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INDEPENDENT JOURNAL OF MANAGEMENT & PRODUCTION (IJM&P)
http://www.ijmp.jor.br v. 10, n. 5, September-October 2019
ISSN: 2236-269X
DOI: 10.14807/ijmp.v10i5.925
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ASSESSMENT OF BONDS UTILISATION IN THE NIGERIAN
CONSTRUCTION INDUSTRY
Usman Muhammed
Federal University Of Technology Minna-Nigeria, Nigeria
E-mail: ussymamin4real@yahoo.com
Emmanuel Chidebere Eze
Federal University Of Technology Minna-Nigeria, Nigeria
E-mail: emmanueleze001@gmail.com
John Abel Tsado
Federal University Of Technology Minna-Nigeria, Nigeria
E-mail: gutsadoabelj@gmail.com
Blessing Okokun
Federal University Of Technology Minna-Nigeria, Nigeria
E-mail: blezy2003@yahoo.com
Submission: 12/08/2018
Revision: 2/08/2019
Accept: 2/27/2019
ABSTRACT
Default by contractors in meeting the time and cost performance of a
project is usually counterproductive. Considering safety from the high
financial burden of construction projects, clients are compelled to seek
a level of guarantee in bonds to safeguard them from financial
problems and provide an incentive for proper and timely completion of
the project by the contractor, thus, minimising failures and risks.
Therefore, the study assessed the level of bond utilisation in the
Nigerian construction industry, with a view to examining the benefits of
its utilisation in construction projects. A survey method was adopted in
which questionnaires were used to collect data from respondents. With
a response rate of 45.30% (164 of 362), the collected data were
analysed using descriptive and analytical scientific method. It was
found that the level of bond utilisation in the construction contract is
high, with a performance bond and Advance payment bond being the
most commonly used construction bond types.
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Assurance of performance and financial security are the major benefits of bond
utilisation. The study recommends that there is a need for more enlightenment of
construction participants on the various types of bond used in construction contracts.
Keywords: Bond, Construction Industry, Construction Professionals, Financial
Experts, Insurance Experts, Nigeria
1. INTRODUCTION
The construction industry is the cornerstone of the socio-economic
development of nations of the world. It drives infrastructural provisions such as roads,
schools, hospitals and other basic facilities (SAIDU; SHAKANTU, 2016); and the
industry is adjudged the leading sector in any country (ADEWUYI; ODESOLA, 2015).
Thus, the industry is responsible for the physical transformation and
development of the environment (OKE at al., 2013). In spite of the enormous benefits
of the construction activities, construction projects are facing some challenges from
failures, which results to project abandonment, delay in project delivery, cost inflation,
poor quality of work and a high initial cost of the project (OGUNSEMI; AJE, 2006). In
order to guide against these challenges be-devilling the construction industry of
Nigeria, bond was introduced (OJO, 2011; OKE et al., 2015).
A construction bond is an instrument introduced to protect and/or indemnify its
recipients against such negative occurrence; and for its benefits to be fully enjoyed,
there must be practical implementation and enforcement of the bonding provisions
and/or conditions. (OKE et al., 2015). Although, bond in construction contract was
seen as a mere formality in the course of negotiating contractual terms and conditions
by both clients and contractors (OJO, 2011).
Bond is an essential feature of the construction industry, and the first known
record of contract bond evolved from the Mesopotamian region around 2750BC and
has been part of the construction industry (SWEET, 2000). Bond was addressed in
the first known written legal code and the oldest surviving written surety contract,
recognizing the need to protect the taxpayer from contractor's failure. Most standard
form of building contact requires the provision of bonds by the main contractor to the
project owner (MCLYNTRE; STRISACHEK, 2005).
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Contract bonds, used seriously in the construction industry are a guarantee
from a surety company to the project owner (obligee) that the general contractor
(principal) will stick firmly to the provisions of the contract (KANGRI; BARKHEET,
2001).
