A performance bond (or performance security) commonly used in the construction industry. As a means of insuring a client against the jeopardy of a contractor. Failing to fulfil contractual obligations to the client. Performance bonds can also needed from other parties to a construction contract.
Whether or not a performance bond is necessary will depend, in the main. On the perceived financial capability of the party bidding to win a contract. As the most common concern relates to a contractor becoming insolvent before finishing the contract. Where this occurs the bond provides an amount guaranteed by a third party. Up to the amount of the performance bond.
Bonds typically set for 10% of the contract value. This compensation can enable the client to get the better of difficulties that have caused by non-performance. Of the contractor such as, for example, finding a new contractor to complete the pending works.
Performance Bonds can be ‘on demand’ or ‘conditional’, with conditional bonds necessitating. That the client provides evidence that the contractor has not performed. Their obligations under the contract and that they have undergone a loss as a consequence.
The obligation for the contractor to render the client with a bond set out in the tender documents. The choice of bondsman and terms with regard to cost falls altogether. To the contractor who secures it prior to the start of work. From a client viewpoint it is wise to specify that the bond stays in place until the end of the defects liability period when the final certificate is issued.
Bonds can be issued either by Performance bond Companies or by a bank, and the cost of the bond is normally borne by the contractor. The cost of the bond gives the client a good guide as to the credit worthiness and repute of the contractor. In the bond market Which will view each contractor differently. In respect of its history, administration and financial health.
The bond is a guarantee and as such is a dependent liability in regard to the contractor’s balance sheet, to be very precise. A small contractor might face a limit on how many bonds it can take out. The contractor sends out the bond document to the beneficiary, i.e. The client who holds it up until the end of the defects liability period.
The bond is affiliated to the contract conditions and the courts take a view that the bondsman has little protection against adverse risk. So it is wise to seek the bondsman’s consent before acting outside the contractual terms, for example by paying the contractors beforehand of work undertaken to ease its cash flow difficulties. Such conduct could jeopardize a subsequent claim on the performance bond.
If you demand payment and performance bonds for a job, you’ll need to apply to check if you qualify for bonding. Note that there are items that are required if you want to get approved for construction performance bonds. When you’re applying for bonding via Performance bond Companies, you’ll wish to ensure your financial statements include what’s needed to give yourself the best chance of getting approved.