What Are Performance Bonds?

Performance Bond

Performance Bond

The performance bond can be described as a bond type that ensures that a bonded contractor is obliged to perform their obligations in the contract in line with the terms and the conditions stated in the contract. Performance bonds generally will be 50% of the amount stated in the contract, but sometimes can be 100% related to the contract-amount. It is important to know that surety will never be liable for more than the amount that is totalled on the bond.

Benefits Of A Performance Bond

This contract offers an owner or owners of a property of building more than just cash in order to rectify issues that have been created by default. A LOC (Letter of Credit) offers the owner an amount of cash to rectify issues that were caused by a default related to the contractor, but this does not mean the project will be completed. The performance bond offer owners the peace-of-mind that regardless of any defaults caused by a contractor, the owner will have the project completed that will be in agreement with the stated terms along with the conditions in the “original” contract.

This Contract Responds To The Very First Dollar

This performance bond is in place to offer complete protection to an owner from the very first dollar lost. The owner will not have to take on the responsibilities for co-payments or deductibles.

Provides Adequate Protection

The LOC’s generally only cover around 10 to 25% of the total contract amount that usually means a drastic shortfall in funds. This amount is typically 40% related to the price of the contract. This leaves an owner in a vulnerable and often very difficult position. The owner usually will not have these funds in order to cover such a shortfall and they will probably need to locate another contractor to carry on with their project.

Non-intrusive Protection

Certified cheques and LOC’s ties up the cash reserves and borrowing line for contractors and denies them any access to money, particularly in a time that is related to financial stress. Unluckily, by asking for this liquid security associated with this nature, owners can unintentionally bring on an issue that they may be wishing to protect themselves from.

Service Contracts And Performance Bonds

Sureties frequently receive a request from clients to issue a bond for a contract that involves providing long term services like snow removal, recycling and waste collection, that can be extended to a 5 years or even more. The growing trends related to these longer terms for maintenance and service contracts encouraged the surety industries to create multi-year payment and performance bonds that offer renewable features. Several agencies and governments around the U.S have now adopted these bond forms as a standard type of security requirement when it comes to the longer term types of service contracts.

The multi-year bonds are not just for the longer term types of service contracts. The construction contractors typically are also asked to offer extended types of warranty protection for defective materials or workmanship.