The bond system is essential in construction projects, commonly perceived to
provide a level of financial protection and incentive for proper and timely performance
of the project (HARRELL, 2003). However, in spite of the benefits of bonds, its usage
has its own problems such as increased cost to the contractor and reduces the
profitability of the project (MUHAMMED, 2012). The money that would have been used
in improving the financial position, cash flow etc., of the contractor, is been used to
obtain bonds to the client (HENRY; AMMAR, 2005).
Oke and Ogunmola (2014) assessed the effects of retention bond on the
performance of construction projects executed by the Ministry of works in Ondo state,
Nigerian. The study reported a significant relationship between retention bond and
project cost and time performance. Hassan and Adnan (2018) assessed the problems
and abuse of performance bond in the construction Industry of Malaysia and found
that the lack of uniformity and inconsistency in the contents of guarantee/bond forms
results from the one-sided interpretations found in the contracts.
Oke and Ogunsemi (2016) carried out a study aimed at examining the effect of
stakeholders, project characteristics and bonding decision factors on the
administration of construction bonding using structural equation modelling within
Lagos and Ondo states; and found that these variables have an effect on the success
of bonded construction projects.
In a similar but separate study, (OKE, 2016) evaluated the risks that are
associated with bonded and unbonded projects with a view to ascertaining their effects
on overall construction projects success. The study utilised data from construction
participants in Lagos and Ondo states. The study revealed that financial soundness of
the issuer also known as credit risk has a major effect on projects with bond while for
projects without bond, liquidity risk requires the most attention.
It is obvious that among the few available studies on bonding especially in
Nigeria, there is little or nonexistence of studies that were carried out in Abuja, the
geographical area of this study. Thus, the need to assess the level of bonds utilisation
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and its benefits among the construction companies in Abuja. The aim of this study is
to assess the level of bonds utilisation in the Nigerian construction industry. The
specific objectives of this study are to assess the level of bond utilisation in
construction projects and to examine the benefits of its utilisation in construction
projects.
The outcome of this study will add to the body of existing knowledge available
regarding bonds utilisation and management in the construction projects. In addition,
the level of awareness of bond utilisation and benefits will improved be among
construction participants and the industry in general.
2. CONSTRUCTION BOND
A construction bond is a written agreement in which one party (the surety)
guarantees that a second party (the principal) will fulfil its obligations to a third party
BOSWELL (2010). Bonds is a tripartite agreement between the surety, the project
owner, and the contractor on the project. Kangari and Bakheet (2001) opined that even
though the underwriting process of surety bonding is considered as a line of insurance;
it has many similar characteristics to a bank lending process because the applicant, in
either case, is being judged as a credit risk.
OKE et al. (2015) assert that contractor most often transfers the risk of
contractor default to a surety company through the submittal of contract bonds. Bonds
constitute a legal guarantee that the project will be completed as expected. In
instances where a bonded contractor fails to perform, the bonding company will
provide some form of restitution to the owner (OKE et al., 2015)
A construction bond also is known as contract bonds is usually undertaken by
a bank or other financial institution and is aimed at making payment to the
client/employer up to a stated aggregate amount (i.e. bond amount) in defined
circumstances (NDEKUGRI; RYCROFT, 2009).
According to Huang (2008), construction contracts require contractors to furnish
performance securities that serve as fundamental financial management tools for
project owners to transfer contractor default risks to security providers. Were good
practice is followed in the prequalification, selection and appointment of contractors
and sub-contractors/suppliers, there may not be the need for bonds and guarantees
utilisation (JACK et al., 2006).
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Bond provisions normally increase the cost and time of a project, this was
confirmed by Oke et al. (2013) who observed a significant relationship between the
cost of the bond and initial cost; final cost; cost overrun; the number of days to secure
bond; initial time, final time and time overrun.
