Impacts of Remedial Rights on Construction Contractors

Addis Ababa University
Faculty of Technology South

Department of Construction Technology and Management
Impacts of remedial rights on construction contractors.

Thesis submitted in partial fulfi llment of B.Sc. Degree in
Construction Technology and Management
Solomon molla
July 2007
Impacts of remedial rights on construction contractors
APPROVED BY BOARED OF EXAMINER

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ADVISOR
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EXAMINER
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South Technology Faculty Dept of Construction Technology &

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Acknowledgement
Our heartfelt appreciation goes to Ato Solomon Sertse, who gave us invaluable
advice and guidance toward the ultimate goal of this paper.
Our thanks also go to the people who supported us in resources to full fill our
paper.
We should also mention all those who invested their precious time filling out
our questionnaires and giving us, in person, all the useful information related to
our specific concern.
Finally, we would like to express our deepest gratitude to our friends and
families especially Meti, Esayas, Hilawi for their admirable support throughout
the whole journey of this project.

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ABSTRACT
Remedial rights are provisions entitled for non-performance of contractual obligation by the
contracting parties. In this thesis the remedial right is focused only on the bases of securities that
demanded before and after the contract. The remedial right is categorized in two to bodies. The first
one is the remedial right for the client on the issuing of securities like acceleration, tender security,
liquidated damage and contract securities. The second one is the remedial rights of the contractors
on the image of the right to guarantee for their payment, time extension and remedial right on
liquidated damage.
This thesis work presents the results of the investigation on the impacts of the remedial rights on the
construction contractors. Understanding the impacts will be useful when the local law adopted from
the foreigners to take a contextual considerations. This means the clauses we take require debate
and discussions among actors in the construction industry.
The thesis is based on three bases namely methodological, conceptual and contextual frameworks.
The two conceptual and contextual frame works discussed on the subject matter of remedial rights
and the necessity of risk management and risk allocation system in the contract. In addition, it is
also reviewed on rules, regulations, and determination of premiums, conditions, exclusions and
arbitration of our Ethiopian sureties. As part of the research, we interviewed and distributed
questionnaires to the stakeholders each representing different interests in the industry.
Among other things, after the collection of data, analysis has been made. The analysis shows that
there is an impact of remedial rights on construction of contractors. Those remedial rights are
creating an opportunity cost and cash flow problem on contractors, contractors are damaging
amount of money to the employer with out proof of loose on the employer, and employers are
giving termination right with out the consent of the contractor after the limited amount of LAD is
passed. On the other hand the rules and regulation of sureties especially the government ones are
rigid.

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Table of Contents
ACKNOWLEDGMENT
Chapter one- Introduction.....................................................................................................................6

1.1-Back Ground...............................................................................................................................6
1.2-Objective....................................................................................................................................9
1.3-scope and limitation..................................................................................................................10
1.4-The study strategy.....................................................................................................................11
1.5-Organazation of the paper........................................................................................................12
Chapter two-Literature review............................................................................................................13
2.1-Contextual framework..............................................................................................................13
2.1.1-Construction industry........................................................................................................13
2.1.1.1-Overview....................................................................................................................13
2.1.1.2-What is a construction contract?................................................................................16
2.1.1.3- history of a contract agreement.................................................................................17
2.1.2-Source of contractual liability...........................................................................................19
2.1.2.1-Risk management system...........................................................................................19
2.1.2.2-contract risk allocation...............................................................................................22
2.1.2.3 -How do you contractually transfer risk to a contractor?...........................................23
2.1.3-Remedial rights..................................................................................................................24
2.1.3.1-Remedies for the employer.........................................................................................25
2.1.3.1.1-Acceleration.........................................................................................................25
2.1.3.1.2-Liquidated and Actual damage............................................................................25
2.1.3.1.3-Tender security....................................................................................................27
2.1.3.1.4-Contract security..................................................................................................29
2.1.3.1.4.1-Introduction..................................................................................................29
2.1.3.1.4.2-Parties in the contract securities...................................................................31
2.1.3.1.4.3-Types of securities........................................................................................31
2.1.3.1.4.4-Conditional and unconditional Bonds/Guarantees.......................................32
2.1.3.1.4.5-Bonds and Guarantees..................................................................................33
2.1.3.2-Remedies for the contractor.......................................................................................41
2.1.3.2.1-Overview.............................................................................................................41

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2.1.3.2.2-The difference between debt and damages..........................................................43
2.1.3.2.3-Remedies for non-payment and delay on completion time.................................43
2.1.3.2.3.1-Time extension.............................................................................................44
2.1.3.2.3.2- Tools to secure payment..............................................................................46
2.1.3.2.3.2.1-Third party guarantee............................................................................47
2.1.3.2.3.2.2-Ensuring viable legal remedies..............................................................48
2.1.4-Sureties companies............................................................................................................49
2.1.4.1-Historical background................................................................................................49
2.1.4.2-Principles of sureties..................................................................................................51
2.1.4.3-Prequalification of the contractor...............................................................................52
2.1.4.4-Contractor failure.......................................................................................................52
2.1.4.5-What does a surety bond cost.....................................................................................53
2.1.4.6-Sureties and the contract.............................................................................................54
2.1.4.7-Benefites of buying a bond/guarantee........................................................................55
2.2-Contexual framework...............................................................................................................55
2.2.1-Banks and Insurance in Ethiopia.......................................................................................55
2.2.2-Issuers of securities...........................................................................................................57
2.2.3-Securities...........................................................................................................................58
2.2.3.1-Collateral....................................................................................................................58
2.2.3.2-Work guarantee...........................................................................................................59
2.2.3.3-Work payment guarantee............................................................................................60
2.2.3.4-Third party guarantees/ guarantying loan...................................................................61
2.2.4-The policy wording for bonds under the Ethiopian insurances.........................................62
Chapter three- Research Design and Methodology............................................................................68
3.1 Description of methodology.....................................................................................................68
3.2 Rationale of Research Questions..............................................................................................70
3.2.1 Type of respondents and company profile.........................................................................70
3.2.2 Securities practiced in Ethiopian construction..................................................................71
3.2.3 The security issuing companies.........................................................................................71
3.2.4 The securities.....................................................................................................................72
3.3 The Research Sample................................................................................................................73

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3.4 Method of Analysis...................................................................................................................74
Chapter four: Results and Discussion.................................................................................................75
4.1 Introduction...............................................................................................................................75
4.2
Assessing the rules, regulations and determination of premium of bond issuers...............76
4.2.1 Arrangements of securities by issuers................................................................................76

4.2.2 Criteria used for selecting customers.................................................................................77
4.2.3 Types of collateral values..................................................................................................78
4.2.4 Fairness of collateral..........................................................................................................79
4.2.5 Conditions for premium determination.............................................................................80
4.2.6 Limitation of contracts.......................................................................................................80
4.2.7 The rules and regulations of issuers...................................................................................81
4.2.8 Default of contractors........................................................................................................81
4.3 Form of contract securities used in Ethiopia construction........................................................81
4.3.1 Types of securities.............................................................................................................82
4.3.2 Effect on the new PPAs amount of bid security................................................................85
4.3.3 Advance payment...............................................................................................................86
4.3.4 Performance bond..............................................................................................................87
4.3.5 Retention money................................................................................................................87
4.4 -Construction contractors payment guarantee, liquidated damage and compensation against
defaulting from employers..............................................................................................................91
4.4.1 Payment (retention) guarantee...........................................................................................91
4.4.2 Liquidated damage and compensation...................................................................................93
Chapter five Conclusion and Recommendation.................................................................................96
5.1 Conclusion................................................................................................................................96
5.2-Recommendation....................................................................................................................102

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Abbreviations
ADB-
Africa Development Bank
CBE-
Commercial Bank of Ethiopia
EBCA-
Ethiopian Building Construction Authority
ERA-
Ethiopian Road Authority
FIDIC-
International Federation Consulting Engineers
IDA.ITB-
Invitation To Bid
LAO-
Liquidated and Actual damage
MoWUD-
Ministry of Works and Urban Development
PPA-
Public Procurement Authority
RFI-
Request For Information

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Chapter one- Introduction

1.1-Back Ground
The construction industry is an enormously important part of any economy. Economic growth
depends on the physical infrastructure that is delivered by the construction industry and its key
participants. Construction, responsible for creating, defining and maintaining the built environment
within which most other social and economic activities take place, is by far the most important way
in which societies create new value. It provides a society with delivery mechanisms for many
aspects of its needs such as economic, social, political, environmental, public sector reform. The
industrys products are essential to mankinds physical and social day-to-day existence.
The construction industry, in global context, is a vast industry that consumes products of other
industries such as material, steel, manufacturing etc and combines complex skills and procedures.
The industry is the overall maze of large organization and smaller companies that facilitate
construction .It combines persons, firms, organizations and corporations that perform a group of
intricately related, but very different activities in construction. The size, influence and impact of
construction industry can not be completely described in just a few words, but the most prominent
characteristics would be (Ralph 2003).
1. It is vast working world wide in every country and climate.
2. It is enormous in the amount of money that projects can cost.
3. It is influential in the economy of every country and community.
4. It uses a tremendous number of people of various talents and abilities.
5. It is dynamic due to its movement toward better quality, higher/newer
technology, safer structures and better service.
6. It is creative.
7. It organized, to cover every aspect of projects from financing, to the
actual construction design and execution.

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Construction projects vary in scope, complexity and costs; however there is a fundamental flow of
necessary events throughout each project, each in its proper context to the project, and that is, every
procedure is only as complex as necessary for the project. The number of parties involved in a
construction project and their specific tasks vary over a wide range. When these parties are involved
together, they need a contractual relationship. So it is highly necessary to understand the
interrelationship and the contractual agreements between the parties for the proper execution of the
project. Here the interest of this thesis is to deal with the impact of the remedial rights that is
concerned as a contract security on the contractual relationships between Clients, Contractors and
also Bond underwriters with their impacts they generated to the contractor.
The oxford dictionary defines a contract is a written agreement or spoken agreement, especially
one enforceable by law. The contract can be between individuals, business to public institution or
public institution to an individual. In the construction industry several documents form a contract
document which is basis for a construction contract to carry out. The documents should explain in
detail of all requirements of the project in a clear and unambiguous way. The documents also
identify all the rights and responsibilities of the main actors of the contract.
Construction contracts include a set of conditions which lay down procedures of general
application. They define the terms of the contract, the rights and responsibilities of the parties to the
contract. The standard contracts in use in Ethiopia are mostly FIDIC (for international contracts),
standard conditions of contract for construction of civil works project of Ministry of Works and
Urban Development (MOUD, 1994), and National Competitive Bidding by Ethiopian Roads
Authority and from January 2006 on ward the new PPA standard conditions of contract.
Usually, especially in public construction contract the conditions of contract demands a contract
agreement with another body (e.g. like bond under writers, insurance companies or banks) out side
of the main participants of the construction contract. Since this thesis is deals with impact of the
remedial rights on construction contractors, its attention will be on the contract documents that are
made by the clients, contractors and bond underwriters. The contract documents are written
intentions of what is required by the client and what is expected from the contractor for its

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performance of work under the contract. The combination of these two concepts constitutes the
respective obligation of an agreement.
When entering into a large value contract it is usual for the employer to seek some form or forms of
security which will reduce the risk of loss in the event that something goes wrong with the
project. There are many ways in which something can go wrong. Some of the most common ways
are; the employer has insufficient funds to complete the project, the employer unreasonably delays
payment or refuses to pay, the contractors quality of work or rate of progress is so poor so that the
contract is terminated by the employer, the contractor is prevented from completing the works, the
works are damaged or delayed by natural or accidental disasters e.g. floods, fire, earthquakes etc.
While it is a relatively simple matter to insure against damages due to natural or accidental cause
but, it is more difficult to insure against the other items. So it is essential that the employer be able
to call upon the security and receive compensation. The Collins dictionary defines a security as:
something given or pledged to secure the fulfillment of a promise or obligation. Contract
securities can take a number of different forms/types e.g. bonds, guarantees and insurance. Usually
in Ethiopia insurance companies provide bonds and insurances and banks provide guarantees.
As Abebe Dinku wrote in Zede magazine (EEA 2000), in Ethiopia Performance security and Bid
security are mostly used by the consultants as one of the criteria for selecting suitable contractor. In
developed countries such Bonds are given by bonding (otherwise called surety) companies. Where
as in Ethiopia there is no registered company which delivers bond issues separately. It is
accomplished by Banks and Insurance companies. The Bond underwriters purpose is to serve as
devices to assure completion of the project by providing financial compensation for the effects of
misfortunes.
Presently, Ethiopia has relatively extensive programmes of infrastructure development. And the
infrastructure development of the country is growing faster. The construction of new regional and
international air-fields, roads, raised buildings and factory buildings are among the construction
investments to be cited. But the construction needs a constructor which has a good performance and
a financial stable Contractor. Because when construction works is considered the risk that is

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involved in construction works come into picture. In the developed world, it is almost impossible to
engage on construction projects with out producing an appropriate guarantee against defaulting. To
compensate this, the industry adjusted it self, time by time, how the risks are shared or transferred
by the participations of the industry. One of the major devices to transfer or to share a risk in the
industry is the contract document. On the contract based on the condition it gives a remedial right to
transfer or share the risk.
Remedial rights are provisions entitled for non-performances of the contractual obligation by the
contracting parties. Such rights can be entertained considering the efforts sustained by the
contracting parties in lieu of their duty to mitigate the non performances. Unless otherwise
contracting parties can prove their effort for there duty to mitigate the occurrences of nonperformances, remedial rights are not directly entitled [Wubishet 2006]. However, if those
provisions come in entitle, they will bring a claim with them. A claim is mostly concerned with
entitlement and liabilities as the result of the legally valid contract.
The following remedial rights well known in construction contracts as a security are;
Remedial rights associated with delay or in time completion of projects such as; time
extension and liquidated damage
Remedial rights associated with non-performance contractual obligation such as, demanding
securities for delay payments, demanding securities for procurement successes, demanding
securities for the performance of the contractor.
1.2-Objective
The aim of this thesis is, therefore, to explore the impacts of remedial rights on construction
contractors in our country and come up with possible ways of alleviating these impacts. In this
thesis because of the scope of the research, the remedial right is focused only on the bases of
securities that demanded before and after the contract (see also on scope and limitation section). The
remedial right is categorized in two to bodies. The first one is the remedial right for the client on the
issuing of securities like acceleration, tender security, liquidated damage and contract securities. The
second one is the remedial rights of the contractors on the image of the right to guarantee for their

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payment, time extension and remedial right on liquidated damage. Moreover, the principles of
bonds and types of Bonds policies in construction industry will be in general discussed.
Therefore, the main objectives of the thesis are;
1. To explore the major forms of contract securities used in Ethiopian
construction.
2. To explore construction contractors guarantee against defaulting from
clients.
3. To explore the practice of liquidated damage in the side of the
contractor in demanding for lost opportunities because of defaulting by
the client.
4. Assess the rules, regulations and determination and fairness of the
premium service charges bonds that are used by banks and insurance
companies that cause barriers to the Contractor in getting the contract
securities and after they got it and to assess how far local banks and
insurances are working to introduce arrangements which have not been
practiced in the industry so far.
5. Assess the impact of the remedial rights on contractors performance
and come up with possible ways of alleviating these impacts.
6. Come up with other possible methods of securities which may be
feasible and important to the contractors but not yet practiced in
Ethiopia.
1.3-scope and limitation

The scope of this study is limited to the impacts of remedial rights on construction contractors on
the basis of securities and to have a possible solution for the impacts of the remedial rights. it also
comprises assessment of the rules, regulations and determination and fairness of the premium
service charges by the sureties.
Furthermore, to see contractual source of liability, the study gives brief reviews on risk management
system and risk allocation in the contract. The reason is the remedial rights are provisions entitled

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for non-performance of the contractual obligation by the parties. This non-performance of the
contractual parties is a risk. May be this risk is any event or constraint that prevents in achieving the
projects goals and objectives. Therefore, to have a reasonable flow, the thesis tries to address the
functions of risk management briefly and discuss on contractual risk allocation which is made as a
conceptual framework so that it can help us in identifying the variables.
Limitation of the study, in the acquisition of data and information occurred because of many things,
for example:
The
willingness
to
provide
information
from
the
respondents.
The research, under our context, is written for the first time.
Therefore, there are limitations in acquiring sufficient
references in libraries.
It is also limited to local contractors that are found in Addis

Ababa,
The time constraint in preparing the study should also be

considerable.
1.4-The study strategy

This thesis has six major steps, first is identification of the problem to be studied; this is from the
existing problems of the construction industry. Secondly, literature review focuses on the trends and
practices used in the construction industry with respect to risk management system and risk
allocation system then it continues to discuss the remedial rights of the two parties and the rules,
regulations and determinations of service charge of sureties. This helps to measure the impacts in to
two conditions;
1. To fulfill the required amount of security and things that will affect the contractors are
identified clearly. For example, to furnish the security they are demanded collateral, based
on this it will lead the thesis to discover fairness of collateral value, fairness and
determination of premium, impacts will be analyzed in terms of contractors cash flow etc.

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2. On conditions of contract and in custom of our construction industry, there are practices and
security clauses that does not give a clear emphasis (does not specify a clear right to the
contractor). For example; on time extension and remedial right for liquidated damage,
remedial right for contractor on payment conditions and in his retention money etc.
The third step is identification of variables from the literature review. Fourthly, preparation and
distribution of questionnaires to the selected sample population, fifthly data collection as well as
analysis of the collected data has been made. And then the sixth step is to draw conclusions and
recommendations on how the impacts of the remedial rights are minimized.
Fig-1.1-The study strategy
1.5-Organazation of the paper

The thesis is based on three bases.
Methodological
Conceptual and
Contextual frame

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Chapter one of the studies presents the background, objective, scope and limitation and the study
strategy while the second chapter highlights literature review on the subject matter of remedial
rights and the necessity of risk management and risk allocation system in the contract. In the
literature review on the contextual and conceptual sub-titles it is also reviews on rules, regulations,
determination of premiums, conditions, exclusions and arbitration of our Ethiopian sureties is
discussed. Chapter three deals with the methodologies followed to prepare this thesis.
Chapter four is focused on with the analysis and result of the distributed questionnaires and/ or
some little interview made to samples of contractors and sureties, who have responded the
questionnaire. Finally, chapter five marks the conclusions of the research, which is backed by the
collected questionnaire and recommendation, which are essential in minimizing the impacts of the
remedial rights.

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Chapter two-Literature review

2.1-Contextual framework
2.1.1-Construction industry
2.1.1.1-Overview
The word construction means different things to different peoples but it has long been part of human
life, and has increased in importance with the added sophistication of civilization. As life became
more communal and social complexes evolved, there was an increased need for construction;
housing; storage, and so on. Also, as life became less nomadic, there came a need to maintain and
improve the structures to meet new needs.
Construction is the massive, worldwide effort to build various types of structures and facilities. This
is accomplished by assembling materials, parts, and systems into the major subsections of the
structure.
All civil works such as buildings, roads, water works, etc., can be grouped under the industry
termed as Construction Industry. The construction industry, as an industry, encompasses many firms
under it. These firms include Designers, Contract Administrators, often collectively called
Consultants, Contractors, Construction materials producing factories, financing companies, etc.and
it is an overall maze of large organizations and smaller companies that facilitate buildings. The
industry is responsible for the construction of all infrastructures.
Recent facts [Wubishet, 2005] showed that while Transport and Communication sector consumed
not less than 70% of the capital budget allotted for the Construction industry; Buildings covered
only about 13 %. Besides, about 58.2% of the federal capital budget of Ethiopia is channeled to the
development of Physical infrastructures.
These figures have indicated that the construction industry is one of the most important contributors
for the Politico-legal, economical, socio-cultural and technological development of Ethiopia. The
construction industry is one among four multi-sectoral components besides agriculture sector,
transport sector and investment that plays important role in developing countries.

