PERFORMANCE BOND.
Also known as a Contract Bond, this is a surety bond issued by an insurance company or a bank to guarantee satisfactory completion of a project by a contractor (the Principal). For example, a contractor may be required under the terms of the project, to provide a performance bond to be issued in favour of a client for whom the contractor is constructing a building.
Performance Bonds are commonly used in construction contracts to provide security for clients (the Obligee/Beneficiary) working with contractors. If the contractor fails to construct the building according to the specifications laid out by the contract (most often due to insolvency of the contractor), the client is guaranteed compensation for any monetary loss up to the amount of the bond. This money covers any losses incurred by the client – for instance, the cost of finding new contractors to complete an unfinished project.
Our Mission
Performance Bonds are commonly used in construction contracts to provide security for clients (the Obligee/Beneficiary) working with contractors. If the contractor fails to construct the building according to the specifications laid out by the contract (most often due to insolvency of the contractor), the client is guaranteed compensation for any monetary loss up to the amount of the bond.
This money covers any losses incurred by the client – for instance, the cost of finding new contractors to complete an unfinished project.
Performance Bonds are mandatory in all government projects, as well as for many private sector projects. The Bid (or tender) Bond required as part of the tender process is replaced by a Performance Bond when the project commences.
A construction Performance Bond will normally cost 10% of the contract value, but this can vary depending on the contractor’s credit and financial history, the size of the project, and other factors. Our experienced team work with Surety providers globally and will ensure the best terms and value for money for your bonding requirements.
Performance Bonds may also provide a guarantee after a contract is finished, during the defects liability period which normally lasts for 6 – 24 months. If there are structural defects or maintenance issues, the contractor will be required to bring the work up to the correct standard.
Some (Beneficiaries) may require an instrument separate from the performance bond to cover a contractual maintenance provision this may also be called a Retention Bond/ Maintenance Bond.
On-demand Performance Bonds vs Conditional Performance Bonds
There are two types of performance bonds
- On-demand Performance Bonds
- Conditional Performance Bonds
On-demand Bonds stipulate that if requested in writing, the bond will immediately be paid out in full. The client (the Obligee) will not need to prove anything (including the contractor’s liability) or fulfil any conditions to claim the bond. These are most commonly used in large, international projects.
Conditional Performance Bonds are a more popular choice and require that the client (the Obligee) meets certain conditions before the bond will be paid out. This normally means that the client has to provide evidence that the contractor (the Principal) did not meet their obligations and fulfil the contract, and that they have therefore suffered losses.
Conditional Bonds also cover the client in the event of the contractor becoming insolvent. It is essential that contracts are very clear and precise so that it is easy to judge whether or not the contractor has met their contractual obligations.
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