2.1. Classification of Bonds
Deng et al. (2004) pointed out that the major difference is whether or not there
is any condition to be met before the obligee is entitled to claim the bond. Based on
the bonds condition, bonds are generally classified into two main categories according
to MICHAEL (2003), and they are conditional bond unconditional or on-demand bonds.
a) Conditional Bonds
Conditional bonds can be identified as that in which payment was made as
conditional upon proof of breach of underlying contract (as opposed to a mere notice
of a breach) by the contractor. Therefore, in practical terms, the conditional bonds are
considered as a security for damages which the employer may recover in the action
against the contractor (MALLESONS, 2003).
Conditional bond is also seen as a default bond. It is a contract guarantee
whereby the surety accepts ‘joint and several' responsibility for the performance of the
contractor's obligations under the building contract. In this, the contractor remains
primarily liable for his performance and not protected by the bond (SUPARDI et al.,
2011).
Conditional bonds are more often seen in domestic construction contracts and
usually provide that the guarantor will pay the bond amount to the employer provided
that certain conditions have been fulfilled. Usually, such conditions would be the
contractor's insolvency or breach of contract. This means that the employer will have
to prove its loss before receiving any monies payable under the bond (TCYOUNG,
2017).
b) Unconditional Bonds
Unconditional bond or "on demand" bond differs from conditional bonds
whereby the contractor has to pay the sum assured on the demand by the
employer/client without any proof of default. The contractor is entitled to insist that the
demand should be made in a form prescribed in the bond (MICHAEL, 2003).
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It is a covenant by the surety (usually a bank) to indemnify the employer
following contractor's default, subject to stated terms and up to a sum commonly
between 10% and 20% of the main contract sum (SUPARDI et al., 2011). In most
circumstances, unconditional bonds are required when there was a sum of money for
a specific purpose against the contractor, the contractor might enjoy the used of funds
otherwise the employer/client be protected away and improves the cash flow. This
application is more to the retention sum where the employer expects that he was
entitled to call on the bond and receive payment immediately if any dispute arises in a
contract (DANIEL, 2008).
Essentially, an unconditional bond is made subject to conditions such as; the
production of an architect or engineer's certificate stating it's opinion that there is a
breach of the contract and the amount stated in the demand is the appropriate
compensation for the breach, authentication of the signature of the owner in the
demand and authentication of the signature of the Architect or Engineer in the
Certificate.
Furthermore condition to an unconditional bond arises where the contract
provides conditions to the payment of the demand (for example, that the contractor is
in breach and failed to remedy the breach within X-days after receiving notice from the
owner requiring him to do so). This type of clause creates an obligation between the
owner and contractor separate from the obligation between the owner and the issuer
of the bond; this could lead to the owner being in breach of contract by calling on the
apparently unconditional bond. To avoid this problem, it is in the owner's interest that
the contract does not mention the bond or any related condition (MALLESONS, 2003).
2.2. Types of Construction Bonds
According to MEHMET et al. (2006), performance bonds and payment bonds
are the common types of bonds available in construction contracts, and those that are
rarely considered in construction contracts are maintenance bonds, supply bonds and
completion bonds. The most common construction bonds in Nigeria are bid bond,
performance bond, advance payment bond and retention bond (OJO, 2011). The
common bonds types in the US construction industry is either payment or performance
(HINCHEY, 1986).
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Bond Guarantee Group highlighted the types of bond to included; Performance
Bond, Payment Bond, Bid Bond - Proposal Bond - Financial Security Bond, Warranty
Bond - Maintenance Bond, Supply Bond, Completion Bond, Subdivision Bond -
Development Bond - Improvement Bond, Landscaping Bond, Service Contract Bond,
Contract Bond - Construction Bond. GIWA-OSAGIE (2018) states that the various
bonds use in international and local construction contracts are the tender bond, bid
bond, advance payment or repayment guarantees, and performance bonds.