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The construction business furnishes capital improvements to countries, which is very much related
to the development of investments to provide future benefit to nations. Since the construction
industry primarily represents investment, construction activities drop more than other industries
during recessions. For example, construction services considerably slowed during the devaluation of
the Ethiopian Birr in 1992. Almost all construction companies suffer out of this depression and their
activities dropped severely until 1994 whereby their suffering partially relaxed when regulation for
price escalation compensation in the form of price index came into force. However, its effect has not
been totally solved until 2000 for some projects, which are still standing and not completed.
[Wubishet, 2005]
In addition to this, the fact that construction works being a team work output, the individuals
involved in carrying out the works and their separate outputs is given the highest importance.
Hence, workers in the construction industry shall be highly motivated and well skilled. However,
the individuals shall be geared to focus on the group coordination and its output. The construction
industry in Ethiopia often makes skills more immediately rewarding and that is why mostly workers
in this industry became more prosperous professionals than in other industries. Considering the
allocated budget every fiscal year and the number of workmen involved, construction industry is
second only to agriculture in Ethiopia.

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The Construction sector in Ethiopia has undergone various organizational changes under
different governments.
Modern construction activity started in Ethiopia with the establishment of the ministry of
pubic works by order No. 38 of 1964, which had the responsibility of regulating the
government construction sector. At that time, local and private construction firms were
encouraged to engage in the construction industry and special encouragement and
incentives were given to develop the capacity of local contractors to participate in Joint
ventures and international construction Bids.
After 1974, due to the change of government, the Ministry of Housing and
UrbanDevelopment was established by proclamation No. 50/1975, replacing the ministry
of public works. As this was the era of socialism, the government had nationalized all
private construction firms, discouraged private construction enterprises and established
government- owned construction and design organizations.
Later on, the construction sector was taken out from the ministry of Housing and
Ministry of urban development and a new ministry called the Ministry of Construction
were established by proclamation No. 3/1981 with the mandate to regulate the
construction sector.
It established the Ethiopian Building Construction Authority (EBCA) as a government
body and as a supervisor to all government construction companies. This authority had
prepared and issued different standards to be observed by contractors and consulting
engineers in building construction in Ethiopia.
The need for establishing an independent regulatory body for office engineering to
control construction projects arose and government enterprise called construction design
Enterprise was established by legal Notice No. 91/1985 under the supervisory authority
of the Ministry of Construction.
AAU, Technology South Faculty, Department of Construction Technology and

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The powers, duties and responsibilities of the ministry of works and urban development
were transferred to the ministry of infrastructure by proclamation No. 256/2001. The
powers and duties of the ministry were an amalgamation of the former powers and duties
of the following executive organs.
-
Ministry of transport and communications,
Ministry of mines and Energy with respect to energy
Ministry of works and urban development with regard to the construction
sector.
At present, after the new restructuring of the ministries, on October 2005, the ministry of
works and urban development was re-established by regulation No. 471/98
CALANDER
EUROPIAN
with the mandate to develop urban infrastructure and to regulate the
construction sector.
Under the Ethiopian system of government, it is the power and duty of the ministry of
public works and urban development to administer any construction contract undergoing
in the country financed by the federal government. The reason why the ministry of works
and urban development is administering construction as an independent entity is because
of few reasons and one of them is the peculiar nature of the construction contracts. The
variety of factors makes a construction contract different from most other types of
contracts. This is because of the length of the project, its complexity, its size, site
conditions, the use of many materials, and the employment of various kinds of operatives
and the fact that the price agreed and the amount of work done by changes as it proceeds.
This makes it virtually impossible to compare it to other contracts and it leads to the title
construction contract.
2.1.1.2-What is a construction contract?

A construction contract is defined as:
An agreement all-normal and civil engineering works and operations,
Consultants agreement on construction operations,

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Labor-only contracts, and
Contracts of any value.
And in Modern Engineering (Bristol) Ltd v. Gilbert-Ash Northern

[1974] AC 689, Lord Diplock at 717B described a building contract as:
An entire contract for the sale of goods, work and labor for a lump sum price
payable by the installments as goods are delivered and the work done.
Decisions have to be made from time to time about such essential matters at the
making of variation orders, the expenditure of provisional and prime cost sums
and extension of time for carrying out the work under the contract.
It is important to realize that the Lord Diplock was referring to a contract made using a
standard form of contract. Such contracts usually make provisions for interim payments
at regular intervals as the wok proceeds, whereas a contract that is described as entire is a
product of a common law. It may make provisions for stage payments but, in essence, it
requires the contract to complete all its work before any entitlement to payment arises.
2.1.1.3- history of a contract agreement

A history of the earliest civilizations reveals that humankind has early instinct developed
and perfect codes of conduct. The valley between Tigris and Euphrates rivers in present
day Iraq is considered as the cradle of civilization, and some of the earliest codes of
conduct were developed there. Thus, codes cover all forms of activities, including
exchange rates, wages, rules of behavior, physical and monetary penalties and
specification for materials. As far back as 2000BC, the laws of Eshunnuna [GoetzeA,
200] decreed:
58: if a wall is threatening to fall and the authorities have brought the fact the knowledge
of its owner,( if nevertheless) he does not strengthen his wall, the wall collapses and
cause a freemans death, then it is capital offence ; jurisdiction of the king.
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The code of hamurabi [Meek.T.J, 1958], circa 1700BC also contained punitive
construction codes:
229: if a builder constructed a house for a seignior, but did not make his work strong with
the result that the house he built collapsed and so has caused the death of the owner of the
house, that builder shall be put to death.
230: if it has caused the death of the owner of the house, they shall put the son of the
builder.
231: if it has caused the death of the son of the owner of the house, he shall give slave for
the slave of the house.
232: if it has destroyed goods, he shall make good whatever is destroyed; and also
because he did not make the house strong which he built and it collapsed, he shall
reconstruct which he collapsed at his own expense.
The present day construction codes are basically derived from the past codes of conduct,
but enriched with experience and modern scientific research outputs. A code of practice
consists of a compendium of good practice to be used as a design aid by engineers. It
summaries briefly the basic design assumptions, procedure of analysis and provides facts
and recommendation in a logical order and simplified expressions to avoid confusion in
interpretation.
This is the reason for conditions of contracts came to picture. General and Special
Conditions of Contract is the administrative law applicable to the contract which is
legally enforcing the contracting parties. The special conditions are meant for those
particular contexts and requirements that cannot be standardized and generalized into
common conditions of contract. Clauses in both conditions of contract shall be the same.
Generally, conditions of contract cover:
Definitions and interpretations of terms used in the contract

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Contract documents priorities, supply of drawings, supplementary
documents
Obligations, Rights and Remedial Rights
Services / Goods / Works, their Measurement and Certifications
Alterations, Claims and Dispute Settlement.
Samples:
MOUD, FIDIC, PPA of standard conditions of contract and Other General and
Particular Conditions of Contract.
2.1.2-Source of contractual liability

In construction contractual relationship, there are terms and promises in which parties in
the contract are governed / administered with. That is, those terms and promises are an
administrative law, which is the legally binding part of the contract. These promises and
terms shall be enforceable by law and incorporates the rights, obligations and remedial
rights of each contracting parties [Wubishet, 2006]. When we mean right, it is having
legal or moral entitlement, and the obligation is legally or morally duty or task that is
provided because of the contract. Moreover, the remedial rights are provisions entitled for
non-performance of the contractual obligation by the parties. This non-performance of
the contractual parties is risk. May be this risk creates any event or constraint that
prevents in achieving the projects goals and objectives. The non-performance of the
parties creates a contractual liability. In reality, party with the strongest bargaining
position will transfer risk to the other parties. Therefore, before we discussed the remedial
rights first lets see the risk management system and risk allocation in the contract.
2.1.2.1-Risk management system

Risk management refers to the art of identifying, analyzing, controlling and responding to
project risk factors, in a manner, which best achieves the objectives of all participants
[Rory]. Although the contract serves as the principal risk management vehicle, parties
must begin managing and minimizing risks long before the contract is signed. To avoid

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inequities, all parties should come to the negotiating table with some idea of their risk
management goals. [Gerald.A, 2000]
Risk management requires a systematic and practical method of dealing with both the
predictable and unpredictable risks inherent in the construction industry. Contract
administrators must acquaint themselves with the risks they are to manage and develop
specific risk minimization strategies. Risk management typically involves the following
functions;
Risk identification: risk identification is the essential first step for a successful project.
Prior to negotiation, each party should assign at least one experienced person to identify
contractual and extra contractual risk. The manager must evaluate risks factors or
characteristics of a risk such as the risk event, its probability of occurrence and the
amount of potential loss or gain. The impact of possible risk can be controlled to the
extent the risks are effectively identified and managed. Risk identification is probably the
hardest and the most important part of risk management system; because, if cannot
identify a risk, it will be excluded from further analysis and therefore will not probably
respond it.
When a contract is made, there will be objectives, using the objectives as a start point it is
enough to ask a question or a statement to identify the risks. Asking or putting statements
can achieve this:
Cause to effect- if this cause happens what effect will it have on the
objectives?
Effect caused by what could cause this undesirable effect, or failure?
Where Does Risk Assessment, Insurance, Bonding and Indemnification Fit in

the Contracting Process?
Use the contract documents as your first tools

o A Request for Information (RFI) can be very useful in determining the
amounts of insurance your targeted contractors carry and how much
the coverage costs them.

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o An Invitation to Bid (ITB) and a Request for Proposal (RFP) are
commonly used in the bidding process.
o At the beginning of the process, use the Risk Assessment to decide
types and amounts of Insurance and Bonding that should be built into
the bid document
o Not forgetting about history! Has your agency, oversight agency, or
peers procured this type of service or product before?
Review solicitation or contract files.
Review past practice.
Ask the old timers.
Create your own historical reference material for future use.
Calling your agency area expert. Who Are the Agency Area Experts?
o Your Manager, program staff or managers
Impact and probability of occurrence: since risks influence all aspect of a project, each
party should quantify and measure the impact a risk will have on the project cost,
schedule, quality or profit. To analyze the impact first;
What is your agencys appetite for risk?
o Risk appetite is the degree of uncertainty an agency is willing to accept to
reach its goals.
o Risk appetite is a key factor in evaluating strategic options.
o Risk Assessment helps management consider risk appetite when setting
goals that align with overall agency strategy, and managing risks related to
that strategy.
Work with your agencys management to decide:
o What is your agencys risk tolerance?
o How much or what are your willing to risk to accomplish the mission or
activity?
o How much can your agency afford to lose in any one occurrence or in the
aggregate?

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What does your agency do (mission, goals, objectives)?
Does the activity fit the agency mission, goals, and objectives?
If for the above question the answer is NO, take management for consideration
then if the management decides YES move on. Were as if the management
decides NO, and then STOP.
Response system: each party should develop a process for formulating risk management.
What are loss prevention/ risk control methods?
Avoid the risk altogether: entirely eliminates any possibility of loss. It is

achieved either by abandoning or never undertaking an activity or an asset.
Prevent the frequency of loss: reduce the frequency or number of looses
Reduce the severity or cost of loss: lowers the severity or cost of lost.
Segregate to prevent one event from causing loss to the whole: arrange
the agencies activity and asset to prevent one event from causing loss to
the whole. In here there are two methods those are; one separate activity
and assets among several locations. The second one is, provide a duplicate
or stand by for use in case assets or activities suffer a loss.
Contractually transfer the risk: this is to insure that a contractor is

responsible for claims arising out of its acts, and has some way to pay for
losses.
2.1.2.2-contract risk allocation

Contractual risk transfer is a form of risk management, which has been employed for
many years in construction industry. It involves the allocation or distribution of risks
inherent to construction project between or among contracting parties. If done effectively,
risk transfers does not grossly or inequitably allocate all risk to one party, but instead
places risk up on parties according to their ability to control and insure against risk.
Additionally effective risk management typically generates positive results on a project
by improving project performance, increasing cost effectiveness and creating a good
working relationship between contracting parties. [Gerald, 2000]
Risk allocation in the construction industry is established by the construction contract.
Ideally, the parties, in their contract, will assign the risks and liabilities to the party best
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equipped to manage and minimize them. The contracting process provides the vehicle for
each party to negotiate, define and limit its rights in accordance with its goals. The risks
and responsibilities associated with a specific project must be clearly allocated with in the
contract. In the end, the contract serves as a framework of the law between the parties and
will establish which party has assumed or negated a particular risk in connection with the
project.
Fig 2.1 Risk transfer chain

Therefore, the goal of risk transfer should be to insure the contractor or the employer is
responsible for claims arising out of his or her acts, and has some way to pay for these
losses. The principles that are used by employers in transferring a risk are;
Contractually transfer the risk to the contractor.
They dont rely on insurance or bonds to cover all of the risks associated with
their contract
They thought Insurance and bonds as the safety net that catches when
everything else goes wrong.
They ask for appropriate insurance and bonds to cover the risk.
2.1.2.3 -How do you contractually transfer risk to a contractor?

There are four steps
1. Do a risk assessment
What is the scope of the contracted service or activity?

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What are the potential loss exposures or risks? What can go wrong?
Who can be harmed?
What is the likelihood that each of these potential loss exposures will
happen?
Rate the severity of each potential loss exposure. How bad can it be?
What could it cost?
2.
Determine the risk rating for each potential loss exposure
Determine the necessary actions for the contractual transfer of risk, such as the
use of appropriate contract templates, contract language, insurance, bonds and
risk control measures.
Use of standardized contract templates.
Use of appropriate contract language including indemnification

clauses and other non-insurance risk transfer.
3.
Use of appropriate insurance, bonds and coverage limits.
Use of appropriate risk control measures.
Review each contract.
Review each contract to insure that clauses are up-to-date and the
language is appropriate.
4.
Follow-up to insure compliance with the insurance and bonding requirements
Insure that you collect and review Certificates of Insurance. Keep a

tracking system to insure that coverages do not expire
2.1.3-Remedial rights
Remedial rights are provisions entitled for non-performances of the contractual obligation
by the contracting parties. Such rights can be entertained considering the efforts sustained
by the contracting parties in lieu of their duty to mitigate the non performances. Unless
otherwise contracting parties can prove their effort for their duty to mitigate the
occurrences of non-performances, remedial rights are not directly entitled [Wubishet,
2006]. However, if those provisions come in entitle, they will bring a claim with them. A

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claim is mostly concerned with entitlement and liabilities as the result of the legally valid
contract.
The following remedial rights are well known in construction contracts
Remedial rights associated with delay or in time completion of projects such as;
time extension, and liquidated damage.
Remedial rights associated with non-performance contractual obligation such as,

demanding securities for delay payments, demanding securities for procurement
successes, demanding securities for the performance of the contractor
Since the objective of this thesis is in assessing the impacts of the remedial rights that is
demanded from the contractor in the procurement and contracting time. Its focusing is
limited to;
1-Remedies for the employer
o Acceleration
o Liquidated damage
o Tender security
o Contract security
2-Remedies for the contractor
o Time extension
o Obtain third party guarantees; or
o Ensure that the contractor has resort to meaningful legal remedies to
collect
2.1.3.1-Remedies for the employer

2.1.3.1.1-Acceleration
When projects delay or when projects are required to be completed before its time,
project doers are obliged to accelerate their services or works to satisfy the requirements.
The project doer is entitled to compensation and time extension, if and only if delays are
justified and at the same time compensable. Otherwise, the acceleration of projects will
only serve project doers from liabilities they should cover to the project owners.
2.1.3.1.2-Liquidated and Actual damage

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Standard forms of contract in the construction industry make provisions for the payments
of liquidated or ascertained (actual) damages arising from delays in completion caused by
the contractor. Liquidated damages are typically used when a determination of actual
damages would be difficult and impossible to ascertain. The amount and application of
liquidated damages are normally set forth in the contract. Some subcontracts incorporate
the liquidated damage clauses in the prime contract. The liquidated damage amount for a
specific time period is determined before the breach occurred. Some contracts attempt to
include both liquidated damages and actual damage clauses. When both clauses are
included in the contract, then liquidation damage clause maybe invalid. If the owner
caused the delay, the liquidated damages provision will not be enforced. If there are
concurrent causes to delay, which are attributable to the owner and the contractor, the
courts will generally not enforce the clause. However, there are cases where the court has
attempted to apportion the damages.
The provisions of clause 8.7 of FIDIC1999 provided for Delay damages. It states that:
if the contractor falls to comply with Time for completion, the contractor shall subject
to pay delay damages to the employer for this default. These delay damages shall be the
sum stated in the Appendix to Tender, which shall be paid for every day, which shall
elapse between the relevant time for completion and the date stated in the taking-over
certificate. However, the total amount due under this clause shall not exceed the
maximum amount of delay damages (if any) in the Appendix to tender.
The main objective of LAD is to act as an inducement to due performance of particular
contractual obligation, or to regulate beforehand in an agreed and certain manner the
rights of the parties. Failure to do so leaves the parties the less predictable remedies
available for breach of a contract [John Adrian, 2005]. This is why LAD is distinguished
from penalties. If the intention is to secure performance of the contract by the imposition
of penalty, then the sum is a penalty; but if, on the other hand, the intention is to asses the
damages for breaches of contract, it is liquidated and ascertained damages.
Problem in liquidated damage

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When an act of prevention for which the employer is wholly or partially responsible,
prevents the contractor from completing on time, the employer cannot recover LAD
unless the contract provides otherwise. Here is the problem comes, how? A clause
providing for liquidated damages are closely linked with a clause which is provided for
an extension of time. The reason for this is that when the parties agree that if there is
delay, the contractor is liable, they envisage that, that delay shall be the fault of the
contractor and of course the agreement is designed to save the employer from having to
prove the actual damage he has sufferedif delay is the fault of the employerthe
problem can be cured if allowance can be made for that part of the delay caused by the
employer. The conditions of contract that is used in this country do not say anything
about this allowance. It is for this purpose Phillomere Lj in peak construction (Liverpool)
Ltd V.Mckinney foundation Ltd (1970) 1BLR 111 commented:
Recourse is to be had to a clause dealing with extension of time
When there is no liquidated damage provisions in the contract the owner will be able to
collect its actual damages. If the owner has any direct involvement in the project its
actual damages can include [Wubishet, 2006]:
1. Additional supervisory expense
2. Other additional expenses actually caused by the delay
3. Over head expenses incurred during the delay period
4. If project is intended to be leased reasonable value of loss of use and the
lost rents which could not have been reasonably avoided
5. If the project is not intended to be leased reasonably value of loss of use,
interest expense during the delay period
6. And any other reasonably foreseeable damages the owner may incur
including damages lost profits from a business.
2.1.3.1.3-Tender security
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Generally, the purpose of this security is for two main reasons, according the new PPA of
SBD for international competitive bidding. The first reason is for pre-securing, in order to
ensure that tenderers are serious about their tenders and those they do not withdraw their
tenders during the tender evaluation period. Employers often require tenderers to provide
financial securities to guarantee that they honor their tenders and hold them valid for the
evaluations period. The second reason is for post-securing, in order to compensate loss of
tender documents preparation, loss due to exit of the successful bidder which uses for
compensation of the costs incurred in transferring to the second lowest competitive and
qualified bidder. It also uses for post-securing of re-tendering time.
Before the PPA reproduced, the amount of the bid security, whether required as a bid
bond, in the form of cash, a certified check or payable order, bank draft, letter of credit,
or an unconditional bank guarantee, it was called a percentage of the bid or as a flat sum.
The custom was stipulating that the Birr amount of the security . . . shall be equal to 10
% of the bid price. It has, however, a certain disadvantages in that the bond or check can
not be written until the actual amount of the bid is known (frequently only a few hours
before the scheduled opening) and that the process of procuring bid bond or certified
check in effect reveals the amount of the bid and it lengths the method of corruption in
bond underwriters company. To ameliorate this, the PPA clearly defined that the' Bidder
shall furnish, as part of the Bid, a Bid Security in original form of Ethiopian Birr in the
amount specified in the BDS'. [ITB, clause 16.1]. Note that the amount of the bid security
according to the PPA is determined by the bidder it self.
The choice among a bid bond, in the form of cash, a certified check or payable order,
bank draft, letter of credit, or an unconditional bank guarantee, is up to the bidder option.
From the bidders point of view, certified checks immobilize operating funds and this
may become a serious consideration when he is bidding on several jobs at about the same
time. On the other hand, the ability to furnish a certified check on a large project indicates
some measure of the financial resources of the contracting firms bidding, an assurance
not necessarily provided by the ability of a bidder to procure a bid bond. Whichever form

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of bid security is to be used, stipulation concerning it should appear in the invitation or
advertisement. [Harold, 2ND EDITION]
Once the Letter of Acceptance has been issued and the successful bidders performance
security received, the entire bid securities (including that of the successful tenderer)
should be returned to the tenderers for cancellation.
In private work, bid guarantees are optional with the owner. Where proposals are to be
received from invited bidders only, the requirement for bid security is often omitting.
2.1.3.1.4-Contract security
2.1.3.1.4.1-Introduction
When entering into a large value contract it is usual for the employer to seek some form
or forms of security, which will reduce the risk of loss in the event that something goes
wrong with the project. Now days, it is usual that a contractor or a contracted supplier of
some high value item or goods requests a guarantee of payment from the employer, this is
not, however, common in conventional construction contracts as undertaken, for example
by ERA according to the manager of the legal services division. There are many ways in
which something can go wrong. Some of the most common ways are the following
The employer has insufficient funds to complete the project
The employer unreasonably delays payment or refuses to pay
The contractor becomes bankrupt or abscond
The contractors quality of work or rate of progress is so poor that the contract is
terminated by the employer
The contractor is prevented from completing the works
The works are damaged or delayed by natural or accidental disasters e.g. floods,
fire, earthquakes etc.

