An agreement between Client and Consultant sets down the Services required by the Client and the conditions under which the Consultant will provide these Services. The essential commitment of a Consulting Engineer is to serve the interests of his Client as a faithful adviser adhering to his professional standards and putting all the benefits of his experience and expertise at the disposal of his Client. The relationship between Client and Consultant, though formally set out in the Agreement, depends for its success on the development of mutual trust and co-operation. From such a relationship will develop a joint commitment to achieving the defined goal.
Consulting Engineers in many countries are faced with a situation where they are often asked to provide Earnest Money Deposit or Bid Bond or Guarantees while bidding for tenders of consultancy work floated both by public sector and private sector.
This creates a host of problems for the Consulting Engineers:
i. It blocks cash/bank limits unnecessarily, putting a strain on the Consulting Engineer's cash flow and limits the ability to grow and improve performance.
ii. Consultancy being a "knowledge industry, a consultant may often not have adequate assets to offer as security to a bank for issuing bid bonds/ guarantees. In the absence of adequate bank limits/cash, Consultants often lose out of jobs which they are otherwise well equipped to handle.
iii. In countries where local banking sector is weak, clients often ask for bid bonds/guarantees to be issued by international banks compounding the problems of the consultant.
iv. With tightening of capital adequacy norms, banks are very selective in issuing bid bonds/guarantees, also the cost of issuing bid bonds/guarantees has increased steeply. This is pushing up the costs of the consultant.
v. It becomes extremely difficult for the consultants to retrieve the EMD/ Bid Bonds/ Guarantee for projects where the consultant is not awarded the tender. The decision process gets unduly delayed thus blocking EMD for long time. Sometimes, these EMDs are even converted into security deposit, if the job is awarded. This issue also needs to be addressed as the Security Deposit gets blocked till the end of project or even after defects liability period.
vi. Client Consultant relationship to a large extent depends on trust and mutual co-operation. Asking for EMD/Bid Bonds/ Guarantees belies this trust.
vii. Call for EMD/Bid Bonds/ Guarantees is a procedure generally followed while inviting tenders for construction work or supply of plant and equipment/other materials etc and this condition is imposed to ensure that the tender is supported by an entity that has the resources to implement the job. This yardstick should not be applied to "Consultants" because primarily a consultant is not a "Contractor" as the former provides services based on knowledge and experience. Procurement of services is different from procurement of goods and works.
Bid or Tender bonds
In cases where Consultants are required to bid competitively, Clients sometimes require that a Tender Bond accompanies the bid. Ostensibly the purpose of this bond is twofold. Firstly, to ensure that a bidder does not change his mind and cancel his bid and, secondly, to exclude non-serious bidders.
As financial compensation does not help the Client towards his objective of securing a trusted Consultant to work with him on the project. FIDIC is not in favour of Tender Bonds. It believes that other methods, such as pre-qualifications for a short list, followed by presentations and negotiations are more likely to succeed in securing for the Client a Consultant of integrity and trust.
Advance payment guarantees
Agreements may specify that an advance payment shall be made to the Consultant to cover heavy initial costs such as mobilisation, purchase of plant, computer equipment or travel and housing costs for staff. Advance payments are generally about 10 percent of the fee but they may be as much as 25% or 30% of the fee, and an Advance Payment Guarantee is usually required by Clients as a security to cover this payment. As this type of guarantee is linked to the advance payment, the amount of the guarantee should reduce in step with the repayment of the advance.
FIDIC does not support the use of Retention of part of the Consultant's fee to supposedly ensure proper performance of the services under a consultancy agreement. On completion of the Agreement there is no further performance to guarantee and the Consultant will be already carrying liability for his performance.
Performance Bonds, as their name implies, are designed to guarantee the proper and timely completion of the Consultant's duties under the Agreement.
The wording of such a bond is very important as it will specify the conditions under which the bond may be forfeit. Non-performance has to be established before the bond can be called.
The use of Performance Bonds of this type, in Consultancy Agreements, has over the last many years almost disappeared. They are however occasionally used in connection with Construction contracts, particularly in the United States. Performance Bonds are often issued by Insurance Companies. FIDIC does not support the use of Performance Bonds.
In recent years there has been increasing use of "On-Demand" Bonds under which a bank or other surety guarantees to make payment when so requested, without any necessity to prove lack of performance. As the name implies an "On-Demand" Bond is given (normally by a bank) to a Client in a form which allows the Client to call the bond, and thus receive payment to the full value of the bond, whenever he (the Client) believes there to be lack of performance by the Consultant. The bank is obliged to honour the Bond as it is payable "On-Demand" and there is no redress. Clearly a Client will normally not take such action until all other means of settling the dispute have been exhausted and the Consultant will take all possible measures to avoid putting his Client into such a position. In addition, no Client will wish to be accused of, or earn a reputation for, unjust calling.
FIDIC does not believe that the use of "On-Demand" Bonds will add to the likelihood of high quality performance, and deprecates their use as they create a potentially confrontational situation which militates against successful co-operation between Client and Consultant. Misuse of such Bonds by delaying their release is counter-productive, as it causes severe problems, and economic difficulty and loss to the Consultant involved.
It is often overlooked that all bonds, but particularly "On-Demand" Bonds, are costly to acquire and set in place, and will therefore ultimately add to the price the Client pays for the Consultant's services. In exceptional cases the Consultant may also feel that there is additional risk associated with the project and for this reason may add to his price.
Therefore, FIDIC recommends as follows:
1. In general, contract guarantees, such as Earnest Money Deposit, Bid Bonds, Performance Bonds and Retention Funds, serve little useful purpose under a consultancy agreement between a Client and a Consulting Engineer. They increase the overall cost without influencing the performance of the services. They should be avoided. Advance Payment Bonds are acceptable as they guarantee repayment of funds advanced by the Client.
2. On-Demand Bonds are by their nature, one-sided and confrontational. FIDIC opposes the use of these bonds.
3. A Client and Consulting Engineer should consider that the interposition of bonds between them is likely to have an adverse effect on the relationship between them which should be based on mutual trust and cooperation.
4. However, if a Client is obliged by local law to require a Bid Bond, the conditions should not make subsequent failure to reach agreement a justification for calling the bond, as both Client and Consulting Engineer should be free to withdraw, if there are considerations that deter either from proceeding.
1. FIDIC Client/Consultant Model Services Agreement, Third Edition, 1998.