However, the focus of this study is on bid bond, performance bond, advance
payment bond and retention bond, since they are what is common among construction
contracts executed in Nigeria.
a) Bid Bonds - In this type of bond, the bidder (i.e. contractor and surety) usually
agree to be firmly and jointly bound to pay a specified sum of money to the employer
during the period of bid validity on the occurrence of certain events or conditions
(GIWA-OSAGIE, 2018). According to Bond Guarantee Group, these bonds are
usually written at 5% or 10% of the bid amount and are submitted along with the bid
proposal. A bid bond simply shows that a contractor has been prequalified for a
project and if the project is awarded to the contractor, the bid bond guarantees that
the contractor will enter into a contract with the owner. If the contractor fails to enter
into the contract, 5% or 10% may need to be paid to the owner as damages.
Generally, there is no charge for this bond.
b) Performance bond/Payment bond - This is the final bond written when a
contractor is awarded a project; and the bond guarantees nearly every term and
condition in the contract. That is proper workmanship, completed on time, among
others (Bond Guarantee Group). Whereas the payment bond guarantees that all
employee, subcontractors, and suppliers have been paid. The bond guarantees the
execution of the contract by the surety in the event that the contractor fails to fully
perform the contract (GIWA-OSAGIE, 2018). This bond is usually taken out by the
contractor, usually with a bank or insurance company (in return for payment of a
premium) for the benefit and at the request of the employer, in stipulated maximum
sum of liability and enforceable by the employer, in the event of the contractor's
default, repudiation or insolvency (ROBINSON et al., 1996).
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A payment bond guarantees the owner that subcontractor's, labours and
suppliers will be paid the monies that they are due from the principal, the owner is
the obligee; the "beneficiaries" of the bond are the subcontractors and suppliers.
Both the obligee and the beneficiaries may sue on the bond. An owner benefits
indirectly from a payment bond in that the subcontractors and suppliers are assured
of payment and will continue in performance. On a private project, the owner may
also benefit by providing subcontractors and suppliers a substitute to mechanics
liens, if the principal fails to pay the subcontractors or suppliers, they may collect
from the principal or surety under the payment bond, up to the penal sum of the
bond, payment bond is often less than the total amount of the prime contract and is
intended to cover anticipated subcontractor and supplier costs (SWEET, 2000).
c) Advance Payment Bonds, according to GIWA-OSAGIE (2018), are bonds given by
the surety after the pre-tender stage when the contract must have been awarded to
the contractor or bidder. This bond ensure that an agreed percentage of the contract
sum is paid in advance to the contractor on the strength of the surety's undertaking,
or guarantee to refund such proportion of the said advance payment received from
the employer representing the value of work not done in the event of the contractor
failing to fulfil the terms of the contract.
d) Retention bond is a guarantee or requirement to secure a due performance which
lies in the background as a reassurance to the client at an overall loss during defect
liability period that he may otherwise face which will be cushioned, to the limit of the
bond (MALLESONS, 2003). According to JCT "98" in clause 30:3 "the employer
may retain a percentage of the value of work, materials and goods referred to the
contract which is named in the appendix as percentage of clarified value retained,
provided always that the sum of the amount so retained equals the amount named
in the said appendix as limit of retention fund which is 5%, limit of 10% of the
contract sum as at the time of tender".
Retention fund is an amount that is due to the contractor which the client hold
as a guarantee; should there be defects on the structure during defect liability period,
these funds retained are to be used to make good such defects. Once the contractor
feels that he has put right all the defects, complained upon by the client, he is entitled
to press for the issuance of a "certificate of completion making good defects as this is
a prerequisite for the release of the other moiety of the retention monies and must be
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procured before final certificate is due (SWEET, 2000). A contractor may furnish a
bond to the employer to secure an early release of retention money; if defects are then
found, the employer will thus have a fund to call on for their rectification as especially
when the contractor fails to carry out his duties to make good such defects. Moreover,
the contractor's money's are no longer retained (MURDOCH; HUGHES, 2000).