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While it is a relatively simple matter to insure against damages due to natural or
accidental causes, but it is more difficult to insure against the other items. Construction
contracts are more difficult in an international environment where the different parties to
the contract may fall under different legal systems, to those of contract, in their home
countries. It is essential that the employer be able to call upon the security and receive
compensation no matter what the origin of the cover is. It is therefore imperative that the
people responsible for the management of a project, on behave of the employer, satisfy
him that the institution providing the legal system under which the institution falls will
permit the payment of compensation in the event of a claim. [Michael Lear, April 2007]
For example as Mr. Michael Lear (contract specialist, technical assistant to build ERAs
capacity) said, one would be unwise to accept cover provided by institution based in a
country (i) with very strict controls on the movement of foreign currencies without
confirmation that payment could be made in the event of a claim or (ii) with a very high
inflation rate or non convertible currency.
Contract securities are financial guarantees to the contractors customer or to the party
financing the cost of the project. Their purpose is to guarantee that the project is
completed for the bid price and to guard the owner from liens filed by unpaid material
suppliers and subcontractors. When contracts are awarded to the lowest bidder or
negotiated to the lowest competitive and qualified bidder, the risk that the contractor may
have imperiled his ability to complete contracts or to pay his suppliers, material men and
subcontractors. This is a very real threat to the owner of the project. The owner demands
his project be built for the lowest possible price consistent with a quality job, but also
desires certainty that the contractor will be financially able to complete the project and
that liens will not be filled against the property that may adversely affect the owner.
Contractors in turn, may wish the same protection regarding to their payment from the
owner or subcontractor. [Harold, 2nd edition]
Of all documents involved in the planning, design, financing, tendering, in contracting
agreement and construction of a project, the simplest and perhaps the most

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misunderstood are the bond/guarantee, which the contractor may be, required to provide.
Now days, it is common for insurance companies or banks to receive a call from a
contractor demanding that the bond underwriter to provide a defense for the contractor
who is sued for failure not to sign the contract, failure to complete a project or for not
paying the subcontractors or material suppliers. The extent of indemnity for which the
bond underwriter is liable is limited by the amount stated in the form of bonds/guarantees
and known as the face value or penal sum. In effect, the bond underwriters have their
own means of an evaluation and analysis of the contractors financial analysis. [Robert.F
and G.Christian, 1995]
2.1.3.1.4.2-Parties in the contract securities
A contract security is a contract among at least three parties: [Wikipedia, website]
The principal - the primary party who will be performing a contractual obligation
which is the contractor
The oblige - the party who is the recipient of the security, which is the owner
The obligor - who ensures that the principal's obligations will be performed which
is the bond underwriter
Through this agreement, the bond underwriter agrees to uphold - for the benefit of the
obligee - the contractual promises (obligations) made by the principal if the principal fails
to uphold its promises to the oblige. The contract is formed to induce oblige to contract
with the principal, i.e., to demonstrate the credibility of the principal and guarantee
performance and completion per the terms of the agreement.
2.1.3.1.4.3-Types of securities
The Collins dictionary defines a security as:

Something given or pledged to secure the fulfillment of a promise or
obligation.

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Contract securities can take a number of different forms/types e.g.
A bond, defined as a written acknowledgement of an obligation to pay a sum or

to perform a contract.
A guarantee, defined as a promise, especially a collateral agreement to answer

for the debt, default or miscarriage of another.
Insurance, defined as securing of compensation in the event of loss or damage

by advance regular payments
A surety is defined as:

A person who assumes legal responsibility for the fulfillment of anothers debt
or obligation and himself becomes liable if the other defaults.
Bonds, Guarantees and Insurance can therefore be classed under the generic term of
security. Usually in Ethiopia, insurance companies provide bonds and insurances, and
banks provide guarantees. As it is expressed in chapter one, this thesis is limited up to
bonds and guarantees. Therefore, insurances are not discussed further here.
2.1.3.1.4.4-Conditional and unconditional Bonds/Guarantees
A conditional bond/guarantee sometimes termed an on-default bond/guarantee is one,

which can be called when a contractor fails to comply with its obligation under the
contract.
An unconditional bond/guarantee sometimes referred to, as an on-demand
bond/guarantee is one that may be called by the employer even when there may be no
justifiable cause for such calling. IDA, ADB and other lenders even PPA, however, state
that any unjustified calling of such a bond/guarantee, or unreasonable pressure exercised

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by an employer, would be regarded by them as contrary to the sprit and basic principles
of international procurement. [ERA guideline for securities]
Due to the increased risk, which unconditional bonds/guarantees carry, financial
institutions are likely to charge more for unconditional bonds than for conditional bonds.
FIDIC and the international contracting community object to the use on-demand
guarantees, for the reason that such guarantees can be called wit h out justification, and
their use is likely to increase the tender sum. [Michael Lear, April 2007]. On-demand
guarantees are universally known and accepted by commercial banks. PPA, in their
standard bidding documents, includes both conditional and unconditional forms of
performance guarantee.
As Mr. Lear said that it should be born in mind that notwithstanding any contractual
provision to the contrary, the employer will ultimately pay for the bond premium as it will
be reflected somewhere in the contractors price. Whilst it is generally considered that
unconditional/ on-demand bonds are onerous and inequitable, in many international
contracts, particularly in the Middle East and Africa, they are insisted upon by the
employer, as is the case with IDA and ERA.
It shall be noted that a contractor might not escape the financial consequences of default
by providing a bond, since a bond underwriters has common law rights of recovery
against the contractor. Under the Ethiopian civil code, such rights of recovery may also
be possible, depending upon the wording of the bond. Under common law system, the
bond underwriter requiring a written form of counter-indemnity or other security from the
contractor usually reinforces such rights of recovery. [Michael Lear, April 2007]
2.1.3.1.4.5-Bonds and Guarantees
Construction contracts usually require a number of different types of bonds/guarantees. In

their usual form, the obligor agrees to pay to the oblige a certain sum of money (penal
sum) in the event that the principal fails to perform the relevant contractual duties.

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Another form does however exist i.e. a surety bond via which the surety guarantees
completion of the contract. These are usually set at far higher percentage of the contract
price than conventional bonds and guarantees. It shall be noted that an employer holding
a surety bond cannot all upon the surety for payment of money he calls for completion
of the contract. [Michael Lear, April 2007]
However, what is the difference between bid guarantee or bid bond, performance
guarantee or performance bond?
Bid security can be in the form of a bid either guarantee or bid bond. While the bid
guarantee is usually issues by an authorized commercial bank, an insurance company
normally issues the bid bond. Bid bonds are generally given and are popular in
Ethiopia. Bid security (guarantee or bond), is provided by the bidder at the time of
submission of his bid, to the Client, as financial security for acceptance of a contract.
Similarly, performance security can be a bank either guarantee or performance bond.

While the performance guarantee given by a commercial bank, an insurance company
(mainly in the Ethiopia) issues the performance bond. The difference between the two
is that in case of the bond the insurance company can cover the total amount of
contract at little cost and has the obligation to pay for completion of the contract by
another contractor.
Appropriate wording for the guarantees are contained in the SBDs. However, if the
security furnished is substantially responsive to the bid documents, but differs in
wording without affecting its substance, it may be accepted. In addition, they have
difference in their validity time.
The most commonly used bonds/ guarantees encountered in international construction

are:

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1. Performance bonds/guarantees
2. Payment bonds/guarantees
3. Advance payment bonds/guarantees
4. Retention bonds/guarantees
5. Miscellaneous bonds/guarantees and Warranties
The above common forms of security are discussed further here:
The performance security
A performance security is a promise by a third party to cover any costs (in the case of a
guarantee or bond) incurred by the employer as a result of non-or poor performance by
the contractor or to complete the works (in case of surety bond) for the same reason.
These costs could relate to the employment of a second contractor to complete the works
or the demolition and reconstruction of unacceptable elements of the works etc. [Michael
Lear, April 2007]
This bond guarantees performance in accordance with the terms of the construction
contract. Obligations under the bond are identical with those of the construction contract
and hence any inadequacies in the contract will constitute similar inadequacies in the
bond. If the bond underwriter has to take over upon default of the contractor, it is obliged
to perform the work in accordance with the contract document to the amount of the penal
sum of the bond. Since the bond underwriter has no liability for costs exceeding this
amount, it is recommended that performance bonds/guarantees be written to cover 100%
of the contract price. In event of default, the bond underwriter may proceed according to
its own judgment about the best way to complete the contract. It may engage another
contractor to do so, may employ the forces of the default contractor, or may accomplish
the uncompleted portion of the work with its own forces. [Harold, 2nd edition]
In the case of IDA and ERA projects, the security is in the form of an unlimited bank
guarantee, which undertakes to cover all costs incurred. The value of the guarantee is

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usually limited to some (usually 10%) of the contract value. However, the limit of the
guarantee will depend on the nature of the works and the contractors likely to be
employing to undertake the works. The value of the guarantee will be determined, by
ERA, prior to the invitation of tenders.
Works contracts usually require the performance security to be furnishing prior to the
formal signing of the contract and within a specified period (e.g. 28 days) of the award of
the contract.
The wording of the guarantee is such that employer is entitled to utilize the guarantee
when and if they deem it necessary i.e. it is effectively a signed check made out to the
employer waiting to be cashed. It is therefore very important that the guarantee document
shall retain in a safe place. Then on satisfactory completion of the works, the employer is
required to return the guarantee to the contractor thereby releasing the contractor from all
liability with regard to the performance of the works.
Satisfactory completion must define in the contract documents. Usually satisfactory
completion will be deeming to have been achieved at one of two stages in the project.
These would either when the taking-over certificate is issue or when the defects liability
certificate is issued. The second option would provide additional security to the employer
for the duration of the defects liability period, usually one year.
In the case of PPA standard bidding documents, the Contract Security shall be valid until
a date 28 days from the date of issue of the Certificate of Completion in the case of a
Bank Guarantee and until one year from the date of issue of the Certificate of Completion
in the case of a Performance Bond. Nevertheless, where the construction contract requires
maintenance obligation over a warranty period of one year following completion, the
obligation of the bond also runs to the end of the same period. The unconditional
guarantee (contract security) and the performance bond forms recommended by PPA are
reproduced at the end of the thesis in appendix A4 and appendix A5 respectively.

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The payment security
Known more defiantly as a labor and material payment bond, this bond guarantees that
the contractors bills for labor and material incurred under the contract will be paid. The
existence of such guarantee protects the owner from liens and other claim made after
completion of the project and after final payment has been made to the contractor. The
relationship among the parties concerned is somewhat more complex than in performance
bonds since payment bonds serve the function of protecting subcontractors, material
vendors and workmen although the owner is still the obligee. [Harold, 2nd edition]
The advance payment security
Construction contracts have large initial expenditure associated with mobilization of
plant, materials, personnel and equipment. In order to assist the contractor with these
initial expenditures and reduce its financial burden, the employer will often provide an
interest free cash advance to the contractor. These advance payments are usually in the
order of five to twenty percent of the contract value, depending on the nature and location
of the works.
In order to avoid the risk of the contractor simply taking the money and disappearing, the
employer will usually require the contractor to provide some form of security to
guarantee the repayment of the loan. On PPA and ERA contracts, this security is the form
of an Unconditional Bank Guarantee and by a bank acceptable to the Employer,
denominated in Ethiopian Birr in the amount of the advance payment. The Guarantee
shall remain effective until the advance payment has been repaid, but the amount of the
Guarantee shall be progressively reduced by the amounts repaid by the Contractor.
Following the full payment of the advance payment, the security is retunes to the
contractor for cancellation. For reference purpose, the advance payment guarantee is
reproduces here after the end of this thesis in appendix A6.
The retention security

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In addition to the above performance securities, the employer usually retains a small
percentage of all interim payments made to the contractor as a further, more readily
available or liquid, security. The reason for this additional security is that the performance
security is provided by a third party and is considered to be available for more serious
failures by the contractor e.g. where the employer is required to undertake the completion
or rectification of the works. Where as retention fund is created to rectify defects or to
induce the contractor to return and rectify any defects arising after completion. Under
FIDIC clause__ created the retention fund.
Since construction contracts are usually carried out over quite lengthy periods of time, the
retention monies are often kept for periods of two years or more after completion. If the
employer becomes insolvent, what will happen to the contractor? The conditions of
contract that is used in our country they did not say anything about this. However in other
country, for instance, Britain, state in their local law; one way of ensuring this is to create
a trust of the retention monies. The retention money becomes a trust fund of which the
employer is the trustee. The employer cannot use the money in its own business and has a
duty to safeguard the fund in interest of the beneficiaries. However, there is no duty to
invest and account as trustee for the fund. A trustee of property normally has an express
duty to increase the value of the fund. Any liquidator appointed where the employer goes
bankrupt, or trustee in bankruptcy, must hand over the retention money in full. Where no
fund has been established, no mandatory injunction will be granted to create such a fund
if the employer is insolvent. The contractor becomes merely an unsecured creditor. [John
Adrrian, 2005]
In this country, not only in this country but also in those countries that have a trust fund
clause is not sufficient for such a claim to be made, as the money must be appropriated
and set aside. This requires it to be in a separate trust fund and usually in a separate bank
account.

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The value of the retained payments is usually limited to five (but sometimes ten) percent
of the contract value. However, in order to create a sizeable fund of retained payments as
early in the project as possible it is usually to deduct ten percent of all payments until the
five percent limit is reaches. [Michael Lear, April 2007]
In the event of the contractors good performance and timely completion of the works,
the retained funds are released to the contractor in two stages. The first on the issuance of
the taking-over certificate (the employer releases one-half of all of the retained funds)
and the second on the issuance of the defects liability certificate (the employer releases
the final half of the retained funds).
The retention of a potion of cash payments can create cash flow problems, for the
contractor, as it represents compensation for expenses incurred. In order to improve their
cash flow (availability of liquid cash), contractors often prefer to replace the retained cash
with a guarantee. This guarantee is, as above, a promise made by financial institution to
provide the funds necessary to rectify some particular elements of the works in the event
that proves necessary. The guarantee would be limited to the same five percent of the
contract value as the cash retention. It is important to note that in order to release one-half
of retention guarantee, it would be necessary for the contractor to provide a new
guarantee for the lesser amount. Depending on the cost of the guarantee to the contractor,
they may or may not choose to reduce the value of the guarantee. [Michael Lear, April
2007]
The FIDIC says if the performance security is in the form of the demand guarantee, and
the amount guarantee under it when the taking-over certificate is issue is more than half
of the retention money, and then the retention money guarantee will not be required. If
the amount guaranteed under the performance security when the taking-over certificate is
issue is less than half of the retention money, the retention money guarantee will only be
required for the difference between half the retention money and the amount guaranteed
under the performance security. In case of PPA and ERA standard contract document
retention guarantee are only acceptable during the defects liability period and for an

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35

amount equal to the difference between the total retention and that release on the issue of
the taking-over certificate.
As with all security documents, it is important that the retention guarantee be retained in
a safe place, as it is required to be returned to the contractor once they have fulfilled their
obligation as described above.
Miscellaneous bonds/guarantees and Warranties
Maintenance bond is given when the contractor has entered into maintenance contract in
writing with the government, employer privet person when he/she uses some sort of pace
as a rent for a specified period and duty.
In addition to the above bonds/guarantees, now days there are some securities especially
designing to the contractor that protects him/her from the consequences of the contractual
obligation. The risk that mainly faces to the contractor from the employer is late payment
or sometimes at all non-payment, none releasing the retention money in the specified
time etc. Among those guarantees that designed to the contractor are payment guarantees.
Payment guarantees are assures that the employer will pay to the contractor the money
that he/she owes. The second type is liens that have been filled against an owners
property by the contractor who have not received payment, this condition called property
overtake. In our context, there is no specified clause that requests these kinds of
guarantees.
In our country there no this kind of custom in the construction industry but what it govern
is the conditions of the contract. For example in FIDIC if clause 14.7, (a), (b) and (c) are
not fulfilled, the contractor shall be entitled to this payment without formal notice or
certification, and without prejudice to any right or remedy. In the case of PPA, if the
Employer makes a late payment, the Contractor shall be paid interest on the late payment
in the next payment.

