Performance Bonds: Performing up to Par

2007-03-08 10:33:40

( Financial )



A GUARANTEE OF SERVICE

Contractors often commit to doing a project without necessarily having the funds to finance the entire project’s completion. This is where performance bonds come in. A performance bond is an insurance to ensure that the project will be completed in case the project payments are slow to come or funds run low.

Often a performance bond is given to the client if the contractor fails to hold up his end of the bargain. Performance bonds may either be given if the contractor cannot finish the project because of financial constraints, or if the contractor fails to meet the specifications as stipulated in the contract due to the use of substandard materials and slipshod labor.

Insurance companies often issue performance bonds to cover the risks that are common to the construction industry. Often a performance bond has a face amount equivalent to the total value of the project regardless of how far into the construction the contractor has gone. If a contactor was able to accomplish half of the project, the client will still receive in full the performance bond which is equal to the entire estimated project cost.

A COMPLEMENTARY BOND

A complement of a performance bond is the maintenance bond. Upon satisfactory completion of a project, the performance bond coverage lapses. The performance bond can then be replaced by a maintenance bond which insures the quality of the contractor’s construction. It works very similar to a guarantee; the only difference is that under a maintenance bond, a lump sum is given to the client if the final product has defects in materials or workmanship.

Both performance bonds and maintenance bonds are fixed term bonds. It means that the bond will lapse after certain conditions are met or after a specific period of time has gone by. Clients generally require performance bonds and maintenance bonds before awarding a project to a contractor.


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