2.3. Benefits of Bonds
The main purpose of a bond is to provide some financial security in the form of
a cash sum payable by the surety for the contractor's failure to perform his obligations
under a contract (GIWA-OSAGIE, 2018). The benefits of bond utilisation includes; It
indicates that a contractor is capable of fulfilling the obligations of the contract, bonded
projects are more likely to be completed than non-bonded projects by the contractor,
the contractor or subcontractor bonding capacity could increase the chances of
securing more projects, the contractor could get technical, financial or management
assistance from the surety bond producer and underwriter , and in case of default by
the contractor, the client is assured of contract fulfilment by the surety company
(SFAA). Thus, Bonds are meant to provide financial security of the client/employer
against the default by the contractor in completing contractual obligations (ENTRUSTY
GROUP, 2005).
3. RESEARCH METHODOLOGY
The study covered the assessment of the perceptions of construction
professionals, financial and insurance experts on the level of bonds utilisation in the
Nigerian construction industry with a view to determining the benefits of bonds
utilisation in construction. The respondents are professionals in both contracting and
consulting organizations, banks and insurance companies, and construction owner's
(Clients) for both public and private sectors located in Abuja.
The choice of Abuja was based on the premise that Abuja is the Administrative
headquarters of the country with lots of construction firms having their head office or
branches in the country's capital as confirmed by (AJE et al., 2015). In addition, there
are a lot of construction projects being executed on a daily basis. Furthermore, most
of the professional's bodies related construction works have either their head office or
liaison office in Abuja.
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According to Saidu and Shakantu (2016), Abuja is one of the metropolitan cities
in Nigeria with the highest population of construction and other sector professionals
practising in either constructing or consulting, banking, insurance and manufacturing
companies or firms. Financial and insurance experts were considered in the study
because of the vital role they play in the issuance, insuring and administration of bonds
for construction participants.
The quantitative research approach was adopted for the study, and well-
structured questionnaires were used to collect data on the perception of the various
professionals regarding the level of bond utilisation in the Nigeria construction industry.
The questionnaires were administered by the authors and through the help of trained
field assistants who were properly briefed about the research topic and given the
necessary information on how to administer the questionnaire.
The questionnaire was designed in two sections using information derived from
the review of the related literature. Section A covered the general information of the
target respondents. Information gathered from section A served as a quality check
and verification of the data from the other part of the questionnaire. Section B covered
questions on the benefits and level of bond utilisation.
The respondents were requested to rate the level of bond utilisation by
construction firms. This was based on a 5-point Likert scale, where 1 = very low, 2 =
low, 3 = Average, 4 = high, and 5 = very high. The respondents were also, requested
to rate the benefits bond utilisation in construction contracts. This was based on a 5-
point Likert scale, where 1 = Not Important; 2 = Slightly Important; 3 = Moderately
Important; 4 = Important; 5 = Very Important.
A pilot survey was adopted to test the suitability and appropriateness of the
questionnaire to meet the study objectives as suggested by (FELLOWS; LIU, 2008).
Eighteen (8) of the draft questionnaire were randomly distributed to the selected
construction professionals and academics and based on their feedback, the final draft
was made.
A total of 362 questionnaires were randomly distributed to target respondents
within the study area. 169 of the questionnaires were retrieved out of the 382
distributed. 5 were discarded as a result of incomplete responses. Thus, only 164 were
fit for the analysis, which represents a 45.30% valid response rate.
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Akintoye (2000) suggested that a response rate of 20 -30% is adequate for
questionnaire surveys in construction management studies. Thus, 45.30% is adequate
for this study.
Frequencies, percentages, and Relative importance index (RII) were used to
analyse the collected data. Frequencies and percentages were used to analyse the
general information of the respondents. Relative importance index was used to
analyse the respondents' perception of the level of bond utilisation and benefits of
bonds to the client. Relative Importance Index (RII) is represented in the formula;
RII = ∑ (1n1+2n2+3n3+4n4+....n(nx))
n(n1+n2+n3+n4+.....nx)
Where, n = the constant responding weighting given to each variable by the
respondents, N= is the total number of respondents used in the analysis
The decision-rule for determining the level of awareness is based on the cut-
off; that items with RII of “0.81 to 1.00 are rated “very high (VH)”; 0.61 to 0.80 are rated
“High (H)”; 0.41 to 0.60 are rated “Moderate (M)”; 0.21 to 0.40 are rated “Low (L)”; and
below 0.20 are rated “Very Low (VL)”.