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Warranties are closely related to surety bonds, but serve as distinct function. By means
of a warranty a contractor, subcontractor, or manufacturer certifies that the material,
product, or equipment in question will perform in accordance with the specified
requirement. Although a warranty does not necessary have to be in writing, it is common
specification practice to require that written warranties be delivered to the owner at the
time of final payment. A distinguishing characteristic of warranties is that they bind the
producer or supplier directly without interposition of the bond underwriter. A common
example of written warranty is the widely used guarantee for bituminous roofing
sometimes referred to as roof bond. Most written warranties carefully circumscribe the
conditions under which the supplier will repair or replace his product and therefore
should be scrutinized to determine the degree of protection actually provided. [Harold,
2ND edition]
Other example of warranty is liquidated damage for delay, is one of the conditions
provided to minimize or avoid delay. Liquidated damage is a specific sum of money
stipulated by the contracting parties as the amount to be recovered for each day of delay
in the delivery of the product or completion of a contract. They do not represent the
actual damages but are established in the initial contract as a substitute for actual
damages. They should represent, however, the most realistic forecast possible of what the
actual damages are likely to be.
2.1.3.2-Remedies for the contractor

2.1.3.2.1-Overview
In a contract, especially in construction contract, the parties are free to stipulate both
how much is to be paid and when payment is to be paid. They may also stipulate what
conditions have to meet before the obligation arises and how payment is to be made.
Payment need not always have to be in money (e.g., land can be exchanged in return for
services), and payment need not be in Birr. What matters is in fulfilling the obligation
required. For example, in conditions of contract the main obligation of the employer is to
pay the contractor for work and material supplied. In addition, the contractors right to

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payment depends on the wording of the contract, and that within the limits of legality the
parties were free to make arrangements they chose means the obligation depends on the
agreement and the payment structure agreed under it. The sum payable may be called: the
tender sum or the contract sum, or the contract price.
It is known that the contractors cash flow is very sensitive to changes payments regimes
on projects. This payment uses for many things. They will pay their suppliers and subcontractors at differing intervals depending on the nature of what has been provided.
Suppliers to the contractor usually invoice at the end of one month for payment at the end
of the following month. In practice, reputable contractors enjoy substantial periods of
credit after the materials have been incorporated into the works. Typically this may be up
to four to six months. Sub-contractors usually have similar waits for payment [John
Adrian, 2005]. In addition, the contractor has to pay the directly employed staff, and its
balance sheet reflects the income from work certified for payment. Most certified sums
have to be paid with in 14 days where the standard forms of contract are used.
It is critical for the contractors operation to hang on to monies received from the
employer for two reasons. Little or no-markup needs to be added to services (which
makes it more competitive when tendering) and it can operate with in limited capital (it
can also gain interest on sums due to supplies and sub-contractor) [John Adrian, 2005].
So as it said above the contractors cash flow is highly depended on the progress
payments.
In payments progress, there is no implied right to payment on account unless the contract
says so. Among the progress payment, interim certificates are most popular.
The general rule in interim certificate is; if there is no certificate, there is no entitlement
to payment. Where a certificate of payment has been issued the contractor cannot be paid
more than that sum even if it is incorrect. The only right the contractor has is to request a
correction in the next certificate. additional, there are number of grounds on which a
certificate can be challenged, including where the proper procedure has not been

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followed, or it has not been issued by the right person, or it is not in the correct form and
at the right time, or where there is fraud or collision, or the employer has interfered in the
issue or the certifier has died or become incapable [John Adrian, 2005]. All this things
creates to the contractor an untimely payment. Then the question is who will be due to the
contractor and when?
Payment clauses in the conditions of the contract usually require the certificate to be
issued and delivered. However, they do not state any guarantee to the contractor for
untimely payment. But the timely payment is a life blood of the contractor even to the
construction industry. So to protect from the consequences of employer untimely/nonpayment the contractors should have a right to claim for a debt and damages.
Nevertheless, they should know the meaning of debt and damages.
2.1.3.2.2-The difference between debt and damages
A debt is money claimed under a partys contractual obligation, whilst damages are
compensation claimed for a breach of contract. The advantage in claiming for payment of
debt is that the claimant has only to establish the following: [John Adrian, 2005]
1. That the sum is due, and any conditions precedent has been met
2. Interest is payable at the commercial rate from the date the debt is payable to
judgment date. There is now a statutory right to interest on late payments and the
standard forms of contract regulate the position. In PPA conditions of contract
clause 43.1 sated that if the Employer makes a late payment, the Contractor shall
be paid interest on the late payment in the next payment. Interest shall be
calculated from the date by which the payment should have been made up to the
date when the late payment is made at the prevailing rate of interest for
commercial borrowing for each of the currencies in which payments are made.
2.1.3.2.3-Remedies for non-payment and delay on completion time

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The advantage of remedy for untimely/non- payment is to speed up the payment of
monies due and to have a guarantee in the time of the employer insolvency or nonperformance. This may be if the contractor achieves by demanding a contract security or
by requesting a modification or addition of clauses on payment clauses. On the other
hand an employer employees a general contractor. All or some works are sub-contracted.
What remedies are available to sub-contractor against the employer if the general
contractor defaults?
Owner insolvency is a risk for every contractor on a private work of improvement.
In some Western countries, including the United States, unpaid contractors have a right to
place a lien on the property on which the project was built. These rights, called
mechanic's liens, in effect give the contractor a security interest in the construction
project. The mechanic's lien right is one way for a contractor to manage the risk of owner
insolvency or failure of payment. In Ethiopia, the local laws dont provide the contractor
with mechanic lien or some sort of guarantee.
The other thing is the time extension regarding to the default of the employer. This term
provides to the contractor an extension of time with a reasonable cost. But how is the
practice in the real word? Is it really used this term to the contractor? Or is it used to the
employer in giving to a right to liquidated damage.
Now lets see the remedies of the contractor in to two parts:
1. Time extension for delay on completion time
2. Tools to secure payment
2.1.3.2.3.1-Time extension
The need for on time completion is, where parties to the contract want to ensure its
compilation or performance by a specified date, usually to do so expressly. This is due to
the characteristic of the project (project has a start and end). Where the parties have not
done so, or the time for performance has passed, a party may well argue for an, implied

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term that the contract should be performed with in a reasonable time. This is why time in
its subject matter and its importance to the contract as a whole.
If we say this so, time extension is a provision for justified time delays. Time extension
may or may not be entitled for compensation. Using the CPM, it is only justified delays
that occur on the critical path that is compensable. In none of the conditions of contract,
the extension of time clause do not make any provisions of payment, and nor do delay
and disruption clauses make entitlement of extension of time. What they express is a
condition precedent to entitlement to compensation [Wubishet, 2006]. Therefore,
entitlement of compensation due to time extension is strongly associated with clauses of
delay and whether it is on critical activities or beyond floats in the case for non-critical
activities.
The extension of time clause in FIDIC 1999 is clause 8.8. The contract provides a
comprehensive list of matters that give rise to a relevant event, which may entitle the
contractor to an extension of time. Such a clause protects the contractor from blame for
what can be called acts of prevention by the employer since they prevent the contractor
from completing the work on time. Its primarily purpose is however, to protect the
employers right to liquidated damage. The contractor is also under a duty to use his best
endeavors to avoid delay no matter how caused. Under the provision of clause 8.4, the
following relevant events entitle the contractor to make an application for an extension of
time to complete the contract:
Force majeure: It can be defined as an act of God. It may have a wider

meaning in the context of the standard forms and includes man-made events or
interventions, which may be beyond the control of the party relying on it.
Exceptionally adverse weather conditions: In here what they take in to account

is not only the extent of time lost was exceptional, but also the weather is
exceptionally adverse so as to give rise to delay causes. Adverse includes
extremes of heat and dryness. Weather records are required to prove that the
weather was exceptionally compared to the norm.

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Unforeseeable shortages in the availability of personnel or Goods caused by

epidemic or governmental actions.
Any delay, impediment or prevention caused by or attributed to the employer, the

employers personnel, or the employers other contractors on the site.
Variations or other substantial changes in the quantity of an item of work included

in the contract
If the contractor considers himself to be entitled to an extension of the time for

compilation, the contractor shall give notice to the engineer in accordance the clause of
contractors claim. The clause has number of requirements: notice is to be given
immediately, not later than 28 days after the contractor became aware. On this clause, in
neither FIDIC nor MOUD, PPA there is no detail word by word what should contain the
written claim. But, heartily it shall contain in written notice include the cause or causes of
delays; the notice must identify any event, particulars of the effect of the relevant event
and an estimate of the extent of delay.
This clause requires the engineer up on receiving the notice, particulars and estimates to
give in writing extension of time. If in his opinion the event(s) is a relevant event and it is
likely to delay the completion of the work. The fixing of the new completion date has to
be fair and reasonable. The engineer shall review previous determination and may
increase, but shall not decrease, the total extension of time.
Generally in this time extension clause, the primary effect is to relieve liabilities of delay
damages such as liquidated damages. However, if found justified for compensation, it
will also bring in entitlements for monetary claims.
2.1.3.2.3.2- Tools to secure payment

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Basically there are two methods for securing payment on a construction project:
Obtain third party guarantees.
Ensure that the contractor has resort to meaningful legal remedies

to collect.
2.1.3.2.3.2.1-Third party guarantee

Third party guarantee can take many forms, including letters of credit, bonds and
guarantees. Regardless of the form, the third party guarantees should be issued by a
substantial and strengthens bank or insurance.
Payment guarantees now are being sought more often by international contractors. This
reality is reflected in FIDIC's 1999 decision to add a Form of Payment Guarantee By
Employer as an annex to the revised Red Book and the new Yellow Book.
FIDIC Form of Third Party Guarantee
To incorporate the FIDIC Form of Third Party Guarantee into a prime contract, a
contractor need only attach the form as an exhibit to the contract and include the
following language in the prime contract:
The Employer shall obtain (at his cost) a payment guarantee in the amount of 20% of the
Contract Sum, and provided by an entity approved by the Contractor (said approval not to
be unreasonably withheld). The Employer shall deliver the guarantee to the Contractor
within 28 days after both parties have entered into the Contract. The guarantee shall be in
the form set forth in Annex __ [enter its letter or number] hereto. Unless and until the
Contractor receives the guarantee, the Contractor shall not be required to commence
work and the Contract Time shall not run. The guarantee shall be returned to the
Employer at the earliest of the following dates:
a) When the Contractor has been paid the agreed Contract Sum;

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b) When the obligations under the guarantee expire of has been
discharged; or
c) When the Employer has performed all obligations under the Contract
Contractors response to a refusal to provide a third party guarantee
Unfortunately, the reality is that owners typically are reluctant to provide third party
guarantees. The guarantees usually are expensive and provide no value as far as the
owner is concerned. Local contractors are not as concerned about owner insolvency.
This may cause the owner to reject requests for third party payment guarantees. If the
owner will not provide a third party guarantee, then the contractor's next step is to
attempt to secure a viable legal remedy in case the owner breaches the contract or
becomes insolence
.
2.1.3.2.3.2.2-Ensuring viable legal remedies
Arbitration
Legal remedies are purely a matter of contract. Dispute resolution provisions are
something that every contractor should review and consider in connection with every
contract. For example, international contractors did not agree to have disputes resolved
under local laws and in local courts. The court systems may be undeveloped, corrupt or
biased against outsiders. And, as discussed below, they believe arbitration award often is
much more enforceable than a court judgment. Constructions that are taken by
international contractors, in ERA, have this kind of custom.
The most popular arbitration rules for international construction projects in Africa is;
International Chamber of commerce(ICC)
United
Nations
Commission
on
International
Trade
law(UNCITRAL)

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Advance payment as an insolvency hedge

It may be the case that the employer will not provide any payment guarantees or security.
In other words, even though the contractor has understood and tried to implement
everything we have discussed up to this point, if the contractor wants the job, the
contractor
must
agree
to
the
employer's
terms
on
these
issues.
This is when the advance payment can become a factor. It is common in Asia and South
Africa for prime contracts to provide that the contractor will receive advance payment,
within a fixed period of time following execution of the contract, of 10 to 20 percent of
the contract sum. In a negotiation in which the employer has rejected the contractor's
request for new provisions of payment guarantees, the contractor can take the moral high
ground by asking for a substantial advance payment. The contractor's position is: "You
would not give me any payment guarantees. At least give me a 20 percent advance
payment."
This is quite a reasonable request, particularly when the contractor posts an Advance
Payment bond/guarantee.
The Advance Payment provides a hedge against owner insolvency. The 20 percent is
reduced proportionally as each progress payment is processed by crediting a portion of
the 20 percent against each progress payment. So until the end of the project, there still is
some paid but unearned money in the contractor's possession that the contractor can use
to cover non-payment in the event of owner insolvency.
2.1.4-Sureties companies
2.1.4.1-Historical background

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Surety bonds have been a valuable tool for centuries. The first known record of contract
surety ship was an etched clay tablet from the Mesopotamian region around 2750 BC.
According to the contract, a farmer drafted into the service of the king was unable to tend
his fields. The farmer contracted with another farmer to tend them under the condition
they split the proceeds equally. A local merchant served as the surety and guaranteed the
second farmers compliance. [Sio.org, website]
Surety ship was addressed in the first known written legal code, the Code of Hammurabi,
around 1792-1750 BC. A Babylonian contract of financial guarantee from 670 BC is the
oldest surviving written surety contract. The Roman Empire developed laws of surety
around 150 AD that exist in the principles of surety ship today. [Meek, T.J, 1958]
While surety ship has a long history, it was not until the 19th century that corporate bond
underwriters were used. Recognizing the need to protect taxpayers and public property
from contractor failure, in the United State Congress passed the Heard Act in 1894, which
required surety bonds on all federally funded projects. From this on wards the concept of
bonding and risk transfer comes to the mind of all investors in the construction industry.
How one evaluates and manages risk on construction projects and makes fiscally
responsible decisions to ensure timely project completion is important. To gamble on a
contractor whose level of commitment or qualification is uncertain or who could become
bankrupt halfway through the job, can be a costly decision. How can a public agency
using the low-bid system in awarding public works contracts be sure the lowest bidder is
dependable? How can private sector construction project owners manage the risk of
contractor failure?
Surety bonds provide financial security and construction assurance by assuring project
owners that contractors will perform the work and pay specified subcontractors, laborers,
and material suppliers. A surety bond is a risk transfer mechanism where the surety
company assures the project owner (oblige) that the contractor (principal) will perform a
contract in accordance with the contract documents.

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2.1.4.2-Principles of sureties
To bond a project, the owner specifies the bonding requirements in the contract
documents. Obtaining bonds and delivering them to the owner is the responsibility of the
contractor, who will consult with a surety bond producer. Subcontractors may also be
required to obtain surety bonds to help the prime contractor manage risk, particularly
when the subcontractor is a significant part of the job or a specialized contractor that is
difficult to replace.
Most surety companies are subsidiaries or divisions of insurance companies, and both
surety bonds and traditional insurance policies are risk transfer mechanisms regulated by
state insurance departments. However, traditional insurance is designed to compensate
the insured against unforeseen adverse events. The policy premium is actuarially
determined based on aggregate premiums earned versus expected losses. Surety
companies operate on a different business model. Surety is designed to prevent loss.
Because of the tremendous financial exposure to the surety, bond underwriting involves
an evaluation and analysis of the contractors finance. The ability to obtain adequate
bonding is governed by the contractors financial strength. The surety may also place
limitations on the type, size, location, and number of contracts to be undertaken by its
principal and will probably insist that the contractor obtain all his bonding from one
source in order to maintain that control. Thus, the relationship between the contractor and
its surety is ongoing. (www.wikipedia.org)
The surety limits the contracts to be undertaken for various reasons. Size and number are
limited so that the contractor does not become overextended financially. The type of
contract undertaken is limited to those areas in which the contractor is experienced in
order that a journey through uncharted territory not results in financial ruin for the
contractor and exposure to loss for the surety. Most sureties will limit the geographic area
in which a contractor may bid for work under the belief that too many projects far from

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the contractors home base interfere with the contractors ability to properly control the
job. [Robbert F. and G. Christian]
Therefore, the surety pre-qualifies the contractor based on financial strength and
construction expertise. Since the bond is underwritten with little expectation of loss, the
premium is primarily a fee for prequalification services, although sureties also use
industry-wide loss costs and loss severity studies to determine premium
2.1.4.3-Prequalification of the contractor

Sureties are able to accept the risk of contractor failure based on the results of a thorough,
rigorous, and professional process in which sureties pre-qualify the contractor. This
prequalification process is an in-depth look at the contractor's business operations. Before
issuing a bond, the surety company must be fully satisfied, among other criteria that the
contractor has: [Sio.org, website]
Good references and reputation;
The ability to meet current and future obligations;
The experience matching the contract requirements;
The necessary equipment to do the work or the ability to obtain it;
The financial strength to support the desired work program;
An excellent credit history; and
An established bank relationship and line of credit.
Before issuing a bond, the surety company must be satisfied that the contractor runs a
well-managed, profitable enterprise, keeps promises, deals fairly, and performs
obligations in a timely manner. Surety bonds have played an important role in the
construction industrys success, allowing the industry to sustain its position as one of the
largest contributors to the nations economic stability and growth.
2.1.4.4-Contractor failure

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Construction is a risk-filled enterprise, and even capable and well-established contractors
can ultimately fail. For instance, recently, the second largest Germanys construction
company in the world has failed. Also, According to BizMiner, in the United States of
America, out of 853,372 building (non-single-family), heavy/highway, industrial
buildings/warehouses, hotel/motel and multifamily home construction, and specialty
trade contractors operating in 2002, only 610,357 were still in business in 2004. Despite
the suretys rigorous prequalification process, sometimes contractor default is
unavoidable. However, when a contractor fails on a bonded project, it is the surety
company that remedies the defaultnot the project owner or taxpayers. [Sio.org,
website]
In the unfortunate event that a bonded contractor does default, the surety has legal
obligations to the project owner and the contractor. First, the owner must formally declare
the contractor in default. Then the surety company conducts an impartial investigation
prior to settling any claim. This protects the contractors ability to pursue legal recourse
in the event that the owner improperly declares the contractor in default. When there is a
proper default, the suretys options often are spelled out in the bond. These options may
include the right to re-bid the job for completion, bring in a replacement contractor,
provide financial and/or technical assistance to the existing contractor, or pay the penal
sum of the bond. [Henry A., 1961]
2.1.4.5-What does a surety bond cost

Bond underwriters premiums vary from one surety to another, but can range from one
percent to ten percent of the contract amount, depending on the size, type, and duration of
the project and the contractor. Typically, there is no direct charge for a bid bond. In many
cases, a performance bond incorporates the payment bond and a maintenance period.
When bonds are specified in the contract documents, it is the contractors responsibility
to obtain them. The contractor includes the bond premium amount in the bid and the
premium generally is payable upon execution of the bond. If the contract amount
changes, the premium will be adjusted for the change in contract price. Contract surety

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bonds are a wise investment protecting public owners, private owners, lenders, and
prime contractors from the potentially devastating expense of contractor and
subcontractor failure.
2.1.4.6-Sureties and the contract

Since construction contracts always, if the owner may order changes in the work without
invalidating the contract, a question arises as to whether such changes may invalidate the
contract securities. By the terms of the bond, the surety guarantees performance in
accordance with the obligations stated in the construction contract at the time both are
executed. However, since the surety is not a party to the construction contract, changes
made by owner and contractor appear to bind the surety to contractual agreements made
without its consent. Such a situation might discharge the bond, although there is opinion
that as long as the original contract contains specific provision for changes, the surety is
obligated to accept such modification. (Henery.A, 1961)
In order to eliminate uncertainty in this connection, many bond forms incorporate a
statement that the surety waives notice of any alteration or extension of time made by the
owner. Provisions of this nature are mandatory in federal government construction
projects. Even with this statement, included, substantial changes in the scope of a project
should not be undertaken without notifying the surety. At some point, the scope of a
change may appear sufficiently great to constitute in effect the making of different
contract; nevertheless, there will be some limit to expansion of the suretys obligations
under the change order mechanism that the courts would uphold.
It must be borne in mind that the surety has relied on the terms of the contract between
owner and contractor in appraising the risk when furnishing the bond. Consequently, it is
fully as important that the owner strictly observe its terms, as does the contractor.
Changes in the handling of retained percentages or payment schedules should never be
undertaken without consent of surety, and the concurrence of surety must be obtained
before making final payment to the contractor.

