a security for damages which the
employer may recover in the action against the contractor (MALLESONS, 2003).
Conditional bond is also
seen as a default bond. It is a contract guarantee whereby the surety accepts
‘joint and several' responsibility for the performance of the contractor's
obligations under the building contract. In this, the contractor remains primarily
liable for his performance and not protected by the bond (SUPARDI et al.,
2011).
Conditional bonds are more
often seen in domestic construction contracts and usually provide that the
guarantor will pay the bond amount to the employer provided that certain
conditions have been fulfilled. Usually, such conditions would be the
contractor's insolvency or breach of contract. This means that the employer
will have to prove its loss before receiving any monies payable under the bond
(TCYOUNG, 2017).
b)
Unconditional Bonds
Unconditional bond or
"on demand" bond differs from conditional bonds whereby the
contractor has to pay the sum assured on the demand by the employer/client
without any proof of default. The contractor is entitled to insist that the
demand should be made in a form prescribed in the bond (MICHAEL, 2003).
It is a covenant by the
surety (usually a bank) to indemnify the employer following contractor's
default, subject to stated terms and up to a sum commonly between 10% and 20%
of the main contract sum (SUPARDI et al., 2011). In most circumstances,
unconditional bonds are required when there was a sum of money for a specific
purpose against the contractor, the contractor might enjoy the used of funds
otherwise the employer/client be protected away and improves the cash flow.
This application is more to the retention sum where the employer expects that
he was entitled to call on the bond and receive payment immediately if any
dispute arises in a contract (DANIEL, 2008).
Essentially, an
unconditional bond is made subject to conditions such as; the production of an
architect or engineer's certificate stating it's opinion that there is a breach
of the contract and the amount stated in the demand is the appropriate
compensation for the breach, authentication of the signature of the owner in
the demand and authentication of the signature of the Architect or Engineer in
the Certificate.
Furthermore condition to an
unconditional bond arises where the contract provides conditions to the payment
of the demand (for example, that the contractor is in breach and failed to
remedy the breach within X-days after receiving notice from the owner requiring
him to do so). This type of clause creates an obligation between the owner and
contractor separate from the obligation between the owner and the issuer of the
bond; this could lead to the owner being in breach of contract by calling on
the apparently unconditional bond. To avoid this problem, it is in the owner's
interest that the contract does not mention the bond or any related condition
(MALLESONS, 2003).
2.2.
Types
of Construction Bonds
According to MEHMET et al.
(2006), performance bonds and payment bonds are the common types of bonds
available in construction contracts, and those that are rarely considered in
construction contracts are maintenance bonds, supply bonds and completion
bonds. The most common construction bonds in Nigeria are bid bond, performance
bond, advance payment bond and retention bond (OJO, 2011). The common bonds
types in the US construction industry is either payment or performance
(HINCHEY, 1986).
Bond Guarantee Group
highlighted the types of bond to included; Performance Bond, Payment Bond, Bid
Bond - Proposal Bond - Financial Security Bond, Warranty Bond - Maintenance
Bond, Supply Bond, Completion Bond, Subdivision Bond - Development Bond -
Improvement Bond, Landscaping Bond, Service Contract Bond, Contract Bond -
Construction Bond. GIWA-OSAGIE (2018) states that the various bonds use in
international and local construction contracts are the tender bond, bid bond,
advance payment or repayment guarantees, and performance bonds.
However, the focus of this
study is on bid bond, performance bond, advance payment bond and retention
bond, since they are what is common among construction contracts executed in
Nigeria.
a) Bid Bonds - In this type of bond, the bidder (i.e.
contractor and surety) usually agree to be firmly and jointly bound to pay a
specified sum of money to the employer during the period of bid validity on the
occurrence of certain events or conditions (GIWA-OSAGIE, 2018). According to Bond Guarantee Group, these
bonds are usually written at 5% or 10% of the bid amount and are submitted
along with the bid proposal. A bid bond simply shows that a contractor has been
prequalified for a project and if the project is awarded to the contractor, the
bid bond guarantees that the contractor will enter into a contract with the
owner. If the contractor fails to enter into the contract, 5% or 10% may need
to be paid to the owner as damages. Generally, there is no charge for this
bond.
