What are Surety Bonds and how are they used in Nicaragua?
Surety bonds, or Fianzas as they are referred to in Nicaragua, are often used to guarantee the financial obligations of a contractor/builder to the project owner. Issued by one of the five local Managua-based insurance companies, they are sometimes confused with insurance policies. They are different from insurance contracts in that they pay when contractual commitments for construction projects are not met.
If the project commitments are not met, the project owner (obligee) can claim the bond, from the (obligor) insurance company, usually up to the bond amount. Then the contractor will be required to reimburse the claimed amount to the surety company/insurance company.
Market Variation in Surety Bonds
Surety bonds serve the same purpose worldwide, but differences arise due to country-specific regulations and market practices. When working in Nicaragua, understanding the precise type and amount of surety bond needed for each construction project is crucial.
Common Surety Bond Types for Nicaraguan Projects
- Bid Bond: Assures you’ll sign the contract if awarded after your bid is accepted. Mantenimiento de Oferta in Spanish.
- Performance Bond: Ensures compliance with contract terms, also known as Fianza de Cumplimiento.
- Advance Payment Bond or Fianza de Adelanto: Common in Nicaragua, safeguards advance payments.
- Payment Bond: Guarantees timely payments to subcontractors.
- Maintenance Bond or Fianza de Vicios Ocultos: Promises rectification of defects post-completion.
- Warranty Bond: Ensures resolution of equipment/material issues.
What the Contractors must show to get a bond approved
- Financials: Strong financial statements are vital. Show working capital and net worth to handle issues backed by good credit and reputation.
- Technical Capacity: Show building experience and skills with past and current projects.
- Contract Analysis: Assess risks in the contract. Sureties, the companies that issue the bonds, will scrutinize contract implications and project delivery times and milestones.
- Market Awareness: Understand local Nicaraguan laws, customs, and market demand.
Surety bonds, or Fianzas as known in Nicaragua, play a crucial role in ensuring the fulfillment of contractual commitments for construction projects.
These bonds are distinct from insurance contracts and are issued by local insurance companies, and with these insights, expatriate investors can confidently venture into Nicaraguan real-estate projects, forging successful outcomes and strong partnerships.