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2.1.4.7-Benefites of buying a bond/guarantee

After analyzing the risks involved with a construction project, consider how surety bonds
protect against those risks. Owners, lenders, taxpayers, contractors, and subcontractors
are protected because:
The contractor has undergone a rigorous prequalification process and is judged

capable of fulfilling the obligations of the contract;
Contractors are more likely to complete bonded projects than non-bonded projects
since the surety company may require personal or corporate indemnity from the
contractor;
Subcontractors have no need to file mechanics liens on a private project when a

payment bond is in place;
Bonding capacity can increase a contractors or subcontractors project

opportunities;
The surety bond producer and underwriter may be able to offer technical,
financial, or management assistance to a contractor; and
The surety company fulfills the contract in the event of contractor default.
Any contractorwhether in business for one year or 100, large or small, experienced or
novicecan experience serious problems. Through the years, surety bonds have held fast
as a comprehensive and reliable instrument for minimizing the risks in construction.
2.2-Contexual framework
2.2.1-Banks and Insurance in Ethiopia
Historical overview

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51

Modern bank in Ethiopia has started following the agreement that was reached in 1905
between Emperor Minilik II and Mr.Ma Gillivray, representative of the British owned
National Bank of Egypt marked the introduction of modern banking in Ethiopia.
Following the agreement, the first bank called Bank of Abyssinia was inaugurated in Feb.
16, 1906 by the Emperor. The bank was totally managed by the Egyptian National Bank
and the following rights and concessions were agreed upon the establishment of Bank of
Abyssinia. Later on due to different reasons it was needed to establish government bank
and transformation of ownership of Abyssinia bank took place in 1931 and the new bank,
called Bank of Ethiopia. It was the first national owned bank in Africa. This bank
operated until the Italian invasion in 1936. From 1936-1942 years were marked by the
Italian occupation where only a few Italian banks were operating.
After the victory over Fascist Italy, the state Bank of Ethiopia was established by a
proclamation issued in August 1942. Although the intention was to establish it as a fullfledged commercial bank, a year later it was given additional central banking duties.
Thus, the state Bank of Ethiopia provided central banking and commercial banking
functions until it was splited in 1963 to form the two banks- the National Bank of
Ethiopia and Commercial Bank of Ethiopia. Accordingly with the issuance of the
monetary proclamation in 1963, the National Bank of Ethiopia and the CBE were
established to handle the national banking and commercial banking functions,
respectively.
During the socialist period the banking system has changed in to mono banking system
and dominating the banking business all over the country. But in the periods [1994-1998]
were characterized by the countrys shift from a command economy to market-oriented
economy; due to a policy redirection. The new banking proclamation, enacted in 1994,
has created several new opportunities for the private sector to be involved in the banking
sector. This enable to relinquish its monopoly position in the countrys banking industry.
The development of insurance also has its own part in history. For instance, Marine
insurance is considered to be the oldest known type of insurance. Something similar to it
was practiced at least 1000 years before the Christian era while the present day form of

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Marin insurance probably began around the eleventh or twelfth century. The early
development of life insurance was closely linked with that of Marin insurance. The
industrial revolution in Europe necessitated the development of fire and accident
insurance. Then came motor, engineering and aviation insurance [Hansell, 1974].
Despite the advancement of insurance as a commercial business, it is little understood
and exercised in the Ethiopian society in general and the construction industry in
particular. There are, currently, greater than ten government owned and private insurance
companies in Ethiopia. Most of them, especially the private insurance companies, are
new to business but show a remarkable development since their establishment in the last
ten years.
2.2.2-Issuers of securities
In the construction industry of Ethiopia bonds and guarantees are issued by insurances
and banks. Both bonds, issued by insurance companies, and guarantees, issued by banks
have their own advantage and disadvantage.
Banks usually regard securities/guarantees as an extension of contractors line of credit
and as they usually know a contractor better than an insurance company would, the
guarantees can normally be issued more speedily. When a guarantee is issued by bank
however, the magnitude of the guarantee may affect the availability of that banks line of
credit to the contractor, which could have adverse repercussion on the contractors ability
to adequately fund the contractor or indeed other contracts taking place during the same
period of risk. Banks are however, generally more prompt in paying out on guarantee as
they are usually less willing to argue or investigate the merits of any claim than an
insurance company. (Micheal Lear, 2007)
Bonds issued by insurance companies will usually only be issued after the insurance
company has made detailed enquiries in to a contractors financial background and ability
to perform the contract in question. Such detailed enquires can be reassuring to an
employer as if the insurance company issues the bond then the company is satisfied with

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the risk. Conversely, if the company refuses to issue the requisite bond and the employer
is aware of such a decision, the employer might decide to question the suitability of the
contractor he has selected.
Ethiopian banks and insurances, in their arrangements of bonds/guarantees, are
categorized under the Letter of guarantee. The main criteria to give this service are by
asking to the contractor how much he will pledge or in the capacity of his collateral
arrangement. The sureties have no revealed prequalification criteria. May be CBE has
eligibility requirements those are:
The CBE extends credit facility to all legal and profitability

business and investment in different sectors
The applicant should contribute at least 30% of the cost of the

project or business
The applicant has to present documents required by the bank
Whereas in insurances, the only thing that matters is the security [collateral] the
contractor can furnish. Now lets see first the securities that are asked by the surety
companies as collateral before we discussed the conditions, exclusions and arbitration of
the sureties of Ethiopian companies.
2.2.3-Securities
The letter of guarantee/bond issued by a bank or insurance is a written promise issued by
the sureties to compensate the beneficiary in the event that the customer fails to honor
his/her/its obligation. For this service, they demand collateral which is acceptable by the
sureties. Among the securities, the following are usually asked by the Ethiopian sureties:
1. Collateral
2. Work guarantee
3. Work payment guarantee

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4. Third party guaranty/guaranty loan
2.2.3.1-Collateral
The excess of the market value of the security pledge the amount of the loan determines
the lenders margins of safety. If the borrower is unable to meet an obligation, the lender
can sell the security satisfy the client. If the security is sold for an amount exceeding the
amount of the loan and interest owed, the difference is remitted to the borrower. If the
security is sold for less, the lender became a general or unsecured creditor for the amount
of the difference.
Because secured lender do not want to be came general creditors, they usually seek
security with a market value sufficiently above the amount of the loan to minimize the
likely hood of their not being to sell the security in full satisfaction of the loan. The
degree of security protection a lender seeks varies the credit worthiness of the borrower,
the security the borrower has available, and the financial institution making the loan.
The degree of the value of collateral varies according to several factors. Perhaps the most
important is marketability. The life of the collateral and the basic riskness associated with
the collateral. The greater the fluctuation in its market value or the more uncertain the
lender is concerning market value, the less desirable the collateral from the stand point of
the lender. The different forms of collateral that can be used to secure loans are owned
asset, an asset that will be purchased by the loan, and account receivables. [James C, 10 th
edition]
2.2.3.2-Work guarantee
The simplest solution from the perspective of the contracting agency is to prepare a letter
guaranteeing the contractor has a certain amount of work. By showing this letter to the
bank the contractor will provide the bank with evidence of liquidity during the period that
the work is guaranteed. Such a letter could be combined with other third party guarantees
the contractors could find on their own behalf.

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In most instances a document guaranteeing work by itself will not be sufficient for
contractors to access credit for the procurement of works or equipment. A contracting
agency can only guarantee work for a certain period, not for the duration of the whole
programme. (www.ilo.org)
2.2.3.3-Work payment guarantee

In case where banks consider letters of guarantee as described above as insufficient, the
contracting agency could agree to make payments to the contractors through the bank,
allowing the bank to withhold parts of the payments in case of bad loan repayment by the
contractor. In many countries, however, the bank is legally not allowed to withhold such
payments and in all instances the consent of the contractor has to be sought. Any contract,
signed by the three parties, would have to sate clearly the conditions under which the
bank can withhold payments, for example:
-
Arrears and non-payment reach at least 90 days
The defaulting contractor has been appropriately warned
The contract would have to state clearly which sums the bank would be allowed to
withhold at what moments:
-
Missed installments only
Penalty interest
Outstanding principal
Legal expenses
Care should be taken in using this method even in countries where the legal framework
supports it. The advantage of the method is that the contractors are backed in their efforts
to establish contracts with a formal financial institution at no additional costs. The risk is

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that when payments are withheld, contractors are not able to pay the wages to the
workers.
Another factor to take into account when pursuing a guarantee arrangements is that banks
do not always regard government agencies as the most reliable financial partners. A bank
could ask for additional certainty that payments will be in time such as the existence of
earmarked government funds or dedicated donor-fund accounts. [Linda deelen, 2000]
2.2.3.4-Third party guarantees/ guarantying loan

A fourth possible way to facilitate contractors access to bank finance is to guarantee the
loans that contractors take to finance their projects. In practice this means that the
programme (third party) would set up a guarantee fund on the basis of which it can
provide the contractors with letters of guarantee. In a letter of guarantee the programme
agrees to share the loan risk with the bank. In case the contractor fails to repay the loan,
the programme pays part of the outstanding debt instead. In a guarantee arrangement the
loan risk has to be shared between the bank, the contractor and the guarantee fund. In
situations where the guarantee fund of the programme covers more than 80% of the risk,
the bank is likely to become lax in monitoring and loan follow-up. At the other hand,
banks will usually not agree on coverage of less than 50%. Good risk sharing
arrangements are in between 60% and 80%. A letter of guarantee is legal document that
states exactly what sums the bank can claim from the guarantee fund when the contractor
defaults on the loan. (www.ilo.org)
In order to assure themselves that the guarantee fund has enough liquidity to pay out
claims, banks will often require that at least part of the guarantee fund be deposited in the
bank. Although in most instances this is a reasonable requirement, the bank should never
be permitted to withdraw funds on its own behalf and without the consent of the
programme. In addition interest on the fund should be reasonable, that is comparable to
medium-term deposit rates. Guarantee funds provide a good shield against currency
exchange risk for the guarantor. The guarantee deposit can be kept in foreign currency,

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while the loans extended to the contractors are noted in local currency. Since possible
claims on the guarantee fund would be based on the exchange rate at the moment of
default, banks carry the full risk of currency devaluation over the term of the loan
contract. www.ilo.org)
2.2.4-The policy wording for bonds under the Ethiopian insurances

Bond insurances are mainly given to cover failure of contractual agreement made
between two or more parties. The legal contract dealt with different parties can fail due to
various reasons. Therefore, in order to compensate the loser there must be a surety to
cover the loss. Worldwide, there are more than 15 types of bond insurances. Ethiopian
insurances currently provide seven types of bond insurances. Namely performance,
supply, bid, advance payment, customs, maintenance and retention bonds.
Hence, let see the policy wording for bonds that are used by local contractors:
I. Bid bond
Under this bond the surety and the principal are held firmly bound to the obligee up to the
amount stated in the policy document. Both the surety and the principal bind themselves,
their successors and assign firmly by these presents.
The principal should submit the accompanying bid which indicates date, detail
information with which the principal interred the contract and the contract and the
purpose or for what the contract is entered.
Conditions
If the bid be accepted as to any or all of the items or materials and workmanship
proposed to be furnished thereby or as to any position of the same, and if the principal

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will within the period specified thereof or, if no period be specified, within ten(10) days
after notice of the award of the contract, enter into contract with the obligee, to furnish all
work and materials at the prices offered by said bid, and will furnish bond with good and
sufficient surety, for the faithful and proper fulfillment of such contract, then this
obligation shall be avoid. And the surety hereby binds itself and its successors to pay to
the obligee, in case the principal fails to enter such contract and give such bond within
the period specified, within ten (10) days after such notice of award of contract the
difference in money between the amount of the bid of the principal on the work and
material so accepted, and the amount for which the obligee may contract with others for
such work and material, if the latter amount be in excess of the former, but in no event
shall the suretys liability exceed the sum hereof.
II Performance bond
Under these bonds the surety and the contractor are held firmly bound to the employer up
to the amount stated in the policy document. Both the surety and the contractor bind
themselves, their successors and assign jointly and severally firmly by these presents.
Whereas the contractor has entered into a certain contract in writing with the employer
which contract with all its covenants and conditions is hereby made a part of this bond to
all intents and purposes as though the contract had been incorporated herein, including
any duly authorized modifications of the said contract that may be made hereafter.
Conditions
1. If the contractor shall well and truly and faithfully comply with all terms, covenants
and conditions of the said contract, on its part to be kept and performed according to
the tenor of the said contract; or if on default by the contractor the surety shall satisfy
and discharge the damage sustained by the employer thereby up to the sum agreed
then this obligation shall be null and void otherwise it shall remain in force and
virtue.
2. This bond is executed the surety upon the following express conditions which shall be
conditions precedent to the right of the employer to recover hereunder.

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Provided always that:
Upon the discovery by the employer or by the employers agent or
representative of any act or omission that shall or might involve a loss
hereunder, the employer shall give immediate written notice thereof with
the fullest information obtainable at the surety at its Head office or Branch
Office concerned.
If the contractor shall fail to comply with the provisions of the contract to such
an extent that the contract shall be forfeited, the surety shall have the right
and opportunity to assume the remainder of the contract and at its option to
perform or sublet the same.
In the event of any breach of the provisions of the contract, the surety shall be
subrogated to all the rights and properties of the contractor arising out of the
contract. All deferred payments and all money and properties, that are then,
or that may thereafter, become due to the contractor under or by virtue of
the contract shall be credited upon any claim that the employer may make
upon the surety.
III Advance payment bond
Under this bond the surety and the contractor are held firmly bound to the employer up to
the amount stated in the policy document. Both the surety and the contractor bind
Where the contractor has entered in to a contract (a certain contact) in writing with the
employer related to for which and only purpose the employer has agreed to pay to the
contractor a sum of agreed amount upon presentation of an advance payment bond for the
same amount. Which agreement with all its covenants and conditions its hereby made a
part of this bond to all intents and purposes as though the advance payment agreement
had been incorporated herein, including any duly authorized modifications that may be
made hereafter.

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Conditions
1. If the contractor shall well and truly and faithfully comply with all terms, covenants
and conditions of the said advance payment, on its part to be kept and performed
according to the advance payment agreement.
2. Or if in default by the contractor the surety shall satisfy and discharge the demand by
the employer thereby up to the sum of agreed amount, then this obligation shall be
null and void otherwise it shall remain in force and virtue.
3. This bond is executed by the surety upon the following express conditions which
shall be conditions precedent; to the right of the employer to recover hereunder.
This original bond shall be returned to the surety after the expiry date. Where no
claim
hereunder is received by the surety from the employer on or before the expiry date,
this bond will automatically become null and void irrespective of its being returned to
the surety or not.
Upon the discovery by the employer or by the employers agent or representative, of any
act or omission that shall or might involve a loss hereunder, the employer shall give
immediate written notice hereof with the fullest information obtainable at the time to
the surety at its Head office.
In the event of any breach of the provisions of the contract, the surety shall be subrogated
to all the rights and properties of the contractor arising out of the contract. All
deferred payments and all money and properties, that are then, or that may thereafter;
become due to the contractor shall be credited upon any claim that the employer may
make upon the surety.
Exclusions:
The surety shall not be liable under this bond for any occurrence whether directly or
indirectly caused by or arising out of:

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War, invasion, act of foreign enemy, hostilities or war like operations

(whether war be declared or not) civil war.
Mutiny, civil commotion, popular rising, military rising, insurrection,

rebellion, revolution, or usurped power, material law or state of siege
or any of the events or causes which determine the proclamation or
maintenance of material law or state of siege or any acts of terrorism.
Earthquake, flood or other acts of God.
Arbitration
All differences arising out of this bond guarantee shall be referred to the decision of an
arbitrator to be appointed in writing by the parties in difference or if they cannot agree
upon a single arbitrator to the decision of two arbitrators, one two be appointed in writing
by each of the parties within one calendar month after having been requested in writing
so to do by either of the parties or in case the arbitrators do not agree of an umpire
appointed in writing by the arbitrators before entering upon the reference. The umpire
shall sit with the arbitrators and preside at their meeting and the making of any award
shall be a condition precedent to any right or action.
IV Retention bond
Under these bonds the surety and the contractor are held firmly bound to the employer up
to the amount sated in the policy document. Both the surety and the contractor bind
The contractor has entered into a certain contract in writing with the employer
mentioning all the necessary information indicated in the policy.
The employer after having given the provisional acceptance, has agreed to enter into a
contract with the contractor, to release the retained amount of money to the contractor
before the expiry date of the maintenance period which contract with all its covenants and
conditions is hereby made part of this bond to all intents and purposes as through it is

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incorporated herein, including any duly authorized modification of the said contract that
may be made hereafter.
Conditions
1. If the contractor shall well and truly and faithfully comply with all the terms,
covenants and conditions of the latter contract or in default by the contractor the
surety shall satisfy and discharge the demand by the employer up to the sum agreed,
then this obligation shall be null and void otherwise it shall remain in force and
virtue.
2. This bond is executed by the surety upon the following express conditions which
shall be conditions precedent to the right of the employer to recover hereunder.
2.1. Upon the discovery by the employer or by the employers agent or representative
of any act or omission that shall or might involve a loss hereunder, the employer
shall give immediate written notice hereof with the fullest information obtainable
at the time of the surety at its Head Office.
2.2. In the event of any breach of the provisions of the agreement, the surety shall be
subrogated to all the rights and properties of the contractor arising out of the
contract. All deferred payments and any and all monies and properties, that are
then, or that may thereafter, become due to the contractor under or by virtue of
the contract shall be credited upon any claim that the employer may make upon
the surety.
Exclusion
The surety shall not be liable for any damage resulting from mobs, riots, fire, the
elements, or acts of God or for the repair or reconstruction of any work or material
damaged or destroyed by any such causes, nor for damages for injury to persons, non for
the non-performance of any guarantee of any work done or materials furnished or the

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maintenance thereof or repairs thereto, not for the furnishing of any bond or obligation
other than instrument.
Chapter three- Research Design and Methodology

This chapter will describe the research methods applied for this study. It will dissect our
every approach and justify adoption of particular methods. Once determining the purpose
of the study and have completed a thorough literature search; the next is to design the
research in detail. Research strategy can be defined as the way in which the research
objectives can be questioned. The two types of research strategies, namely, qualitative
and quantitative research are used differently depending on the purpose, type and
availability of information which is required.
Qualitative research is subjective in nature and it emphasises meanings, experiences,
description and so on. Unlike the above method quantitative research method is objective
in nature. It is defined as an inquiry into human problem, based on testing a hypothesis or
a theory composed of variables, measured with numbers, and analysed with statistical
procedures, in order to determine whether the hypothesis or theory hold true.
Quantitative research method is selected when wanting to find facts about a concept, a
question or an attribute, and or when wanting to collect factual evidence and study the
relationship between these facts in order to test a particular theory or hypothesis.
As stated earlier, the main aim of this paper is to measure the impacts of remedial rights
on the contractor. Our paper thus identified differences in the desk study and assessed
impacts via the field survey. Our approach to achieve that has been as follows.

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3.1 Description of methodology
Before delving into the actual research work, we did some background research on risk
management system and risk allocation, construction contracts, remedial rights and types
or remedial rights, sureties.
The fact that the presence of risk, is the main source causing contract agreements, the
concept from risk management system and risk allocation type was our first interest. In
this area we saw the type of risks and how to allocate them and it is in this area where
contracting came into picture along with how to contractually transfer the risks involved.
The next step was to look into the contracting, which includes the right, responsibility,
and the remedial right. It is the remedial right which is the concern of the study.
In the remedial rights part what we tried to state was each partys remedial rights, which
is non performance of agreements in proper manner. The next thing we employed was to
classify remedial rights in two, which were remedies for the employer and remedies for
the contractor. It was after remedies for the employer that the subject bond and
guarantees came to rise. We also included parities involved in these securities.
Along with the above mentioned subjects, the sureties companies came. As has been said
before, Surety bonds provide financial security and construction assurance by assuring
project owners that contractors will perform the work and pay specified subcontractors,
laborers, and material suppliers. In this area we tried to look at the principles of sureties,
qualification of the contractor, and the relation ship between sureties and contracts.
The paper also included a contextual framework, which are banks and insurances in
Ethiopia. This part touched the insurers in Ethiopia, the securities they provide, and the
policy wording for bonds under the Ethiopian insurances.
Since the objective of this thesis is assessing the impacts of the remedial rights that are
demanded from the contractor, it has focused in: remedies to the employer as:
acceleration, liquidated damage, tender security, contract security and remedies for the
contractor as: time extension, obtain third party guarantees or ensure that the contractor
has resort to meaningful legal remedies to collect. We also covered a subject about bonds
and guarantees and surety companies, which are not part of the contract.

