LONDON: European governments need to seriously consider the behavioural consequences of different performance bond models for government investment projects, especially as they embark on projects to kick-start COVID-19-affected economies.

In its new Best’s Special Report, “Performance Bonds—Demand Spotlights Different Approaches”, AM Best notes that the difference between European and U.S. performance bond formats reflect a wide range of historical, practical and societal factors. Though these differences are quite extensive and interlinked, AM Best’s report highlights that certain advantages to each framework can be clearly identified.

Tony Silverman, associate director, AM Best, said, “Cherry picking parts of the U.S. model would likely help avoid some of the costly high profile company and contract failures seen amongst construction and other service suppliers to governments in Europe. It also could make for a better functioning bidding system on government contracts where medium-sized companies can compete based on their skills and merits.”

The report notes that European public authorities are not generally obligated to deal with insurers in the course of awarding publicly funded contracts, and any criteria deemed to be in the public interest may influence the final choice of bidder.

Public authorities remain accountable, but their discretion is not constrained by the requirements of 100% contract bonding. This contrasts with the U.S. framework, where legislative enforcement of 100% bonding on contractors for public works means that a medium-sized principal that can obtain a bond is on an equal financial footing with all other bidders, regardless of size, in front of the hiring authority.

Silverman commented further: “European performance bond frameworks do preserve government authorities’ hiring discretion, but sometimes at the cost of having to reorganise problematic contracts with original terms that were unsustainable and may have failed to pass a performance bond filter. What’s important is that performance bond regimes do not just reflect history and should support recognised priorities across policy objectives.”