b) Performance bond/Payment
bond - This is the final bond
written when a contractor is awarded a project; and the bond guarantees nearly
every term and condition in the contract. That is proper workmanship, completed
on time, among others (Bond Guarantee Group). Whereas the payment bond
guarantees that all employee, subcontractors, and suppliers have been paid. The
bond guarantees the execution of the contract by the surety in the event that
the contractor fails to fully perform the contract (GIWA-OSAGIE, 2018). This
bond is usually taken out by the contractor, usually with a bank or insurance
company (in return for payment of a premium) for the benefit and at the request
of the employer, in stipulated maximum
sum of liability and enforceable by the employer, in the event of the contractor's default,
repudiation or insolvency (ROBINSON et al., 1996).
A payment bond guarantees the owner that
subcontractor's, labours and suppliers will be paid the monies that they are
due from the principal, the owner is the obligee; the "beneficiaries"
of the bond are the subcontractors and suppliers. Both the obligee and the
beneficiaries may sue on the bond. An owner benefits indirectly from a payment
bond in that the subcontractors and suppliers are assured of payment and will
continue in performance. On a private project, the owner may also benefit by
providing subcontractors and suppliers a substitute to mechanics liens, if the
principal fails to pay the subcontractors or suppliers, they may collect from
the principal or surety under the payment bond, up to the penal sum of the
bond, payment bond is often less than the total amount of the prime contract
and is intended to cover anticipated subcontractor and supplier costs (SWEET,
2000).
c) Advance Payment Bonds, according to GIWA-OSAGIE
(2018), are bonds given by the surety after the pre-tender stage when the
contract must have been awarded to the contractor or bidder. This bond ensure
that an agreed percentage of the contract sum is paid in advance to the
contractor on the strength of the surety's undertaking, or guarantee to refund
such proportion of the said advance payment received from the employer
representing the value of work not done in the event of the contractor failing
to fulfil the terms of the contract.
d) Retention bond is a guarantee or requirement to
secure a due performance which lies in the background as a reassurance to the
client at an overall loss during defect liability period that he may otherwise face
which will be cushioned, to the limit of the bond (MALLESONS, 2003). According
to JCT "98" in clause 30:3 "the employer may retain a percentage
of the value of work, materials and goods referred to the contract which is
named in the appendix as percentage of clarified value retained, provided
always that the sum of the amount so retained equals the amount named in the
said appendix as limit of retention fund which is 5%, limit of 10% of the
contract sum as at the time of tender".
Retention fund is an amount
that is due to the contractor which the client hold as a guarantee; should
there be defects on the structure during defect liability period, these funds
retained are to be used to make good such defects. Once the contractor feels
that he has put right all the defects, complained upon by the client, he is
entitled to press for the issuance of a "certificate of completion making
good defects as this is a prerequisite for the release of the other moiety of
the retention monies and must be procured before final certificate is due
(SWEET, 2000). A contractor may furnish a bond to the employer to secure an
early release of retention money; if defects are then found, the employer will
thus have a fund to call on for their rectification as especially when the contractor
fails to carry out his duties to make good such defects. Moreover, the
contractor's money's are no longer retained (MURDOCH; HUGHES, 2000).
2.3.
Benefits
of Bonds
The
main purpose of a bond is to provide some financial security in the form of a
cash sum payable by the surety for the contractor's failure to perform his
obligations under a contract (GIWA-OSAGIE, 2018). The benefits of bond
utilisation includes; It indicates that a contractor is capable of fulfilling
the obligations of the contract, bonded projects are more likely to be
completed than non-bonded projects by
the contractor, the contractor or
subcontractor bonding capacity could increase the chances of securing more
projects, the contractor could get technical, financial or management assistance
from the surety bond producer and underwriter ,
and in case of default by the contractor, the client is assured of
contract fulfilment by the surety company (SFAA). Thus, Bonds are meant to
provide financial security of the client/employer against the default by the
contractor in completing contractual obligations (ENTRUSTY GROUP, 2005).
3. RESEARCH METHODOLOGY
The study covered the
assessment of the perceptions of construction professionals, financial and
insurance experts on the level of bonds utilisation in the Nigerian
construction industry with a view to determining the benefits of bonds
utilisation in construction. The respondents are professionals in both
contracting and consulting organizations, banks and insurance companies, and
construction owner's (Clients) for both public and private sectors located in
Abuja.