Furthermore, the reliability and internal consistency of the questionnaire was
carried out using Cronbach's alpha test. This test measured the reliability of each of
the field of the questionnaire and the mean of the entire fields of the same
questionnaire. The acceptable value range of Cronbach alpha is between 0.0 and +1.0
and as the value tends toward 1, the higher the degree of internal consistency.
The Cronbach alpha value for the variables is 0.878 and 0.912, thereby
implying that the questionnaire is credible and have a high degree of reliability. A
research instrument is perfect as the value of the Cronbach alpha tends towards 1.0
(MOSER; KALTON, 1999). This analysis was carried out using statistical package for
social science (SPSS) Version 20.
Table 1: Reliability statistics
Case Processing Summary
N %
Case 1
Valid 164 100 Cronbach's Alpha 0.878
Excludeda 0 0 N of Items 5
Total 164 100
Case 2 Valid 164 100 Cronbach's Alpha 0.912
Excludeda 0 0 N of Items 15
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Total 164 100
a. Listwise deletion based on all variables in the procedure.
Case 1- Level of bond utilisation; Case 2 - Benefits of bond utilisation
4. RESULTS AND DISCUSSION
4.1. General information of respondents
The analysis of the general information of the respondents showed that, on the
basis of their categories 12.2% (20) are contractors, 20.12% (33) are Quantity
Surveyors, 12.8% (21) are Architects, 17.68% (29) are Engineers, 25.00% (41) are
Bankers/insurance officers, and 12.2% are clients. In a nutshell, bank/insurance
companies constituted a larger proportion of the respondents as they are the major
providers of the bonds to the construction companies.
In terms of year of experience, 23.78% of the respondents have experience
between 0 - 5 years, 33.54% represent professionals with 6 - 10 years, 20.12% of the
respondents are professionals with 11 - 15years of experience, 16.46% represent
professionals with 16 - 20, and finally 6.10% are professionals with 21years and above
experience.
The average year of experience is 9.5years. In a nutshell, it was inferred that
the respondents experienced enough and information extracted from them could be
relied upon. Academically, 47.56% of the respondents hold a Bachelor degree, while
23.78%, 26.22% and 2.44% hold a Higher National Diploma, Master degree and
Doctorate degree respectively. This shows that the respondents are academically
qualified to give an informed response that could aid the achievement of the study aim.
Based on the class of bonds, the respondents are more familiar with the
conditional bonds than the unconditional bonds. This is evident in their responses;
(133) 81.10% of them are familiar with conditional bonds while (31) 18.90% are familiar
with unconditional.
Furthermore, the analysis revealed that the common bond types used among
construction participants are performance bond (32.32%) and Advance payment bond
(37.20%), and this is followed by retention bond (15.24%). This finding is agreement
with MUHAMMED (2012) and OKE et al. (2015). According to These similar but
separate studies, it was found that an advance payment bond and Performance bond
are the most common types of bonds used in a construction contract in Nigeria.
