A Guide to Understanding Performance Bonds

1. A Guide to Understanding Performance Bonds A performance bond (also known as a contract bond) is a financial guarantee to one party in a contract against the failure of the other party to meet its obligations. It is also referred to as a contractor's bond, bank performance bond or simply performance bond. A performance bond is usually provided by a bank or an insurance company to make sure a contractor completes designated projects. A bank's commercial loan department will often use a commercial guaranty insurance policy on high value projects as collateral for their loans. If the borrower cannot pay the loan back, they can collect on the policy. Performance & Payment Bonds are insurance policies that protect against the failure of a party in a contract, typically one of the signatories, to meet the terms of that contract. Much like other types of insurance policies, performance bonds can be costly and somewhat difficult to obtain. They're also required in some industries while being rare in others— although they are typically far more common when dealing with large companies rather than smaller ones. Knowing when and why you might need a performance bond will help you to avoid the pitfalls associated with this type of policy. These bonds protect both contractors and the public, as well as guarantee performance of the work to be contracted. It is also a form of public transparency to ensure that all parties involved are held accountable for their performance. There are many different types of performance bonds and each are custom-made for the project in question, available from numerous agencies that specialize in such bonds. Keeping a backup plan is important when working on a project, especially in fields like construction where the unexpected can happen. When you are working on a job site, it is important to consider all possibilities of what could go wrong during the cycle of the project. You never know when you will have to adjust or adapt to new circumstances. Many developers and other companies enter into contracts with independent contractors, who work within the framework of that contract to complete its requirements. However, a contractor's failure to honor it can leave a project uncompleted or raise the cost of completion. This risk can be mitigated by having a performance bond in place prior to beginning construction. A performance bond allows the contractor to become insolvent and still pay for the services rendered. If a payment occurs after completion, the obligee is not liable for any further payments required to complete obligations in the contract. Although this term may sound intimidating, parties to a performance bond really is quite simple--creating a performance bond is not unlike creating any other type of guarantee. There will likely be many contractors ready to step up and provide a performance bond in order to secure a job from you, the obligee. It's up to you to choose the party that best meets your needs, ensuring the best possible outcome for the job. Performance & Payment Bonds are common in construction and real estate development, but they can also be used in a number of other industries. Though payment bonds and performance bonds share many similarities, understanding their differences allows for the best use of each bond for investments or jobs that call for them. So if you're interested in

2. utilizing performance bonds or payment bonds to protect your interests and ensure the completion of your job or project, look into their benefits now. You'll feel pretty bold when you don't second-guess yourself later.