The choice of Abuja was
based on the premise that Abuja is the Administrative headquarters of the
country with lots of construction firms having their head office or branches in
the country's capital as confirmed by (AJE et al., 2015). In addition, there
are a lot of construction projects being executed on a daily basis.
Furthermore, most of the professional's bodies related construction works have
either their head office or liaison office in Abuja.
According to Saidu and
Shakantu (2016), Abuja is one of the metropolitan cities in Nigeria with the
highest population of construction and other sector professionals practising in
either constructing or consulting, banking, insurance and manufacturing
companies or firms. Financial and insurance experts were considered in the
study because of the vital role they play in the issuance, insuring and
administration of bonds for construction participants.
The quantitative research
approach was adopted for the study, and well-structured questionnaires were
used to collect data on the perception of the various professionals regarding
the level of bond utilisation in the Nigeria construction industry. The
questionnaires were administered by the authors and through the help of trained
field assistants who were properly briefed about the research topic and given
the necessary information on how to administer the questionnaire.
The questionnaire was
designed in two sections using information derived from the review of the
related literature. Section A covered the general information of the target
respondents. Information gathered from
section A served as a quality check and verification of the data from the other
part of the questionnaire. Section B covered questions on the benefits and
level of bond utilisation.
The respondents were
requested to rate the level of bond utilisation by construction firms. This was
based on a 5-point Likert scale, where 1 = very low, 2 = low, 3 = Average, 4 = high, and 5 = very high.
The respondents were also, requested to rate the benefits bond utilisation in
construction contracts. This was based on a 5-point Likert scale, where 1 = Not
Important; 2 = Slightly Important; 3 = Moderately Important; 4 = Important; 5 =
Very Important.
A pilot survey was adopted
to test the suitability and appropriateness of the questionnaire to meet the
study objectives as suggested by (FELLOWS; LIU, 2008). Eighteen (8) of the
draft questionnaire were randomly distributed to the selected construction
professionals and academics and based on their feedback, the final draft was
made.
A total of 362
questionnaires were randomly distributed to target respondents within the study
area. 169 of the questionnaires were retrieved out of the 382 distributed. 5
were discarded as a result of incomplete responses. Thus, only 164 were fit for
the analysis, which represents a 45.30% valid response rate.
Akintoye (2000) suggested
that a response rate of 20 -30% is adequate for questionnaire surveys in construction
management studies. Thus, 45.30% is adequate for this study.
Frequencies, percentages,
and Relative importance index (RII) were used to analyse the collected data.
Frequencies and percentages were used to analyse the general information of the
respondents. Relative importance index was used to analyse the respondents'
perception of the level of bond utilisation and benefits of bonds to the
client. Relative Importance Index (RII)
is represented in the formula;
|
RII = |
∑ (1n1+2n2+3n3+4n4+....n(nx)) |
|
n(n1+n2+n3+n4+.....nx) |
Where, n = the constant
responding weighting given to each variable by the respondents, N= is the total
number of respondents used in the analysis
The decision-rule for
determining the level of awareness is based on the cut-off; that items with RII
of “0.81 to 1.00 are rated “very high (VH)”; 0.61 to 0.80 are rated “High (H)”;
0.41 to 0.60 are rated “Moderate (M)”; 0.21 to 0.40 are rated “Low (L)”; and
below 0.20 are rated “Very Low (VL)”.
Furthermore, the
reliability and internal consistency of the questionnaire was carried out using
Cronbach's alpha test. This test measured the reliability of each of the field
of the questionnaire and the mean of the entire fields of the same
questionnaire. The acceptable value range of Cronbach alpha is between 0.0 and
+1.0 and as the value tends toward 1, the higher the degree of internal
consistency.
The Cronbach alpha value
for the variables is 0.878 and 0.912, thereby implying that the questionnaire
is credible and have a high degree of reliability. A research instrument is
perfect as the value of the Cronbach alpha tends towards 1.0 (MOSER; KALTON,
1999). This analysis was carried out using statistical package for social
science (SPSS) Version 20.
