A performance bond (also called a contract bond or standby letter of credit) provides surety or a guarantee of payment of a contract bid in the event that the contractor fails to complete a project successfully or satisfactorily.
This guarantee is normally provided by a third party such as a bank, insurance provider or other type of financial institution who is referred to as the guarantor. The guarantor will pay the full amount stipulated in the bond (normally the total contract price) upon non-completion of the contract.
A contractor normally applies for a performance bond when they win a bid for a contract from a client. The bond may in some cases be necessary for the bid to be awarded to a specific contractor, especially where funds have been provided upfront to enable the contractor to perform their stated duties.
It provides the client and not the contractor with the assurance that they will recover their funds upon non-completion of a project. The funds from the financial institution will not be paid to the contractor but directly to the client or party listed to receive the funds. The client has no responsibility to the either the bond provider or the contractor.
Although this type of bond operates similarly to an insurance policy in that it provides cover in the event of a contract being incomplete, it is not insurance. The difference lies mainly in the fact that no premiums are paid upfront by the contractor or the client. Rather, the guarantor reclaims the funds from the contractor after the contract bond has been paid in full.
Non-completion of a contracted project is normally due to the contractor running out of funds or becoming bankrupt during the contract period. However, the bond will be activated for other reasons that should be specified in the bond contract. For example, if the work does not meet required quality standards or does not meet with certain specifications and is therefore deemed to be unsatisfactory.
In most cases, performance bonds are used in the real estate development and construction industries. The investor or developer in such projects may require a bond in order to provide them with a guarantee that the work will be completed in accordance with quality standards and to specification. In other words, performance bonds may be a requirement in order for a contractor to be awarded a specific contract, especially where these contracts are issued by the government.
Payment bonds may form part of a performance bond which covers the cost of labor and materials for the project. Payment bonds may also be awarded without the necessity of a performance bond. Bid bonds may be awarded before a contractor is awarded a specific contract in order for them to bid for the contract.
Bonds express (http://www.bondsexpress.com/performance-bonds/) provides a variety of performance, payment and bid bonds for contractors specifically in the construction industry. Eligibility for bonds can be evaluated for future projects as well as current contracts or projects.