Is your company scheduling construction projects? Do you worry about your investors’ money when commencing a large-scale project? Then, a performance bond can protect your assets.
The topic of surety bonds can seem overwhelming to many companies, especially if they are less familiar with it. This bond is typically used for real estate development and construction projects. It is a contract bond like a surety issued by a bank or an insurance company. It guarantees the completion of a project to the client’s satisfaction.
Read on to know more about the document known as a performance bond meaning, its history, and its benefits.
What is the history of the performance bonds?
It is believed that surety bonds originated in the Roman and Persian empires. However, a much-needed change was made to these bonds in the 19th century, allowing private contractors to use them.
It was common for contractors to fail to complete projects or pay subcontractors on time, resulting in investors and taxpayers losing significant amounts of their money. That is how the concept of performance or surety bonds started.
What is a performance bond?
Performance bonds provide investors with a financial commitment regarding the success of contracts. Typically, the banks and insurance companies issue these bonds.
Large government projects like road and bridge construction require a significant investment, and often come with a significant risk factor. That is where a performance bond comes in. The project owner can take out a ‘performance bond’, meaning that they are taking out an additional insurance to protect themselves from any losses that may be incurred due to the contractor’s inability to fulfill his obligations as per the contract.
How does a performance bond work?
A performance bond involves three parties:
- The principal is the primary entity or individual performing the work. That person is generally the contractor.
- The surety is the financial institution that provides the performance bond, such as a bank or insurance company.
- A customer is an obligee, whereas the company, individual, or government organization will be the recipient who owns the project.
Performance bonds protect investors and owners when a contractor doesn’t deliver the project. These bonds are only available to the project owner or property, and nobody else can claim them.
Effective performance bonds outline explicitly the work that needs to be performed. If the descriptions are vague, the contractor cannot be blamed for any claim redemption problem in the future. In cities with substantial construction projects, investors buy performance bonds to ensure that the work is finished as per the contract.
What are the merits of a performance bond?
1. No fear of loss
Performance bonds guarantee satisfactory completion of the project. If a contractor declares himself bankrupt or is not able to complete the project on time, the investor can get his money back. Therefore, there is no fear of losing your money with a performance bond.
2. Security
If you have invested a considerable amount of money in a construction project, there are high risks of losing it if the project fails. Your money is completely safe if the contractor has a performance bond. Moreover, no other person can claim it.
Conclusion
Now that you know what a performance bond is, and what its benefits are, it is easier to comprehend them. This agreement is essential for investors who put their money into large projects like government buildings, bridges, monuments, roads, etc.
Performance bonds protect the investor from losses that may occur in the event that the contractor fails to complete the project properly or on time due to any number of factors.
It can be overwhelming for businesses to learn about and purchase surety bonds. Therefore, working with a surety bond company with proven experience and expertise is imperative. Ensure the contracts are detailed and precise; otherwise, vagueness can cause trouble in claim redemption. Remember, performance bond benefits only apply to specific contract violations.