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Next, with our preliminary conversations and encounters with practicing professionals
and our advisor, we were able to select our area of concentration. We chose to
meticulously address a limited types of remedial rights (in accordance with our initial
classification) thereby simplifying our questionnaire.
In our fieldwork research, we used the survey approach. Field work research refers to the
methods of preliminary data collection used by the researcher. In this case surveys are
used to gather data from a relatively large number of respondents within a limited time
frame, which is the main reason we used this method. it is then concerned with a
generalized result when data is abstracted from a particular sample or population.
After deciding what type of data to be collected (quantitative) and have also decided on
the research approach (survey) then the next will be how to select the technique to collect
the data. The two features in collecting data are either by questionnaire or by interview.
For the study, we selected questionnaire.
A questionnaire (to be covered in more detail in the next section) was prepared based on
our findings of the comparative study of the topics stated above.
What we had initially been able to obtain was knowledge from the insurers, contractors
and clients as part of the literature review. We thus had to review our work in light of this
finding and incorporate the practice.
3.2 Rationale of Research Questions

The postal questionnaire is probably the most widely used data collection technique for
conducting surveys and it is also used in order to find out facts, opinions, and views on
what is happening outside.
The reason why we used this data collection method is that it is: first speedy regarding to
the time we have to collect the data we need and as second option it is economical. It is
also for their wide geographical coverage and uses to assemble a mass of information at
minimum expense and short time.

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The questionnaire was divided into four parts: type of respondents and company profile,
securities practiced in Ethiopian construction, the security issuing companies, and the
securities. Each section will be discussed next.
3.2.1 Type of respondents and company profile

This part of the questionnaire addresses questions related to our type sample. It specifies
the body that has knowledge about financial matters of the company and it explains the
grade of the company that tells the reputation and financial ability of the contractor.
3.2.2 Securities practiced in Ethiopian construction

wrong with the project. This leads us to the term remedial rights, which are provisions
entitled for non-performances of the contractual obligation by the contractor. These rights
mainly include contract securities that are financial guarantees to the contractors
customer, in our case the employer, or to the party financing the cost of the project. Their
purpose is to guarantee that the project is completed for the bid price and to guard the
owner from liens filed by unpaid material suppliers and subcontractors.
This section of the questionnaire explores which types of securities are commonly
practiced in our country and digs the information on the reason why others are not
demanded. This questionnaire was designed to also help identify the frequency of being
asked.
3.2.3 The security issuing companies

In the construction industry of Ethiopia bonds and guarantees are issued by insurances
and banks. Both bonds, issued by insurance companies, and guarantees, issued by banks
have their own advantage and disadvantage.
We deemed this section of the questionnaire to be relevant since most construction
projects in Ethiopia are connected with these companies. Obtaining bonds/guarantees and

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delivering them to the owner is the responsibility of the contractor, who will consult with
insurers. These insurers pre-qualify the contractor based on financial strength and
construction expertise. The first set of question explores what institutions do contractors
mostly take from (insurance/bank) and why. The second set of questions was devised in
such a way as to determine the difference in expectation of the governmental or private.
In addition, by asking contractors from which facilities (public/private) they take these
securities, we can identify which one is not affordable and which is.
3.2.4 The securities

This part of the questionnaire addresses questions about securities that are our focused
one: bid security, advance payment security, performance bond/guarantee, retention fund,
contractors guarantee and compensation.
The first set of questions, about bid security, determines the difference on the contractors
finance effect because of the change in the rule.
The next set of question is about advance payment security. Due to the increased risk,
financial institutions are likely to charge more for unconditional guarantees than for
conditional guarantees. This is raised on the second question of first part and guides us to
understand the big effect on the contractors financial matter.
The third set of question, performance bond/ guarantee, gathers information on the
amount deducted prior to the opinion of respondents (contractors) on the fairness of the
amount demanded from them.
The fourth set of question talked about retention fund. Many construction contracts
provide that a certain percentage of each progress payment will be retained by the owner.
A typical 5-10% is retained and kept by the owner until job completion and acceptance
by the owner after final complete payment is made. Owners look on retention as further

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protection against eventualities such as the cost of remedying defective work, settlement
of liens or other payment claims from parties paid by the constructors, liquidity damage
and similar claims against the constructors (Clough, Richards, 1975).
This part gears the respondents toward identifying the impact of retention fund on their
cash flow. And also includes doubts on if retention money is for the uses of the above
mentioned then why not releasing it as soon as defects liability period is finished or if it is
delayed why not paid with the interest as the contractor pays the employer when delayed
payment. The next part gathers opinion of contractors if retention fund is removed or
reduced.
The fifth set of question explores about contractors guarantee. It is known that the
contractors cash flow is very sensitive to changes payments regimes on projects. This
payment uses for many things. They will pay their suppliers and sub-contractors at
differing intervals depending on the nature of what has been provided. Suppliers to the
contractor usually invoice at the end of one month for payment at the end of the
following month. After all the payment, the contractor has to make, what if the employer
delays the payment, from which the contractor pays its dues. Do the contractors have
protection for this? This section explains the serious distortions that may occur during
delay of payment.
The sixth set of question, compensations, determines the applicability of compensation to
the contractor. When default by the employer, the contractor is entitled to time extension
and in our literature review, we mentioned that, time extension is a provision for justified
time delays and time extension may or may not be entitled for compensation. If it is
default by the employer and this cause delay on the project, time which can be a reason
for the entitlement of time and actual cost but no allowance. This section explains about
this payment to the contractor.
Once deciding on the technique for collecting the field work data and have thoughts
about what to ask, one should be ready to decide on the characteristics of the respondents

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and the sample has to be drawn from the population. Not to forget that the sample
selected should have direct relationship with the topic here in the study and it is stated
below:
3.3 The Research Sample

Our research sample can be divided into three categories as:
o contractors
o Financiers /insurers (obligor)
o Employers/clients(oblige)
A sample is selected from the three categories based on relevant experience in contractual
agreements and use of contract securities.
We selected the samples from contractors based on the experience they have with
financers and ----------------------------- to be continued.
3.4 Method of Analysis

We used a descriptive method of analysis from the survey approach which aims to
answer questions like, how many? Who? What is happening? Moreover, we employed
inductive approach.

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Chapter four: Results and Discussion

4.1 Introduction
The major objective of our study is to explore the impacts of remedial rights on
construction contractors in our country and come up with possible ways of alleviating
these impacts. The study paper shows that the domestic contractors have a significant
impact of remedial rights. This is indicated from the collected data of the distributed
questionnaires and interview.
In the research there were three population frames that are considered to have better
exposure of the industry. Thus were contractors, clients, and bond issuers. For all
populations 40 questionnaires were distributed and 32 returned. 20 of them were for
contractors, 8 of them were for clients and 12 of them were for bond issuers. From these
5 from contractors, 2 from clients, and 1 from bond issuers were rejected. With this the
response rate is 80%. So, the sample size is large enough to be considered representatives
of respondents. The following table summarizes the distributed sample population.
Table 4: Distribution of questionnaires and response rate
RESPONDENTS
DISTRIBUTED
RETURNED
USEABLE
RETURNED
No.
(A)
(B)
REJECTED
RATE (B/A)
USEFUL
(C)
RATE
(C/B)
Contractors
20
15
75%

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93.3%
71

2
clients
75%
100%
Bond issuers
12
11
91.6%
11
100%
40
32
80%
31
total
During the process of distributing and collecting of the questionnaires there were some
problems which makes reduced to our number of returning questionnaires. Among the
obstacles were; the countrys budget closing is at the month of June. This makes the
construction companies and the employers busy to respond our questionnaires. The
second biggest obstacle were it was hard in getting an appropriate information provider
with engineering and remedial right know how at the same time. In addition, the
willingness to provide information from respondents is also considerable and last but no
least the respondents needed a lot of time to answer the questions provided and we did
not have that much time.
Assessing the rules, regulations and determination of premium of bond issuers.
As discussed in the literature review of this study we mentioned about ways of allocating
risks using contract and among these ways, contract securities are one of them. These
contract securities are provided by contractors as request of clients. Contractors get these
securities from bond issuers who have their own pre-qualification. In the construction
industry of Ethiopia, bond issuers provide different arrangements of securities for their
customers which seams feasible for them. Of the arrangements entertained in each bond
issuers there are arrangements is presently closed this is because in order to prevent
possible losses that insurers may suffer as a result of issuing financial guarantee, bonds
and other unconditional bonds, the National Bank of Ethiopia has issued directive no
SIB/24/2004, prohibiting insurance companies from issuing financial guarantee bonds
and other unconditional bonds with effect from 1 March 2004. 87.5% of bond issuers do
not have plan to introduce other arrangements that are not exercised locally while the rest
of the respondents do not know weather there is a plan or not in their company.
4.2.1 Arrangements of securities by issuers

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The arrangements provided by these insures are: tender security (TS), advance payment
security (AD.P), performance security (PS), payment security (PAY.S), and retention
security (RS) and other. Out of the distributed questionnaires to sureties we have come to
understand that there is a difference in frequency of providing these securities. The
collected data is summarized as shown in the graph below:
Fig. 4.1-arrengments mostly entertained by local bond issuers

As we can see from the chart above performance security and advance payment are the
most entertained arrangements. And on the other hand payment security is the least one
provided. We understand from the interview we did with some of the bond underwriter
heads, they indicated that payment securities are not usually asked and instead the clients
compensate it with retention money. We have come to notice that retention securities are
exercised less frequently. Based on this data again tender security and retention securities
are also provided. But looking at tender security provision, banks furnish tender security
as guarantee and using this affects the contractor for since tender securities lasts for short
time and obtaining guarantees are more expensive than bonds, contractors see it
disadvantageous for them. The other securities mentioned from our distributed
questionnaires are: custom bond and maintenance bond.
4.2.2 Criteria used for selecting customers

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To full fill these securities, banks and insurances have almost the same criteria for their
customers for the service demanded. Among these are:
Collateral value
Cash flow ability of the firm
credit worthiness of the company( trust worthy)
Provision of performance in the line of business and stage of licence.
Past performance by the contractor.
From this, the issuers may use one or more of these criteria to qualify the contractors.
Based on the data we collected 11.1% of the issuers use only collateral value as a
criterion and on the other hand 77.7% of issuers demand more than one criteria or
combinations of criteria and uses many screening for selection and the rest 11.1% use
trust worthiness for evaluation.
4.2.3 Types of collateral values
In terms of issuers, collateral value can be owned assets, account receivables, work
guarantee, work payment guarantee, and others. Owned asset is, from the data collected,
the most useable type of collateral used. And from the questionnaire distributed to
analyse this, almost 100% of them use this. The rest of them use work guarantee as an
addition. Moreover, owned asset can also be assets of third party. As one can perceive
from the data most bond issuers use owned assets as collateral to secure for the bond or
guarantee they provided. As to some contractors opinion, account receivable is more
liquid and most used in developing country. Therefore, local banks are advised to
consider it. (Account receivables are incomes to be collected where services are
delivered. In construction case it could be payment certificate, justified claim.) Looking
into contractors perception, 66% use owned asset as collateral although 26.7% work
guarantee ,6.7% of them exercise work payment guarantee and 26.7% use guaranteeing
loan type of collateral.

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Fig.4.2 collateral mostly used by contractors.

From casual interview we did with bond issuers we have come to know that depending
on the type of securities and their form (bond/guarantee), the amount of collateral
required from the contractors differs. For instance, if the security is asked in the form of
guarantee, the collateral and premium required will be expensive. This is because
guarantees cost more than bonds. On the other hand, when we come to the type securities,
if it is performance bond the amount of collateral required is 100% of the bond but
unlikely, for others like advance payment security, retention security 30-50% of the bond
as collateral is demanded. So, it should be advised here to use a retention security for
contractors and clients also should agree to replace the retention money by a security
because if they want to help the industry and the domestic contractor this is the only
chance they have in minimizing the impact of the contract security that creates on the
cash flow problem.
4.2.4 Fairness of collateral
As the fairness of collateral, contractors gave us some of their opinion on it based on their
awareness on the amount required. 75% says that the amount of collateral demanded is
unfair. Because they believe that the amount of the collateral value asked to secure the
bond/guarantee is of high value (1.2:1 or sometimes 1:1) this is not feasible for
contractors with no sufficient fixed asset to secure. And 25% of them said that the amount
of required as a collateral is fair.

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4.2.5 Conditions for premium determination
In assessing the premium of the securities, the bond issuers determine the premium based
on:
Size(amount) of the bond
Type of the bond
Duration of the project
Contract price
Location of the contract
Out of the collected data 55.6 % respondents they use size, type, contract price, location
of the contract and duration of the project in determining the premium(cost) of the
bond/guarantee while 44.4% respondents they use only a contract price as determination
of the premium of the bond.
4.2.6 Limitation of contracts
The bond issuers limit the contracts to be undertaken for various reasons. Size and
number are limited so that the contractor does not become overextended financially. The
type of contract undertaken is limited to those areas in which the contractor is
experienced in order that a journey through uncharted territory not results in financial
ruin for the contractor and exposure to loss for the surety. Most sureties will limit the
geographic area in which a contractor may bid for work under the belief that too many
projects far from the contractors home base interfere with the contractors ability to
properly control the job. Therefore, out of the distributed data 55.6% say that they place
limitation on the type, size, location and number of contract to be undertaken by the
contractor in order to minimize their own risk. And the rest of 44.4% they do not provide
limitations. Sometimes this creates an impact on the growth of the contractor because at
the same time he does not allowed by its sureties to participate in different projects. In the

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industry taking different contracts generate an opportunity to distribute the cash needs in
the different projects and this helps to create a cash flow forecast.
4.2.7 The rules and regulations of issuers
The rules and regulations of private and governmental banks are rated by the contractors
as shown in the graph below.
Fig.4.3 -Rate of rules and regulations of bond issuers

4.2.8 Default of contractors
Contractors get different arrangement forms of securities and due to different reasons;
one may fail to full fill his/her obligation. From the reasons we observed from the data,
some of them are: mismanagement of the project by the contractor and disagreement
between the contractor and employer. The rate of contractor default is stated next in
percent. According to the data collected 33.3% of the issuers of bonds have faced
contractor who failed to full fill his/her obligation and 66.7% have not faced any default
in their experience.

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4.3 Form of contract securities used in Ethiopia

construction
wrong with the project. Therefore, risk is one of the reasons for the requirement of
contract securities. The common contract securities used are: bid security, advance
payment security, performance security, payment security, retention security. From these
contract securities, the most exercised securities by local contractors, according to the
data collected, depend on the facility (governmental/private/NGO). This rate of usage is
shown in the graph
Fig 4.4- Type of security in governmental construction

4.3.1 Types of securities
From the employers point of view almost all of them demand 100% bid security, 100%
performance security and 50% of them ask advance payment security. In addition, in the
case of contractor preference, to replace the retention money deducted from his interim
payment from the distributed data 33.3% of employers said that contractors use retention
security as means of releasing their retention money. When looking into payment
security, as employers respondents say, almost none of them ask payment security and

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rather they compensate it with the withheld money. Whereas, 30% of contractors implied
that they have been asked this type of securities.
Above all, sometimes, there might be a chance where no employers and contractors are
involved in these securities. This is because of some reasons: in most cases, private
clients give the contract considering relation ship and negotiation. In addition, some of
implied they are well esteemed customers and they are not asked much.
Fig 4.5types of contract securities in private construction

In the case of warrantees, liquidated damage and roof bond, 70% of employers demand
such kind of warranty.

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Fig 4.6 types of contract securities in NGO
The contractors in our country furnish the demanded securities from banks and
insurances. This might still depend on the type of securities they think is suitable and
convenient to take from either of them. According to one respondent, he explained that
they use insurances for performance bond and banks for advance guarantee and bid
security. This implies that both insurances and bank can be used at the same time by the
contractors. Out of the distributed data we observed results given below:
Fig 4.7 security issuers used by contractors

This results shows that contractors mostly use banks as issuers for their demanded
securities then follows insurances. The data also implied using both security issuers is off
lesser amount.
When coming to the subject of private and governmental security issuers, the following
the data collected showed this result.

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Fig.4.8 most used security service providers.

The result showed here explains clearly that private companies are mostly used by
contractors. The respondents believe that services provided by private companies are:
-
They require less collateral.
They are faster, flexible, transparent, and effective and this helps to save time.
They are easily accessible and many in number.
Unlike governmental issuers, they do not prioritize anyone. I.e. governmental

service providers give priority to government companies and public works.
4.3.2 Effect on the new PPAs amount of bid security

As discussed in the literature review it was mentioned that PPA has made some change in
the amount of bid security. It has stated that the amount of bid security be submitted
along with the bid is determined by the bidder itself. From our understanding based on
the replies we had, most of them do not know about the new statement. But from the
respondents who have knowledge about this, data was collected on the reply as follows.
33.3% of respondents think that this change security is advantageous. The main reasons
for this merit are:

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-
It removes the corruption made by issuers through leakage of information.
Sometimes, they request to submit bid security much higher than the project
demanded. It may also be not returned on time. Therefore, one respondent
believe that change of the amount bid security will help solve this problem.
As to some of respondents, it relives the contractors from worrying about the

amount demanded from them and rather they will choose the convenient
amount for the bid security.
The Figure below shows this data graphically
Fig 4.9 comment on PPAs new bid amount

4.3.3 Advance payment
Now days, Advance payment is the most important financial assistance for local
contractors in order to successfully complete projects. To get the advance payment,
contractors are expected to furnish advance payment security. In here there is a problem
which is, most contract documents require the contractor to furnish unconditional bank
guarantee for the provision of advance payment by the employer. Out of the distributed
questionnaires, data collected shows 100% of respondents say that unconditional bank
guarantee have a significant impact on them. Because, as they said, if the guarantee is
unconditional the collateral will be almost 1:1.so this leads them not to use the collateral

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asset to another financing use. In addition, one of the respondents suggested that banks,
which furnish unconditional guarantees, demands buildings, which the contractor may
not be able to present. This also takes much time to issue. He also added, if the insurances
were allowed to furnish this security, it would have been simple and easy to obtain the
guarantee for they take machineries and small vehicles as collateral.
4.3.4 Performance bond
Performance bond, which is the leading type of security, is always demanded by
employers. From the respondents point of view this security is asked from 5-10% of the
contract price and 95% of respondents believe that it is fair. But the amount of collateral
asked for this security is almost equal to the amount of the bond. As to the respondents,
60% of them said that the amount of collateral is not fair. Whereas, the rest 40% think it
is fair. According to the data collected, 75% of contractors believe that the premium
required to pay to secure thus performance bonds are unfair and 25% of contractors
believe it is fair.
4.3.5 Retention money
Many construction contracts provide that a certain percentage of each progress payment
will be retained by the owner. A typical 10% is retained and kept by the owner until job
completion and acceptance by the owner after final complete payment is made. Owners
look on retention as further protection against eventualities such as the cost of remedying
defective work, settlement of liens or other payment claims from parties unpaid by the
constructors, liquidity damage and similar claims against the constructors. Similarly,
contractors withhold part of payments due to their sub-contractors.
In assessing whether the amount of retention withheld is fair or not, from the respondents
58.33% said it is fair and 41.67% said it is unfair.
The figure below shows the contractors comment on the fairness of retention withheld.

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Fig 4.10 comment on the fairness of retention withheld

This analysis considered the purpose, uses and cost of the retention money. From the
respondents all of them agree that the purpose of the retention is acceptable. And the
analysis also revealed that the median rate for retention is 3% and ranged from 1-10%.
According to the data 60% of the respondents believe that retained money has a
significant impact on them and 26% of them say it does not have and two contractors
says the impact depends on the project amount. For the 60% the contractors, makes the
impact to prepare budget for the retention money. Meanwhile, out of the distributed data
21.4% of contractors say that with holding of large sum of money by the employer does
not increase contractors borrowing costs or elevate the cost of construction. From the
distributed data 100% employers agree with those contractors, their reason is
-
Retained money does not increase contractors borrowing costs instead it

makes them to do their job correctly in order to get back their money.
The total amount of retained money is by far than the contractors profit.
Whereas 57% of contractors believes increase contractors borrowing costs or elevate the
cost of construction. This is because as they say; when the contract amount is
significantly high the retained amount will have an impact on the working capital of a
given company. This means they make them to expense other costs for a means of
financing for their cash flow. As to some contractors opinion cash retention is not the

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only means of protection to those who employ contractors or sub-contractors one
commonly sought alternative is a retention security.
In assessing the time of realizing the retention money, out of the distributed data 50% of
them says clients realize the retention money on time while 50% of them they do not
agree.
As discussed in the literature review, in our country there is no any guarantee to the
contractor in the event that the employer fails to return the retained money of the
contractor because of insolvency. In assessing the experience of contractors how it
handled the retained money, out of the distributed data 100% of the respondents the only
thing they know is simply deducted by clients and don not know how the employer
handles it.
In assessing weather the main contractors deduct retention money from their subcontractors or not 66.7% of them deduct retention from their sub-contractors and 33.3%
of them did not deduct. In addition, the main contractors realize the retained money for
their sub-contractors on half at the substantial completion and the remaining half after
defect liability period of their part.
On the distributed questionnaires there was one question that was asked for the
employers and contractors in order to see their opinion on removal or reduction of the
burden of retention money. The original question were what difference would it make if
there will be removal or reduction of the burden of retention?