Table 1: Reliability statistics
|
Case Processing Summary |
|
|
|||
|
|
|
N |
% |
|
|
|
Case 1 |
Valid |
164 |
100 |
Cronbach's Alpha |
0.878 |
|
Excludeda |
0 |
0 |
N of Items |
5 |
|
|
Total |
164 |
100 |
|
|
|
|
Case 2 |
Valid |
164 |
100 |
Cronbach's Alpha |
0.912 |
|
Excludeda |
0 |
0 |
N of Items |
15 |
|
|
Total |
164 |
100 |
|
|
|
|
a. Listwise deletion based on all variables
in the procedure. |
|||||
|
Case 1- Level of bond utilisation; Case 2 -
Benefits of bond utilisation |
|||||
4. RESULTS AND DISCUSSION
4.1.
General
information of respondents
The analysis of the general information of the
respondents showed that, on the basis of their categories 12.2% (20) are
contractors, 20.12% (33) are Quantity Surveyors, 12.8% (21) are Architects,
17.68% (29) are Engineers, 25.00% (41) are Bankers/insurance officers, and
12.2% are clients. In a nutshell, bank/insurance companies constituted a larger
proportion of the respondents as they are the major providers of the bonds to
the construction companies.
In terms of year of experience, 23.78% of the
respondents have experience between 0 - 5 years, 33.54% represent professionals
with 6 - 10 years, 20.12% of the respondents are professionals with 11 -
15years of experience, 16.46% represent professionals with 16 - 20, and finally
6.10% are professionals with 21years and above experience.
The average year of experience is
9.5years. In a nutshell, it was inferred
that the respondents experienced enough and information extracted from them
could be relied upon. Academically, 47.56% of the respondents hold a Bachelor degree,
while 23.78%, 26.22% and 2.44% hold a Higher National Diploma, Master degree
and Doctorate degree respectively. This shows that the respondents are
academically qualified to give an informed response that could aid the
achievement of the study aim.
Based on the class of bonds, the respondents
are more familiar with the conditional bonds than the unconditional bonds. This
is evident in their responses; (133) 81.10% of them are familiar with
conditional bonds while (31) 18.90% are familiar with unconditional.
Furthermore, the analysis revealed that the
common bond types used among construction participants are performance bond
(32.32%) and Advance payment bond (37.20%), and this is followed by retention
bond (15.24%). This finding is agreement with MUHAMMED (2012) and OKE et al.
(2015). According to These similar but separate studies, it was found that an
advance payment bond and Performance bond are the most common types of bonds
used in a construction contract in Nigeria.
Table 2:
General information of respondents
|
Category |
Classification |
Freq. |
% |
Cum. % |
|
Categories of Respondents |
Contractors |
20 |
12.20 |
12.20 |
|
Quantity surveyors |
33 |
20.12 |
32.32 |
|
|
Architects |
21 |
12.80 |
45.12 |
|
|
Engineers |
29 |
17.68 |
62.80 |
|
|
Banks/insurance |
41 |
25.00 |
87.80 |
|
|
Clients |
20 |
12.20 |
100.00 |
|
|
TOTAL |
164 |
100.00 |
||
|
Years of
experience |
0 – 5 years |
39 |
23.78 |
23.78 |
|
6 – 10 years |
55 |
33.54 |
57.32 |
|
|
11 – 15 years |
33 |
20.12 |
77.44 |
|
|
16 – 20 years |
27 |
16.46 |
93.90 |
|
|
21 years and above |
10 |
6.10 |
100.00 |
|
|
TOTAL
(Av. Year = 9.5) |
164 |
100.00 |
||
|
Academic
Qualification |
Higher National diploma |
39 |
23.78 |
23.78 |
|
Bsc/B.Tech |
78 |
47.56 |
71.34 |
|
|
Master degree |
43 |
26.22 |
97.56 |
|
|
Doctorate degree |
4 |
2.44 |
100.00 |
|
|
TOTAL |
164 |
100.00 |
||
|
Classes
of Bonds |
Conditional bond |
133 |
81.10 |
81.10 |
|
Unconditional bond |
31 |
18.90 |
100.00 |
|
|
TOTAL |
164 |
100.00 |
||
|
Common
Bond |
Bid bonds |
10 |
6.10 |
6.10 |
|
Advance payment bond |
53 |
32.32 |
38.41 |
|
|
Performance bond |
61 |
37.20 |
75.61 |
|
|
Payment bond |
15 |
9.15 |
84.76 |
|
|
Retention bond |
25 |
15.24 |
100.00 |
|
|
|
TOTAL |
164 |
100.00 |
|
4.2.
