Performance bonds are a type of surety bond. A surety bond assures the project owner that any financial loss incurred during construction will be compensated. It is a different type of agreement, as it involves three parties. The first party is the project owner, who is known as the obligee. The second party is the surety company that promises to compensate the project owner. The third party is the contractor who is known as the principal. During any failure by the principal to perform his obligations, the surety company shall enforce the bond and compensate the obligee for any damages caused.
WHAT IS THE ROLE OF CONTRACT BONDS IN CONSTRUCTION PROJECTS?
Contract bonds used in construction projects will make sure that the principal will fulfill their obligation towards the obligee. What is a contract bond? It is essentially a broader version of a surety bond designed to guarantee the fulfillment of contractual duties. The three main types of contract bonds are bid, performance, and payment bonds.
WHAT IS A PERFORMANCE BOND?
A performance bond gives financial security to the project owner regarding the completion of the project as expected within the time. The need for a performance bond arises to determine the reliability, validity, financial solvency, and stability of the contractor. The surety company shall require the contractor to pay compensation in the event of any default.
WHAT IS A PAYMENT BOND?
A payment bond is used to provide financial security to all the labour and material suppliers related to a construction project. It assures that all the workers and suppliers will get their contribution as agreed.
WHAT IS A BID BOND?
This type of bond gives a word of commitment by the contractor regarding sticking to the price and conditions they have agreed to at the time of taking the project.
WHEN IS A PERFORMANCE BOND REQUIRED?
The requirement of a performance bond in a construction project is considered essential. If a contractor happens to take a project in the United States, then he has to undertake a performance bond as mandated by federal law. A performance bond is required if the project is wholly government-funded or the cost involved in the project is more than $100,000.
HOW DO THE THREE TYPES OF CONSTRUCTION BONDS WORK TOGETHER?
The three types of construction bonds are considered an integral part of any construction project. The need to include all three bonds arises at the time of a project funded by the amount contributed by the taxpayers of a country. The use of all three bonds will strengthen financial stability and mitigate risk throughout the lifecycle of the project.
CONCLUSION
Surety bonds are considered an important financial instrument while constructing a project. It provides financial security to the project owner, ensuring that the contractor completes the project within the agreed time. Performance bonds are used to give assurance regarding the performance of the project as agreed. It is advisable for you to obtain a performance bond from a surety company before starting a construction project.