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Table 4.2-summery of opinion of employers and contractor on reduction/removal of
retention money
Employers opinion
-
Contractors opinion
It is a security for any problems
It makes cash flow smooth
occur after the completion of a
Since the amount of retention is
given work, so if we remove
5%, it does not have any
retention we will have no
significant
security for maintenance.
construction
The contractors will not be
effect
on
the
For the client their will be a
careful and will cause more
probable loose of his direct
defects
guarantee from the contractor
and incurs cost to
rectify the defects to us.
Because of the retained money

the amount of cash to be used
will raised, this helps increasing
on
the
companies
working
capital.
-
It will remove the opportunity

cost of the contractor
The local contractor could use

this money for different purpose
of construction
From the above table shown, comments from contractors and employers about retention
money were different. We can observe that retention money withheld, for the employer, is
always advantageous and direct guarantee. I.e. it is not a piece of paper that is withheld,
but direct cash. This is the only advantage for employers. On the other hand, some
contractors said it is not necessary and bad for the cash flow and the others say it has no
effect on them. The contractors from the claim side said in, other words, they could have
done better things with it, as there is nothing done with the money withheld, and they

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could have improved the resources they have instead of withholding the money and wait
for defects to come.
4.4 -Construction contractors payment guarantee, liquidated damage and

compensation against defaulting from employers
4.4.1 Payment (retention) guarantee
As discussed in the literature review, the advantage of remedy for untimely/nonpayment is to speed up the payment of monies due (also the retained money) and to have
a guarantee in the time of the employer insolvency or non-performance. This may be the
contractor achieves by demanding a contract security, by requesting a modification or
addition of clauses on payment clauses, or by ensuring viable legal remedies like
arbitration or using advance payment as a security against defaulting by the client. On the
other hand an employer employees a general contractor. All or some works are subcontracted. What remedies are available to sub-contractor against the employer if the
general contractor defaults?
Out of the distributed questionnaires 78.6% of the respondents have never demand from
their clients any guarantee/viable legal remedies against defaulting from its side even
they don know about this remedial right. But 14.3% is demanded unconditional bank
guarantee and the 7.1% of the respondents what they did is, they ensure viable legal
remedies like arbitration, using advance payment as a security against defaulting by the
client. This is also showed on the graph below.

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Fig4.11 demand of securities as remedial right

In the distributed questionnaire, it also asked to the employers that whether they were
requested a payment (retained) guarantee by contractors. From the distributed data 100%
of the employers say that they never asked to furnish this kind of arrangements. The main
reasons for not being asked payment (retention) guarantee by contractors are summarized
in the following table below.
Table 4.3- Summery of opinion of employers for not being asked payment
(retention) guarantee by contractors and contractors for not asking.
Employers opinion
-
Contractors opinion
Because we have a good repetition
Because there are no clauses in
and relationship of experience
the conditions of contract to
work with our contractors
support this.
Since being a contractor is a job
Regarding our experience, all
,in order to get the contract the
retention money is reimbursed
only thing they have to choose the
as soon as the acceptance is
contractors
finalized
is
to
trust
the
organization
-
The system is not well practiced

and also there is no institution
who deliver this service
Because the regulation is always

support to the client
Because
of
competition
the
contractor rushes to secure the

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-
Most of our contractors have trust
job and he has no time and right
on us because when project
to accomplish this thing
started enough budget is allocated

for it and they know it
Starting from the employer side of answer, the main reason for not being asked retention
security is because they have trust and relationship with the contractors they hire. On the
other hand, even though contractors said different things, the answers reflect on the defect
on the condition of contract about the contractors claim. This shows that if there was a
clause that states the right for the contractors to ask for retention security, they would
have used it and the employers suggestion would fail. The conditions of contract
In assessing in the last ten years, how often contractors has been involved in a case that
was triggered by defaulting (such as non-payment, late payment, insolvency) on the part
of its client. Out of the distributed data, almost 100% of the respondents say that in
individual they triggered by defaulting of the client is between once and five times. So,
based on this from all the respondents 100% of them agree that the demanding a payment
guarantee from employers would have helped them.
4.4.2 Liquidated damage and compensation
When an act of prevention for which the employer is wholly or partially responsible,
prevents the contractor from completing on time, the employer cannot recover LAD
unless the contract provides otherwise. Based on this in the distributed questionnaire to
assess whether the contractors demanded liquidated damage for lost opportunity because
of defaulting by the employer non-of them have not requested yet, what they say is only
time extension compensation is there the reason is because of the costume and simply the
contractor losing its time and money.
In the other hand, most construction documents specify a liquidated damage of 1/1000 of
the project cost (up to a certain maximum amount) for each day the project is
unjustifiable over due. According to the respondents of the contractors 95% of them say
that the amount is not fair and the 5% of respondents does not say anything.

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Meanwhile, from the employers point of view their reasons for not being asked
allowance money like the one they request for liquidated damage is: the contractor is
always claim for any related financial losses but not for extra allowance.
Table 4.4-Recommendation of clients and contractors on minimizing the impact of
remedial rights
Employers recommendation
-
Recently the government of

Ethiopia decided to use
insurance bond rather than
bank guarantees this is one step
forward, therefore in our
company opinion this is
enough. It is not necessary to
give the contractors excessive
minimization, it makes them
reluctant.
It is good to put a standard
form of regulations and change
on the conditions of contract,
on each type of the remedial
rights
Contractors recommendation
-
Clients have to change their

attitude towards the contractor
because they always think the
contractor always mischief and
the security issuers and have to
analyze the defaulting using a
database and if the defaulting
projects are with in acceptable
margins in number they have to
reduce their requirement of
premium.
Clients they should try to select
the contractor properly and
security issuers should try to
study the past record of the
contractor, and avoid issuing a
bond with out equivalent
collateral.
The policy of security should be
revised by NBE. Insurance
companies should involve in the
business industry whose primary
function is to give contract
security
Clients should minimize amount
and number of security
It is very useful if the payments
and relations were on time. But
in our country just it seems like
a culture to with hold payments
for long times
Bank guarantee better to be
replaced by insurance guarantee

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in order to alleviate shortage of
cash flow
Thus, last part of comments is mostly about issuers and indicated that the main impact of
contract securities is mostly by bond issuers and the expectations they have from the
contractors.
Chapter five Conclusion and Recommendation

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5.1 Conclusion
The construction of Ethiopia can be said it is in its newborn stage that requires integrated
positive contribution from all parties in the industry and to bring the desired development
to its beneficiaries. Though, such developments are not expected over night; investigating
the existing problems in the construction industry and taking timely remedial measure is
paramount important. Based on this, the other hand message of this thesis is to see into all
possible efforts to be made for the development of the domestic construction industry so
that the industry will be in a better position to contribute for the poverty reduction efforts
of the country. From the many ways the one possible way of developing the capacity is
through proper studying the impact of remedial rights on the domestic construction
contractors.
This thesis has included discussion on the risk management and how they allocate risks
on the contracts. Assessing the impact of the remedial rights on the domestic construction
contractors was a major part of the research. Therefore after the analysis of the collected
data the following conclusions were made
The major form of contract securities used in Ethiopia with respective of mostly
entertained is
Performance security
Advance payment security
Tender security
Retention security
Other like custom bond, maintenance bond
Payment security
The Ethiopian sureties do not have planned to introduce other arrangements of

securities that are not exercised locally.

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Securities in the form of guarantee are more expensive than in the form of
bond.
Bond issuers require more than one criterion as compensation for the perceived
risk associated with giving securities to contractors.
The study shows that there are security issuers uses a lot of criterion for their
customers for the service demanded. The main reason of the sureties is to
compensation of the perceived risk. From the criterias chooses the sureties is:
Collateral value
credit worthiness of the company( trust worthy)
Provision of performance in the line of business and stage of

licence.
Past performance by the contractor.
Most sureties use most of the time owned assets as collateral to secure for the
bond or guarantee they provided. This situation is creating a highly impact on
the domestic contractors.
The study shows that most sureties use an owned asset for collateral. This
condition has a highly impact on the domestic construction contractors.
Contractors in our country are suffering from cash shortage to finance
construction projects. The only thing to solve this problem is getting a short or
long term loans. To get those loans contractors is expected to furnish an owned
asset. But this owned asset if it were occupied by a surety for the service of
security, the contractors would not have any means of substituting this value
because from the study of previous student thesis it was discovered that banks

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require only collateral as compensation for the perceived risk associated with
lending to contractors. Therefore, this situation is creates a cash shortage on the
domestic contractors and the shortage of cash is being affects completion time and
cost of project. As to some contractors opinion, account receivables are more
liquid and most used in developing country. So, sureties are advised to consider it.
The amount of collateral demanded by sureties is unfair.
The study of this study shows that the amount of the collateral value asked to
secure the bond/guarantee is high value (1.2:1 or sometimes 1:1). This is not
feasible for contractors with no sufficient fixed asset to secure and it also makes
them limiting their capacity to get loan.
Sureties
use
different
condition
in
determination
the
premium
of
bonds/guarantees.
The study shows that sureties determine the premium based on size of the
security, type of the security, duration of the project, contract price and location of
the contract.
Sureties are limiting contracts to be undertaken by contractors for the perceived
risk associated with them.
The result of this study shows that the bond issuers limiting the contracts to be
undertaken for various reasons. Size and number are limited so that the contractor
does not become overextended financially. The type of contract undertaken is
limited to those areas in which the contractor is experienced in order that a
journey through uncharted territory not results in financial ruin for the contractor
and exposure to loss for the surety. Most sureties will limit the geographic area in
which a contractor may bid for work under the belief that too many projects far
from the contractors home base interfere with the contractors ability to properly
control the job. This limitation creates an impact on the growth of the contractor
because at the same time he does not allowed by its sureties to participate in

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different projects. In the industry taking different contracts generate an
opportunity to distribute the cash needs in the different projects and this helps to
create a cash flow forecast.
The rules and regulations used by sureties especially the government ones are
unsupportive to construction industry.
There is information gab between employers, contractors and sureties.
Information is one of the resources for any business environment but the two
stakeholders face information gab as indicated in the analysis, the flow of
information is not smooth. The data collected in this thesis shows that different
results were obtained for the same question. This is created due to the information
gap between the stakeholders.
The most exercised securities by local contractors depend on the facility (type of
client).
The result of this thesis shows that the most exercised securities by local
contractors depend on the facility. This means public works demanded securities
than NGO and private clients give the contract considering relationship and
negotiation.
Banks give more service of security than insurance companies.
Private Banks and insurance provide more privilege than the government
banks and insurance for the security service.
The result of the study shows that private companies are mostly used by
contractors. The reason for this is private companies:
Their rules relatively flexible and their risk sharing contribution are
slightly greater than the government ones.
They require less collateral.

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They are faster, flexible, transparent, and effective and this helps to save
time.
They are easily accessible and many in number.
Unlike governmental issuers, they do not prioritize anyone. I.e.

governmental service providers give priority to government works
The new PPAs amount of bid security is not well known on the contractors but
this security has an advantage to the domestic contractors.
The result of the study shows that most of the contractors do not know about the
new statement. But from the contractors who have knowledge about this, they
found it advantageous. The main reasons for this merit are:
It removes the corruption made by issuers through leakage of information.
Sometimes, they request to submit bid security much higher than the
project demanded. It may also be not returned on time. Therefore, one
respondent believe that change of the amount bid security will help solve
this problem.
As to some of respondents, it relives the contractors from worrying about

the amount demanded from them and rather they will choose the
convenient amount for the bid security.
The operation of the retention mechanism is an opportunity cost to the

contractors or sub-contractors, equivalent to loose of interest on the amount of
money with held.
Local contractors has no any guarantee in return the retained money and they
have no any idea how the employers handle it.
From the research study it reveals that in our country there is no any guarantee to
the contractor in the event that the employer fails to return the retained money of

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the contractor because of insolvency. In addition the study shows that the
experience of contractors how it handled the retained money, the only thing they
know is simply deducted by clients and don not know how the employer handles
it.
By know days in the construction industry of Ethiopia cash retention is not the
only means of protection to those who employ contractors or sub-contractors,
one commonly sought alternative is a retention security.
Employers need of reduction or removal of retention is very low.
Domestic contractors never demand from their clients any payment guarantee
or viable legal remedies against defaulting from its side.
Owner insolvency, non-payment and late payment are a risk for every contractor
on a private work of improvement. For this purpose, mechanics liens, payment
guarantee and viable legal remedies give to the contractor a security in the
construction project. In Ethiopia, the local laws don not provide the contractor
with this kinds of remedial rights.
In the last ten years individual contractors has been triggered by the default of
employers between once and five times. So, the demanding of payment
guarantee is the interest of all domestic contractors.
The amount of the liquidated damage demanded is not fair.
The data collected from contractors shows that the estimate for the unjustified
delay with a maximum limit of 10% is highly unfair. This further affects the
capacity of local contractors by increasing their deductions (which amounts to
penalties) due to delays than was the practice before. In addition, unfairness of
liquidated damage may contradict the context of most local construction projects
where materials are scarce, cash flow problems are intense, equipment rental or
lease provisions are inadequate, the decision making process is slow, most designs
are incomplete, and so on, all of which will cause more damages to the capacity
of domestic contractors.

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Liquidated damages are paid to the employer with out any proof of loss on the
employers part.
From the data collected from contractors that damages are paid to the employer
with out any proof of loss on the employers part. It is neither here nor there
whether the employer has in fact experienced loss or not. That is, certification of
non-completion or inability to justify delay is the only condition precedent to the
employers right to deduct liquidated damage from any payment due to the
contractor.
Liquidated damage gives to the employer a right to terminate the project once
the limit of the damage has been reached.
From the study of the research it concludes that the employers are left to exercise
his right to terminate the project once the limit of liquidated damage has been
reached. Since there is no other way to compensate the employer, the project
completion time will lose its value.
Ethiopian contractors are believed in addition of cost and time extension to
entitle allowance money like the one employers request for liquidated damage.
5.2-Recommendation
This project believed to guide the employers, contractors and sureties to have mutual
understanding concerning remedial rights based on the securities that rises on the
contractual relation ship. Based on the result of the study, the followings
recommendations are forwarded on the bases of problems that find out on the remedial
rights that can affect the domestic construction contractors.
1. The rules and the regulation of sureties concerning in selecting customers
criterion is rigid, specially the government ones, so far the better improvement of
the domestic construction industry they should work closely with contractors and

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it is better to revise the rules and the regulations with the preference of its
customers.
2. Securities in the form of guarantee are more expensive than in the form bond. The
government and any employer, which has needed to a construct some structure,
should understand this. Since the purpose of bonding and guaranteeing is, the
same securities should furnish in the form of bond to assist the contractor in the
cost of security.
3. Sureties better decrease the amount of collateral and should see other collaterals
outside of owned asset like using account receivables. since construction needs to
much cash and it is difficult to get sufficient collateral to secure the amount of
loan if it is already occupied by sureties. So it is advised to provide the securities
by accepting work payment guarantee, third party guarantee and work guarantee
etc.
4. Sureties had better not limit contracts that can be undertaken by the contractor at
same time in order to minimize the effect on the capacity of the domestic
contractor. Because taking different contracts generate an opportunity to distribute
the cash needs in the different projects and this helps to create a cash, material and
human flow forecast and distribution.
5.
Among employers, contractors and sureties to improve the contribution of one

party, they should work hand in hand. Especially for sureties and contractors we
recommend if the contractors prepare workshop through their associations and
invite sureties to participate (viseversal). The contractors should also prepare
expert trainers to their employers on the conditions of contract securities.

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6. Clients have to change their attitude towards the contractor because they always
think the contractor always mischief and the security issuers have to analyze the
defaulting using a database and if the defaulting projects are with in acceptable
margins in number they have to reduce their requirement of premium. In addition,
Bank guarantee better to be replaced by insurance guarantee in order to alleviate
shortage of cash flow.
7. Recently the government of Ethiopia decided to use insurance bond rather than
bank guarantees this is one-step forward but in here, we like to recommend NBE
should revise the policy of security. Insurance companies should involve in the
business industry whose primary function is to give contract security. Moreover, it
is good to put a standard form, regulations and change on the conditions of
contract, on each type of the contract security.
8. Employers, in order to provide advance payment, they require the contractor to
bring unconditional on demand advance payment guarantee which has higher
commission than the conditional on demand. Therefore, employers had better
accept conditional on demand advance payment guarantee in order to improve
cash flow problem of contractors.
9.
Contractors should try familiar themselves familiar with new conditions that can
be advantageous to them (for example on new PPAs SCC and SBD). In addition,
they should aware on the remedial rights they have on the conditions of contract.
10. The operation of the retention mechanism is an opportunity cost to the contractors
or sub-contractors, equivalent to loose of interest on the amount of money with
held. The contractor to balance the income lost and to have a guarantee in case of
owner insolvency or non/let-payment of the retention money, he should insist to
the employer to open a dual account by the name of the two stakeholders.

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11. Employers had better accept a retention security for the retention money in order
to improve cash flow problem of contractors and to bring in advance stage for the
capacity of the local contractors.
12. Owner insolvency, non-payment and let payment are a risk for every domestic
contractor. Therefore contractors are advised to request mechanics liens, payment
guarantees and viable legal remedies as a security for something goes in the
side of the employer.
13. We are strongly recommend that to reconsider on the clause of liquidated damage
to have an assessment of proof on loss on the employers part before the
contractor pay the damage and employers shouldnt given a right to terminate the
project once the limit of the damage has been reached.
14. Contractors advised to request in additions of cost and time extension, allowance
money like the one employers request for liquidated damage in the case of default
of the employer.
15. Finally, we believe that some of the remedial rights especially that concerned as a
contract security need contextual consideration; that is they require debate and
discussion among actors in the construction industry.

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References
1. ERA legal services divisions securities guideline for projects counterparts
2. G.Christian Hedeman June 1995 & Robert F.Cushman Architect and Engineer
Liability, claims against design professionals, second edition
3. Gerald I. Katz, 2000 Presentation on contract risk allocation
4. Goetze, A
5. Harold D.Hauf, Building contracts for design and construction second edition
6. Henry A. Cohen, 1961 Public construction contracts and the law
7. http://www.wikipedia.org//puplic/english/employment/finance,
8. http://sio.org (index.htm),10 things you should know about surety bonding
9. http://www.ilo.org/puplic/english/employment/finance, equipment finance for
small contractors in puplic work programs lindea deelen kwaku osei bonsu,
working paper
10. James C.Van Horne, 10th edition, Financial Management and policy
11. John Adrianse, 2005Construction contract law, the essentials
12. Kassaw Bediru, Mesfin Hailu and Yehyes Dereje, 2006 " The role of banks in
minimizing contractor's cash-flow problems". A thesis summated to AAU of
technology faculty-south
13. Meek, T.S (translator),The code of Hammurabi in the ancient near East, J.B.
Pritchard,
14. Princeton University press, Princeton.N 1958,PP. 163
15. Conditions of contracts, Multilateral development bank harmonized editions,
march 2006.
16. The Federal Democratic Republic of Ethiopia, Standard Bidding Document
(SBD), For Procurement of Works, For National Competitive Biddings (NCB).