Level
of awareness of bonds utilisation
The analysis of the respondent's perception of
the level of bond utilisation is shown in Table 3. From the table it can be
seen that based on the ranking of the respondents' perceptions, performance
bond with (RII = 0.856) is ranked 1st, followed by advanced payment bond with
(RII = 0.815) and thirdly, retention bond with (RII= 0.790). With the value of
the relative important index, it can be concluded that all the respondents are
aware of the bond types used in the Nigerian construction industry, as they all
have their RII values greater than 0.50 (50%). Overall, the level of awareness
of bond utilisation is 78.41%, implying a high level of awareness since it fell
into the cut-off point of 0.61 to 0.80 set for ‘'high' level. Thus, it is
concluded that the level of bond utilisation in the Nigerian construction
industry is high.
This result supports the finding of MUHAMMED
(2012) who reported that the level of advance payment bond utilisation ranges
between 61-80%. The result of this study also contradicts some findings of OKE
et al. (2015) and MUHAMMED (2012). IT was found that the level of utilisation
of bid bond, performance bond, and retention bond ranges between 5%-60%. This
is in disagreement with the result as the least level of utilisation is in bid
bond which is 0.690 (69%) and this fell within the cut-off point for High
usages. OKE et al. (2015) who reported that on the overall, the level of
awareness of the bond assessed was very low; and retention bond had the highest
value of awareness, followed by bid/tender bond, performance bond and advance
payment bond. It was, however, found by OKE et al. (2015) that considering the
significance and usage of bond; advance payment bond and performance bond are
the most widely used and significant in the construction industry of Nigeria.
The least used are a bid bond and
retention bond.
Table 3: Level of awareness of bonds utilisation in the construction
industry
|
Responses |
|||||||||
|
S/Nr |
Type of bond |
Very Low |
Low |
Average |
High |
Very High |
Sum |
RII |
Rank |
|
1 |
Bid bonds |
17 |
36 |
12 |
54 |
45 |
566 |
0.690 |
5 |
|
2 |
Advance payment bond |
4 |
13 |
18 |
61 |
68 |
668 |
0.815 |
2 |
|
3 |
Performance bond |
2 |
10 |
9 |
62 |
81 |
702 |
0.856 |
1 |
|
4 |
Payment bond |
12 |
20 |
13 |
55 |
64 |
631 |
0.770 |
4 |
|
5 |
Retention bond |
5 |
21 |
15 |
59 |
64 |
648 |
0.790 |
3 |
|
|
Average |
|
|
|
|
|
|
78.41% |
|
4.3.
Benefits
of Bond Utilisation
Table 4 shows that the result of the analysis
of the respondents perceived the benefits of bond utilisation in the
construction industry. From the table, Assurance of performance (RII= 0.927),
Financial security (RII = 0.927), It makes the contractor have a sense of
commitment (RII = 0.918), Completion of work within the stipulated time and
cost budget (RII = 0.910), and Its guarantee that the contractor will meet its
obligations according to the terms and condition agreed upon (RII = 0.899); are
ranked 1st, 2nd, 3d, 4th and 5th respectively.
This finding supports the finding of OKE et
al. (2015) who found that bonds ensure that contractors comply with conditions
of the contract and also help to indemnify clients against default. According
to The Surety & Fidelity Association of America, financial security and
assurance of performance are key among the importance of bonds. Bonds ensure
financial security and ensure timely completion and within budget.
For example, according to Oke and Ogunmola (2014),
a retention bond has a significant relationship with construction time and cost
performance. This implies the possibilities of having project cost and time
being overrun as a result of default in the works of the contractor if there no
retention bond or at least any other bond type. Bond also guarantee financial
backing and ensure rectification of defects (OKE, 2013).
It is observed that bond utilisation in
construction contracts can assist to cushion the effects of poor performance,
which results from inefficiencies of the construction teams, faulty materials
and workmanship, financial incapacity, among other factors. This increases the
risks of failure in projects time, cost, quality, and other performance
parameters.
