What You Should Know About Performance Bonds?
The market is flooded with many types of surety providers offering all kinds of bonds to secure performance of a contractorâ€™s obligations.
12:37 23 January 2019
With more disputes arising, there is now huge pressure more than ever on developers and owners to secure a performance bond, the main purpose of which is, in effect, to guarantee the contractors’ timely, proper and faithful performance of the contract.
What is a Performance Bond?
A performance bond is a contract agreement in which the surety company provides guarantee to the owner that the contractor will carry out the contract in full accordance with the obligations laid out in the document. Such a bond entitles the surety company to offer protection to the owner from non-performance of the contract and the possible losses, in the event of the contractor not fulfilling.
In other words, performance bonds provide the much-needed comfort and assurance to owners in case a contractor defaults from delivering on the obligations of the contract, allowing an independent company (also known as the surety company) to intervene and take charge of the situation, thereby making sure that the developer or owner doesn’t suffer any losses as a result.
Why Performance Bonds?
Owners find performance bands from a surety company as a more accessible alternative than letter of credit or bank bonds in general as they tend to lock up the capital, which can otherwise be put to good use for furthering their business and taking it to the next level. Besides, the prospect of being able to transfer the risk (of a contractor defaulting) to an independent company could be really exciting for any owner.
Given how valuable a performance bond is, owners consider the ability of a contractor to secure performance bonds from a reputable surety company before evaluating bids and tenders for the proposed contract work. Therefore, it becomes important for the contractor to find a reliable underwriter for securing performance bonds, if it is to gain the confidence of the owner and get the contract going.
In fact, in the present situation, all contractors are expected to secure a performance bond as a key component of their working contracts.
How a Performance Bond can help?
This is how a performance bond can help, in case there is a default.
Depending on the format of the bond agreed to, the surety company will have a few options at its disposal, if the contractor does not complete the project specified in the contract. Below are some of them:
- Provide financial assistance or extend necessary support to the contractor to allow it to faithfully complete the project in full accordance to the contract
- Engage a new contracting firm to carry out and complete the contract
- Take up the role of the contractor themselves and subcontract the pending work out; or
- Pay in full the amount set in performance bond as a penalty
It is extremely important that you do some due diligence on the surety provider you’re likely to engage with, in order to give yourself the best chance of getting a bond tailored to your requirements and a reliable service from a trustworthy provider with good reputation in the market. Remember, only a dependable surety provider would have vast experience developing programmes for contractors, councils and government bodies, regardless of the size and scope of the project.
BondsExpress.com is a leading online surety bond agency operating out of New York, with over four decades of experience. If you’re in the market to buy performance bonds, get in touch with them to see how you can leverage their experience to get the bond you’re looking for.