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17. Micheal Lear,C:/contractors specialist/training/CA4 divisional handover &
securities/CA4b contract securities doc3. April, 2007
18. Rory Burke 4th edition,Project management (planning &controlling techniques)
19. Wubshet Jekale Mengesha, April 2006 Procurement & Contract Management
lecture note

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APPENDICES
APPENDIX: A1
THE IMPACT OF CONTRACT SECURITIES AND REMEDIAL
RIGHTTS ON CONSTRUCTION COTRACTORS
Questionnaire for contractors
i.
Respondent and company profile
1) What is your position and responsibility in your firm?

Owner
General Manager
Other _____________________
2) What is your firms grade? (Please specify your grade number in the boxes provided)
GC
BC
RC
SC
ii.
Securities practiced in Ethiopian Construction
3) How often are you required to furnish bid/contract securities? (could be any kind)
Always
About times
About times
About 1/4 times
Never
A. When required to produce securities in what form are you often demanded?
(Multiple choices possible)
Type of security
Governmental
Bid security
Advance
payment
security
Performance bond
Performance guarantee
Payment security
Retention security
Private Non-governmental organization
If any other, please specify _________________________________________________

________________________________________________________________________
B. In the cases you were not demanded securities, what do you think were the
reasons that your clients didnt request the securities?
________________________________________________________________________
__________________________________________________________________
iii.
The security issuing companies

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4) When asked to furnish securities, which institution do you mostly select for security
services? (Multiple choices possible)
Insurance
Banks
Others, specify _______________________________________________

______________________________________________________________
5) Which bank/insurance do you mostly prefer for security services and facilities?
Government
Private
Please give us reason for your preference

________________________________________________________________________
________________________________________________________________________
6) Do your banks/insurances require collateral as compensation for the perceived risks
involved in giving security to your company?
Yes
If yes, what are they?
(Multiple choices
Possible)
No
Collateral
Work guarantee
Work payment guarantee
Guaranteeing loan
Other _____________________________________
_____________________________________________
7) How do you see the rules and regulations of the issuers of bonds?
Banks/insurance Excellent
Very
good
Good
Acceptable Poor
Very
poor
Private
Government
iv.
The securities
Bid security

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8) According to the new standard bid document PPA the amount of the bid security to be
submitted along with the bid is determined by the bidder itself. Does this thing have
an advantage to you?
Yes, how _____________________________________________
___________________________________________________
___________________________________________________
No, why __________________________________________________
___________________________________________________
___________________________________________________
Advanced payment security

9) Most contract documents require the contractor to furnish unconditional bank
guarantee for the provision of advance payment by the employer. Does this guarantee
have a significant impact on you?
Yes
No
If yes please specify the nature of the impact and what you would have preferred
________________________________________________________________________
__________________________
Performance bond/guarantee
10) On average, in terms of percentage of the project cost, what is the amount of
performance bond you are required?
Less than 5%
5-10 %
Greater than 10%
A. In your opinion, is this amount fair?

Yes
No
B. If you think that the amount required is unfair, do you believe that this increases
construction costs unnecessarily?
Yes
No
11) If you have to provide collateral to secure a performance bond, on average what
proportion of the bond should the collateral amount be?
10-30 % of the bond
30-50 % of the bond
Above 50%
100 % of the bond

In your opinion, is the amount requested fair?
Yes
No

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12) On average, is the premium you are required to pay to secure these performance
bonds fair?
Yes
No
Retention fund
13) If your contract stipulate provision for clients to retain a percentage of money from
the interim payment, on average, is the amount deducted fair?
Yes
No
14) As a contractor, do you think that retention has a significant impact on your cash
flow?
YesNo
15) Do you prepare budget for the retention that will be deducted?
Yes
No
16) Do your clients normally release the retention money on the time specified on the
contract?
Yes
No
17) In your experience how is the retained money handled? (Multiple choices possible)
Simple deducted by client and dont know how he/she handles it
The deducted money is stored in a separate traceable account in the name of
the client
The retained money is held in a separate account in the common name of my
company and my client
Other, please specify ___________________________________________________
18. Have you ever received interest on the retained money?
Yes
No
18) What difference would it make if there will be removal or reduction of the burden of
retention? ____________________________________________________________
___________________________________________________________________
19) As a major contractor, do you deduct retention money from your sub-contractors?

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Yes
No
20) If you deduct retention from your sub-contractors, when do you release the retained
money?
All at the substantial completion of the part they are sub contracted
Half at the substantial completion and remaining half after defect liability period
of their part
Half at the substantial completion of their work and remaining half after defect
liability period of the project
Other, please specify
______________________________________________________________________
_____________________________________
E. Contractors guarantee
21) Have you ever demanded your client any guarantee against defaulting from its side
(such as non/late payment, insolvency, etc)?
Yes
No
A. If yes what guarantee do you demand to protect yourself against your clients
defaulting? (Multiple choices possible)
Overtake the property delivered
Obtain third party guarantee such as payment guarantee
Ensure viable legal remedies like arbitration or using advance payment as
a security against defaulting by the client, etc.
_____________________________________________________________________
_______________________________________________________
B. If you dont normally demand your client a sort of guarantee, please tell us your
reasons for not doing so

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________________________________________________________________________
_______________________________________________________
22) In the last ten years, how often have you been involved in a case that was
triggered by defaulting on the part of your client (such as non payment, late payment,
insolvency etc?)
B/n 0nce and five times,
More than five times,
None
If you have been involved in such cases, do you believe that demanding a guarantee
from your client would have helped?
Yes
No
F. Compensations
22) Have you ever demanded liquidated damage for lost opportunities because of
defaulting by the employer (please note that this is not meant the claims for the actual
costs incurred due clients defaulting)?
Yes
No
If no, why _______________________________________________________________

_______________________________________________________________________
23) Most construction documents specify a liquidated damage of 1/1000 of the project
cost (up to a certain maximum amount) for each day the project is unjustifiably
overdue. In your opinion, is this amount is fair
Yes
No
24) What do you recommend in order to improve the contribution of clients and issuers of
bonds in minimizing the impacts of the contract security?
Client________________________________________________________________
_____________________________________________________________________
____________________________________________________________________
Bond issuers__________________________________________________________
_____________________________________________________________________
_____________________________________________________________________

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APPENDIX: A2
THE IMPACT OF CONTRACT SECURITIES AND REMEDIAL

RIGHTTS ON CONSTRUCTION COTRACTORS
Questionnaire for clients/employers
1. How many projects have you awarded to local contractors in the last ten years?
Less than 10
10 -20
above 20
2. From which company do you want the contractor to bring the bond? (Multiple
choices is possible)
Bank
Insurance
Other, _____
________________
________________
3. Do you require securities on the bid/contract time?

Yes
No
If yes, please list types of securities you requested from the contractor (multiple choices
is possible)
Type of security
Mark (X)
Bid security
Performance an
Payment security
Retention security
If you dont request securities, what will you do on the wake of defaulting by the
contractor?
________________________________________________________________________
__________________________________

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4. Do you think retention suggests lack of trust in the firms chosen to do the work?
Yes
No
If no, why? ___________________________________________________________

_____________________________________________________________________
5. Do you think withholding retention money by your organization increases
contractors borrowing costs or elevate the cost of construction?
Yes
No
6. In your opinion, what difference would it make if there will be removal or
reduction of the burden of funding retention on your organization?
__________________________________________________________________
__________________________________________________________________
_______________________________
7. Have you ever been requested a payment guarantee by contractors for your timely
payment and retention money release?
Yes
No
If yes, what kinds of guarantee do you furnish?

Payment guarantee
property overtake right
Advance payment as
security
If no, why do you think they do not request a guarantee? _________________________
________________________________________________________________________
________________________________________________________________________
8. For untimely completion, do you request a liquidated damage from the
contractor?
Yes
No
If yes, in average is the amount of liquidated damage fair?

Yes
No

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In addition, by your interest or by your default may be you made an extension of time.
Do you believe this extension of time entitles the contractor to ask allowance money like
the one you request for liquidated damage?
Yes
No
If no, why? _____________________________________________________________

________________________________________________________________________
________________________________________________________________________
9. Most construction documents specify a liquidated damage of 1/1000 of the project
cost (up to a certain maximum amount) for each day the project is unjustifiably
overdue. In your opinion, is this amount is fair
Yes
No
10.
If you deduct retention from your contractors, when do you release the
retained money?
All at the substantial completion of the part they are contracted
Half at the substantial completion and remaining half after defect liability period
of their part
Half at the substantial completion of their work and remaining half after defect
liability period of the project
________________________________________________________________________
___________________________________
11.
What do you recommend in order to improve the contribution of clients and
issuers of bonds in minimizing the impacts of the contract security on contractors?
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________

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APPENDIX: A3
THE IMPACT THE IMPACT OF CONTR ACT SECURITIES AND
REMEDIAL RIGHTTS ON CONSTRUCTION COTRACTORS
Questionnaire for issuers of bonds

1. What is your position and responsibility in your firm? ______
General Manager
Bond underwriting head
Other _____
2. What service does your company provide?

Insurance
Bank
Other, ____________
3. Which of the following arrangements do you provide to contractors/ employers?

(Multiple choices possible)
Tender security
Performance bond
Payment security
Retention security
If other explain________________________________
4. From the above arrangements, which do contractors frequently demand? (Please
rank them from 1-7: with 1 being the most demanded)
Tender security
Performance bond

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Payment security
Retention security
If other explain________________________________
5. What are your major criteria to select customers, especially contractors? (Please
rank them from 1-4: One being the most major)
Collateral value
Credit worthiness of the company
If other, please specify_________________________________________
___________________________________________________________________
6. If your firm has issued the given bond by demanding collateral, which type of
collateral is accepted from construction firms? (Multiple choices possible)
Owned assets
Account receivables
Work guarantee
Work payment guarantee
And if other please explain _____________________________________
____________________________________________________________
7. Do you provide contractors advisory services about potential risks of their
proposed plan?
Yes
No
Please explain why ________________________________________________________

________________________________________________________________________
8. Does your company place limitation on the type, size, location, and number of
contracts to be undertaken by the contractor to provide securities?

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Yes,
9.
No
In the history of your company do contractors or any of the owner default on a

contract concerning in the issue of securities?
Yes
No
If yes, would you please give us an explanation based on the loses they incurred to your
firm.
. _______________________________________________________________________
________________________________________________________________________
________________________________________________________________________
10. How do you determine the cost of bond/ guarantee? Based on:
Size
Type
Duration of the project
Contract
Other pleas specify ____________________________________
______________________________________________
______________________________________________
______________________________________________
______________________________________________
______________________________________________
11. How fair do you think is that premium you charge in issuing securities to
contractors (compared to the services you provide to other sectors)?
Very fair
Moderately fair
Similar to other sectors,
More expensive than other sectors

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APPENDIX: A4
Note for Bidders: The Contract Security should be on the letterhead of the issuing Financial
Institution and should be signed by a person with the proper authority to sign documents that are
binding on the Financial Institution.
Contract Security
(Bank Guarantee)
Contract Security (Unconditional Bank Guarantee)

Date: [insert date]
Procurement Reference No.: [insert procurement reference number]
To: [name and address of Employer]
WHEREAS [name and address of Contractor] (hereinafter called the Contractor) has
undertaken, in pursuance of Contract No. [number] dated [date] to execute [name of
Contract and brief description of Works] (hereinafter called the Contract);
AND WHEREAS it has been stipulated by you in the said Contract that the Contractor shall
furnish you with a Bank Guarantee by a recognized bank for the sum specified therein as
security for compliance with his obligations in accordance with the Contract;
AND WHEREAS we have agreed to give the Contractor such a Bank Guarantee;
NOW THEREFORE WE hereby affirm that we are the Guarantor and responsible to you, on
behalf of the Contractor, up to a total of [amount of Guarantee] [amount in words], such
sum being payable in the types and proportions of currencies in which the Contract Price is
payable, and we undertake to pay you, upon your first written demand and without cavil or
argument, any sum or sums within the limits of [amount of Guarantee] as aforesaid without

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your needing to prove or to show grounds or reasons for your demand for the sum specified
therein.
We hereby waive the necessity of your demanding the said debt from the Contractor before
presenting us with the demand.
We further agree that no change or addition to or other modification of the terms of the
Contract or of the Works to be performed thereunder or of any of the Contract documents
which may be made between you and the Contractor shall in any way release us from any
liability under this Guarantee, and we hereby waive notice of any such change, addition, or
modification.
This Guarantee shall be valid until a date 28 days from the date of issue of the Certificate of
Completion.
This guarantee is subject to the Uniform Rules for Demand Guarantees, ICC Publication No.
458, except that subparagraph (ii) of Sub-article 20(a) is hereby excluded.
Signature and seal of the Guarantor
Name of Financial Institution

Address
Date

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APPENDIX: A5
Note for Bidders: The Performance Bond should be on the letterhead of the issuing Institution
and should be signed by a person with the proper authority to sign documents that are binding on
the Institution.
Performance Bond
By this Bond, [name and address of Contractor] as Principal (hereinafter called the
Contractor) and [name, legal title, and address of surety, bonding company, or
insurance company] as Surety (hereinafter called the Surety), are held and firmly
bound unto [name and address of Employer] as Obligee (hereinafter called the
Employer) in the amount of [amount of Bond] [amount of Bond in words], for the
payment of which sum well and truly to be made in the types and proportions of
currencies in which the Contract Price is payable, the Contractor and the Surety bind
themselves, their heirs, executors, administrators, successors, and assigns, jointly and
severally, firmly by these presents.
Whereas the Contractor has entered into a Contract with the Employer dated the [day]
day of [month], [year] for [name of Contract] in accordance with the documents, plans,
specifications, and amendments thereto, which to the extent herein provided for, are by
reference made part hereof and are hereinafter referred to as the Contract.
Now, therefore, the Condition of this Obligation is such that, if the Contractor shall
promptly and faithfully perform the said Contract (including any amendments thereto),
then this obligation shall be null and void; otherwise it shall remain in full force and
effect. Whenever the Contractor shall be, and declared by the Employer to be, in default
under the Contract, the Employer having performed the Employers obligations
thereunder, the Surety may promptly remedy the default, or shall promptly:
(1)
Complete the Contract in accordance with its terms and conditions; or
(2)
Obtain a Bid or bids from qualified bidders for submission to the Employer
for completing the Contract in accordance with its terms and conditions, and
upon determination by the Employer and the Surety of the lowest responsive

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Bidder, arrange for a Contract between such Bidder and Employer and make
available as work progresses (even though there should be a default or a
succession of defaults under the Contract or Contracts of completion arranged
under this paragraph) sufficient funds to pay the cost of completion less the
balance of the Contract Price; but not exceeding, including other costs and
damages for which the Surety may be liable hereunder, the amount set forth in
the first paragraph hereof. The term Balance of the Contract Price, as used
in this paragraph, shall mean the total amount payable by the Employer to the
Contractor under the Contract, less the amount properly paid by the Employer
to the Contractor; or
(3)
Pay the Employer the amount required by the Employer to complete the
Contract in accordance with its terms and conditions up to a total not
exceeding the amount of this Bond.
The Surety shall not be liable for a greater sum than the specified penalty of this Bond.
Any suit under this Bond must be instituted before the expiration of one year from the
date of issuance of the Certificate of Completion.
No right of action shall accrue on this Bond to or for the use of any person or corporation
other than the Employer named herein or the heirs, executors, administrators, successors,
and assigns of the Employer.
In testimony whereof, the Contractor has hereunto set its hand and affixed its seal, and
the Surety has caused these presents to be sealed with its corporate seal duly attested by
the signature of its legal representative, this [day] day of [month], [year].
Signed by
on behalf of [name of Contractor] in the capacity of
In the presence of
Date
Signed by
on behalf of [name of Contractor] in the capacity of

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In the presence of
Date

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APPENDIX: A6
Note for Bidders: The Advance Payment Security should be on the letterhead of the issuing
Financial Institution and should be signed by a person with the proper authority to sign
documents that are binding on the Financial Institution.
Advance Payment Security

Bank Guarantee for Advance Payment
To:
[name and address of Employer]

[Name of Contract]
Gentlemen:
In accordance with the provisions of the Conditions of Contract, Clause 51 (Advance
Payment) of the above-mentioned Contract [name and address of Contractor]
(hereinafter called the Contractor) shall deposit with [name of Employer] a Bank
Guarantee to guarantee his proper and faithful performance under the said Clause of the
Contract in an amount of [amount of Guarantee] [amount in words].
We, the [Bank or Financial Institution], as instructed by the Contractor, agree
unconditionally and irrevocably to guarantee as primary obligator and not as Surety
merely, the payment to [name of Employer] on his first demand without whatsoever
right of objection on our part and without his first claim to the Contractor, in the amount
not exceeding [amount of Guarantee] [amount in words].
We further agree that no change or addition to or other modification of the terms of the
Contract or of Works to be performed thereunder or of any of the Contract documents
which may be made between [name of Employer] and the Contractor, shall in any way
release us from any liability under this Guarantee, and we hereby waive notice of any
such change, addition, or modification.

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This Guarantee shall remain valid and in full effect from the date of the advance payment
under the Contract until [name of Employer] receives full repayment of the same
amount from the Contractor.
This Guarantee is subject to the Uniform Rules for Demand Guarantees, ICC Publication
No. 458.
Yours truly,
Signature and seal:
Name of Bank/Financial Institution:
Address:
Date:

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Faculty of Technology South

Impacts of remedial rights on construction contractors.

Impacts of remedial rights on construction contractors

APPROVED BY BOARED OF EXAMINER

South Technology Faculty Dept of Construction Technology &

Impacts of remedial rights on construction contractors

South Technology Faculty Dept of Construction Technology &

Impacts of remedial rights on construction contractors

South Technology Faculty Dept of Construction Technology &

Impacts of remedial rights on construction contractors

Chapter one- Introduction.....................................................................................................................6

South Technology Faculty Dept of Construction Technology &

Impacts of remedial rights on construction contractors

South Technology Faculty Dept of Construction Technology &

Impacts of remedial rights on construction contractors

Assessing the rules, regulations and determination of premium of bond issuers...............76

4.2.1 Arrangements of securities by issuers................................................................................76

South Technology Faculty Dept of Construction Technology &

Impacts of remedial rights on construction contractors

Africa Development Bank

Commercial Bank of Ethiopia

Ethiopian Building Construction Authority

Ethiopian Road Authority

International Federation Consulting Engineers

Liquidated and Actual damage

Ministry of Works and Urban Development

Public Procurement Authority

Request For Information

South Technology Faculty Dept of Construction Technology &

Impacts of remedial rights on construction contractors

Chapter one- Introduction

South Technology Faculty Dept of Construction Technology &

Impacts of remedial rights on construction contractors

South Technology Faculty Dept of Construction Technology &

Impacts of remedial rights on construction contractors

South Technology Faculty Dept of Construction Technology &

Impacts of remedial rights on construction contractors

South Technology Faculty Dept of Construction Technology &

Impacts of remedial rights on construction contractors

1.3-scope and limitation

South Technology Faculty Dept of Construction Technology &

Impacts of remedial rights on construction contractors

It is also limited to local contractors that are found in Addis

The time constraint in preparing the study should also be

1.4-The study strategy

South Technology Faculty Dept of Construction Technology &

Impacts of remedial rights on construction contractors

Fig-1.1-The study strategy

1.5-Organazation of the paper

South Technology Faculty Dept of Construction Technology &

Impacts of remedial rights on construction contractors

South Technology Faculty Dept of Construction Technology &

Impacts of remedial rights on construction contractors

Chapter two-Literature review

South Technology Faculty Dept of Construction Technology &

Impacts of remedial rights on construction contractors

South Technology Faculty Dept of Construction Technology &

Impacts of remedial rights on construction contractors

AAU, Technology South Faculty, Department of Construction Technology and

Impacts of remedial rights on construction contractors

Ministry of transport and communications,