Oke (2013) confirmed that the use of
retention bond and other types of bonds reduces the level of risks and problems
related to the performance of construction projects. Entrusty Group (2005)
pointed out that the bonds provided for construction projects are meant to
create financial safety of the client/employer against the failure of the
contractor to complete its contractual obligations
The least ranked benefits of bond utilisation
in construction are It allows for proper monitoring (RII = 0.865), In the event
of liquidation/bankrupt of contractor, there will be a safety provision to both
parties (RII = 0.821), It saves the contractor from any obstacles (RII =
0.767), Bid validity clearly protected (RII = 0.705), and Create mutual
responsibility and discipline (RII = 0.649).
Regardless of the ranking of the variables, a
critical examination of the relative importance index value of individual
variables showed that they are highly beneficial in construction contracts. The
RII value ranges from 0.927- 0.649 which fell in within the cut-off point of
0.61 to 0.80 set for ‘'high' benefits. Furthermore, on average, the RII =
86.0%. It is, therefore, concluded that bond utilisation in a construction
contract is highly beneficial to the parties to the contract and in the
construction industry.
Table 4: Benefits of bond utilisation in the construction industry
|
S/Nr |
Benefits |
RII |
Rank |
|
1 |
Assurance of performance |
0.927 |
1 |
|
2 |
Completion of work within
the stipulated time and cost budget |
0.910 |
4 |
|
3 |
Financial security |
0.927 |
1 |
|
4 |
It saves the contractor
from any obstacles |
0.767 |
13 |
|
5 |
Increase the level of
assurance of financial utilisation |
0.89 |
8 |
|
6 |
Bid validity clearly
protected |
0.705 |
14 |
|
7 |
It guaranteed that the
contractor would meet its obligations according to the terms and condition
agreed. |
0.899 |
5 |
|
8 |
In a case of default from
the contractor, the client can call back on the bond to guard against loss. |
0.896 |
6 |
|
9 |
Transparency |
0.883 |
9 |
|
10 |
It also enables the
client to know the strength of the contractor’s ability. |
0.895 |
7 |
|
11 |
It makes the contractor
have a sense of commitment. |
0.918 |
3 |
|
12 |
In the event of
liquidation/bankrupt of the contractor, there will be a safety provision to
both parties. |
0.821 |
12 |
|
13 |
It allows for proper
monitoring. |
0.865 |
11 |
|
14 |
Create mutual responsibility
and discipline. |
0.649 |
15 |
|
15 |
It ensures proper
compliance with building standard. |
0.883 |
9 |
Average 86.0%
5. CONCLUSION AND RECOMMENDATION
Failure of Time and cost performance of
construction projects is now commonplace in the most construction industry of
the world. With contractors being blamed for much of the failures. Bonds are
obtained to safeguard clients from the financial problems and provide an
incentive for proper and timely completion of the project by the contractor to
eliminate failures and risks. This study assessed the level of bond utilisation
in the Nigerian construction industry, with a view at examining the benefits of
its utilisation in construction projects.
Based on the findings, the study concludes that
the level of bond utilisation in the construction contract is high, with a
performance bond and Advance payment bond is the most common construction bond
type. Also, Assurance of performance, Financial security, It makes the
contractor feels a sense of commitment, Completion of work within the
stipulated time and cost budget, and Its
guarantee that the contractor will meet its obligations according to the terms
and condition agreed upon are the most important benefits derived from bond
utilisation in the construction industry.
Consequent upon the finding of this study,
the following recommendation was put forward as strategies for better knowledge
on effective utilisation of bonds in the Nigerian construction industry. This
study found that some of the practitioners are lacking ideas or knowledge on
the least utilized bonds such as Retention and Payment bonds; thus, to make
bonds more effective in the Nigerian construction industry, the researchers
recommend that practitioners need to be enlightened about all types bonds used
in the construction contracts.
Considering the importance of bond, there is a need for proper
documentation of all issues relating to bonds contract.
More benefits of bond utilisation could be
identified from a similar study carried out in other regions of the country.
So, there I need for further studies in that direction. In addition, a similar
study could be carried out in the oil and gas sector of the Country, especially
at the Niger-delta region of Nigeria that is dominated by oil and gas
companies. Bond utilisation and management in construction contracts of oil and
gas companies could be assessed.
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