The construction industry needs a digital platform for guarantees and bonds

Why is the construction industry still working with paper versions of these vital documents in the digital era? It’s a question asked by Simon Streat, VP Product Strategy, Bolero International.

By Simon Streat, VP Product Strategy, Bolero International 

In the highly competitive world of construction, where the pressure to perform is unrelenting and the penalties for failure can be severe, guarantees and bonds are essential instruments to provide the protection that companies are looking for.

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Simon Streat
Simon Streat

The variety and complexity of handling these documents can be daunting, as businesses with offices dispersed across the UK strive to manage everything from parent company guarantees to bonds covering performance, land clearance, advance payments for plant and off-site materials, as well as the guarantees required of house-builders for defects liability by regulatory bodies such as the NHBC.

While lawyers may find a steady stream of work from disputes arising from guarantees and bonds, those responsible for these documents within the industry know that without the original, a business can do nothing to either amend the document or receive what is due to them as a beneficiary.

In the absence of the original guarantee, the bank or surety provider has no obligation to compensate a developer when a contractor falls down on the job or the supplier fails to deliver specialised plant or prefabricated building components.

Stuck in the paper era

Unfortunately, the majority of businesses in the construction sector are limited by paper-based processes, using spreadsheets in an attempt to gain some degree of visibility and control. This is not easy when thousands of guarantees and bonds may have multiple signatories or beneficiaries and most relate to projects managed by staff in remote, regional offices.

Guarantees used by construction companies, for example, are often remitted to head office for supervision, leading to mistakes and hugely unnecessary delays. Far too much time is consumed completing amendments to match the evolving nature of projects, as, for instance, when a business hits its targets early and wants to end or reduce payments for the guarantee its bank is providing. Without the original document, the bank will potentially ignore such a request.

Lack of visibility for the builder, developer or indeed, the surety-provider, not only makes this difficult, it also will frequently lead to such potential cost-reductions being entirely overlooked. And of course amending a paper document when these three parties are typically involved (as well as obtaining confirmation from a national organisation’s regional offices), can take days or weeks if the guarantee is distributed by traditional means. In a digital world, this time is significantly reduced as  all parties will have access and visibility to the guarantees involved.. If a builder completes ten houses, a guarantee may be called up ten times before it is terminated, each occasion taking up time and resources. The process of termination itself also needs agreement from all parties before the document is sent on to the bank.

None of this is straightforward. At any time, businesses engaged in construction, depending on their size, are likely to have paper documents constantly in physical transit, flowing back-and-forth, racking up costs and consuming precious staff-hours.

Digitisation is safer, smarter and faster

It makes it all the more incomprehensible that the construction industry, which is constantly embracing and driving innovation in all other areas, has yet to grasp the huge efficiencies of document digitisation. Once documents have been digitised, they can be securely exchanged over a single, cloud-based platform that gives full and secure visibility. Speed of exchange is only constrained by the internet, negating the need for documents to be couriered between the parties and their regional offices, which is when they are frequently mislaid, lost or sent to the wrong address.

Electronic guarantees or bonds, by contrast are constantly visible to all the parties on a digital platform, including banks and surety-providers, but only the legal holder can amend them, with every action automatically and irrevocably logged.

Why stick with paper-based processes?

When documents can be passed securely between builders, contractors, suppliers, developers, banks, surety companies and regulators at the click of a mouse, it seems inconceivable that any of these organisations would want to stick with paper-based processes, even if they have already managed some sort of ad-hoc integration of guarantee management with treasury systems.

Digitising their guarantees, bonds and the workflows that have evolved around them, will achieve major gains in cost-reduction and release of working capital. No longer will businesses routinely lose money paying for bank guarantees that have outrun their original purposes but which have never been updated. The problem of lost documents will itself disappear, while the laborious process of couriering paper around to gain acceptance for amendments or terminations will be consigned to the construction industry’s history along with timber scaffolding.

If the industry is serious about embracing all the advantages of the digital era it must now leave paper in the bin and start managing vital documents such as guarantees and bonds on a cloud-based digitisation platform.