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Table 2: General information of respondents
Category Classification Freq. % Cum. %
Categories of Respondents Contractors 20 12.20 12.20
Quantity surveyors 33 20.12 32.32
Architects 21 12.80 45.12
Engineers 29 17.68 62.80
Banks/insurance 41 25.00 87.80
Clients 20 12.20 100.00
TOTAL 164 100.00
Years of experience 0 – 5 years 39 23.78 23.78
6 – 10 years 55 33.54 57.32
11 – 15 years 33 20.12 77.44
16 – 20 years 27 16.46 93.90
21 years and above 10 6.10 100.00
TOTAL (Av. Year = 9.5) 164 100.00
Academic Qualification Higher National diploma 39 23.78 23.78
Bsc/B.Tech 78 47.56 71.34
Master degree 43 26.22 97.56
Doctorate degree 4 2.44 100.00
TOTAL 164 100.00
Classes of Bonds Conditional bond 133 81.10 81.10
Unconditional bond 31 18.90 100.00
TOTAL 164 100.00
Common Bond Bid bonds 10 6.10 6.10
Advance payment bond 53 32.32 38.41
Performance bond 61 37.20 75.61
Payment bond 15 9.15 84.76
Retention bond 25 15.24 100.00
TOTAL 164 100.00
4.2. Level of awareness of bonds utilisation
The analysis of the respondent's perception of the level of bond utilisation is
shown in Table 3. From the table it can be seen that based on the ranking of the
respondents' perceptions, performance bond with (RII = 0.856) is ranked 1st, followed
by advanced payment bond with (RII = 0.815) and thirdly, retention bond with (RII=
0.790). With the value of the relative important index, it can be concluded that all the
respondents are aware of the bond types used in the Nigerian construction industry,
as they all have their RII values greater than 0.50 (50%). Overall, the level of
awareness of bond utilisation is 78.41%, implying a high level of awareness since it
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fell into the cut-off point of 0.61 to 0.80 set for ‘'high' level. Thus, it is concluded that
the level of bond utilisation in the Nigerian construction industry is high.
This result supports the finding of MUHAMMED (2012) who reported that the
level of advance payment bond utilisation ranges between 61-80%. The result of this
study also contradicts some findings of OKE et al. (2015) and MUHAMMED (2012). IT
was found that the level of utilisation of bid bond, performance bond, and retention
bond ranges between 5%-60%. This is in disagreement with the result as the least
level of utilisation is in bid bond which is 0.690 (69%) and this fell within the cut-off
point for High usages. OKE et al. (2015) who reported that on the overall, the level of
awareness of the bond assessed was very low; and retention bond had the highest
value of awareness, followed by bid/tender bond, performance bond and advance
payment bond. It was, however, found by OKE et al. (2015) that considering the
significance and usage of bond; advance payment bond and performance bond are
the most widely used and significant in the construction industry of Nigeria. The least
used are a bid bond and retention bond.
Table 3: Level of awareness of bonds utilisation in the construction industry
Responses
S/Nr Type of bond Very Low Low Average High Very High Sum RII Rank
1 Bid bonds 17 36 12 54 45 566 0.690 5
2 Advance payment bond 4 13 18 61 68 668 0.815 2
3 Performance bond 2 10 9 62 81 702 0.856 1
4 Payment bond 12 20 13 55 64 631 0.770 4
5 Retention bond 5 21 15 59 64 648 0.790 3
Average 78.41%
4.3. Benefits of Bond Utilisation
Table 4 shows that the result of the analysis of the respondents perceived the
benefits of bond utilisation in the construction industry. From the table, Assurance of
performance (RII= 0.927), Financial security (RII = 0.927), It makes the contractor
have a sense of commitment (RII = 0.918), Completion of work within the stipulated
time and cost budget (RII = 0.910), and Its guarantee that the contractor will meet its
obligations according to the terms and condition agreed upon (RII = 0.899); are ranked
1st, 2nd, 3d, 4th and 5th respectively.
This finding supports the finding of OKE et al. (2015) who found that bonds
ensure that contractors comply with conditions of the contract and also help to
indemnify clients against default. According to The Surety & Fidelity Association of
America, financial security and assurance of performance are key among the
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importance of bonds. Bonds ensure financial security and ensure timely completion
and within budget.
For example, according to Oke and Ogunmola (2014), a retention bond has a
significant relationship with construction time and cost performance. This implies the
possibilities of having project cost and time being overrun as a result of default in the
works of the contractor if there no retention bond or at least any other bond type. Bond
also guarantee financial backing and ensure rectification of defects (OKE, 2013).
It is observed that bond utilisation in construction contracts can assist to
cushion the effects of poor performance, which results from inefficiencies of the
construction teams, faulty materials and workmanship, financial incapacity, among
other factors. This increases the risks of failure in projects time, cost, quality, and other
performance parameters.
Oke (2013) confirmed that the use of retention bond and other types of bonds
reduces the level of risks and problems related to the performance of construction
projects. Entrusty Group (2005) pointed out that the bonds provided for construction
projects are meant to create financial safety of the client/employer against the failure
of the contractor to complete its contractual obligations
The least ranked benefits of bond utilisation in construction are It allows for
proper monitoring (RII = 0.865), In the event of liquidation/bankrupt of contractor, there
will be a safety provision to both parties (RII = 0.821), It saves the contractor from any
obstacles (RII = 0.767), Bid validity clearly protected (RII = 0.705), and Create mutual
responsibility and discipline (RII = 0.649).
Regardless of the ranking of the variables, a critical examination of the relative
importance index value of individual variables showed that they are highly beneficial
in construction contracts. The RII value ranges from 0.927- 0.649 which fell in within
the cut-off point of 0.61 to 0.80 set for ‘'high' benefits. Furthermore, on average, the
RII = 86.0%. It is, therefore, concluded that bond utilisation in a construction contract
is highly beneficial to the parties to the contract and in the construction industry.
Table 4: Benefits of bond utilisation in the construction industry
S/Nr Benefits RII Rank
1 Assurance of performance 0.927 1
2 Completion of work within the stipulated time and cost budget 0.910 4
3 Financial security 0.927 1
4 It saves the contractor from any obstacles 0.767 13
5 Increase the level of assurance of financial utilisation 0.89 8
6 Bid validity clearly protected 0.705 14
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7 It guaranteed that the contractor would meet its obligations according to the
terms and condition agreed. 0.899 5
8 In a case of default from the contractor, the client can call back on the bond
to guard against loss. 0.896 6
9 Transparency 0.883 9
10 It also enables the client to know the strength of the contractor’s ability. 0.895 7
11 It makes the contractor have a sense of commitment. 0.918 3
12 In the event of liquidation/bankrupt of the contractor, there will be a safety
provision to both parties. 0.821 12
13 It allows for proper monitoring. 0.865 11
14 Create mutual responsibility and discipline. 0.649 15
15 It ensures proper compliance with building standard. 0.883 9
Average 86.0%
5. CONCLUSION AND RECOMMENDATION
Failure of Time and cost performance of construction projects is now
commonplace in the most construction industry of the world. With contractors being
blamed for much of the failures. Bonds are obtained to safeguard clients from the
financial problems and provide an incentive for proper and timely completion of the
project by the contractor to eliminate failures and risks. This study assessed the level
of bond utilisation in the Nigerian construction industry, with a view at examining the
benefits of its utilisation in construction projects.
Based on the findings, the study concludes that the level of bond utilisation in
the construction contract is high, with a performance bond and Advance payment bond
is the most common construction bond type. Also, Assurance of performance,
Financial security, It makes the contractor feels a sense of commitment, Completion
of work within the stipulated time and cost budget, and Its guarantee that the
contractor will meet its obligations according to the terms and condition agreed upon
are the most important benefits derived from bond utilisation in the construction
industry.
Consequent upon the finding of this study, the following recommendation was
put forward as strategies for better knowledge on effective utilisation of bonds in the
Nigerian construction industry. This study found that some of the practitioners are
lacking ideas or knowledge on the least utilized bonds such as Retention and Payment
bonds; thus, to make bonds more effective in the Nigerian construction industry, the
researchers recommend that practitioners need to be enlightened about all types
bonds used in the construction contracts. Considering the importance of bond, there
is a need for proper documentation of all issues relating to bonds contract.
More benefits of bond utilisation could be identified from a similar study carried
out in other regions of the country. So, there I need for further studies in that direction.
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In addition, a similar study could be carried out in the oil and gas sector of the Country,
especially at the Niger-delta region of Nigeria that is dominated by oil and gas
companies. Bond utilisation and management in construction contracts of oil and gas
companies could be assessed.
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