What is a Performance Bond?
Also known as a contract bond, this is a surety bond issued by an insurance company or a bank to guarantee satisfactory completion of a project by a contractor. For example, a contractor may be required to provide a performance bond to be issued in favor of a client for whom the contractor is constructing a building.
Performance bonds are commonly used in construction contracts to provide security for clients working with contractors. If the contractor fails to construct the building according to the specifications laid out by the contract (most often due to insolvency of the contractor), the client is guaranteed compensation for any monetary loss up to the amount of the bond. This money covers any losses incurred by the client – for instance, the cost of finding new contractors to complete an unfinished project.
Performance bonds are mandatory in all government projects, as well as many private sector projects. A construction performance bond will normally cost 10% of the contract value, but this can vary depending on the contractor’s credit and financial history, the size of the project, and other factors.
Performance bonds may also provide a guarantee after a contract is finished, during the defects liability period which normally lasts for 6 – 12 months. If there are structural defects or maintenance issues, the contractor will be required to bring the work up to the correct standard. This may also be called a retention bond.
On Demand Performance Bonds vs Conditional Performance Bonds
There are two types of performance bond – on-demand and conditional.
On demand bonds stipulate that if requested in writing, the bond will immediately be paid out in full. The client will not need to prove anything (including the contractor’s liability) or fulfil any conditions to claim the bond. These are most commonly used in large, international projects.
Conditional performance bonds are a more popular choice and require that the client meets certain conditions before the bond will be paid out. This normally means that the client has to provide evidence that the contractor did not meet their obligations and fulfil the contract, and that they have therefore suffered losses. Conditional bonds also cover the client if the contractor becomes insolvent. It’s essential that contracts are very clear and precise so that it’s easy to judge whether or not the contractor has met their contractual obligations.
How to Get a Performance Bond
It is the contractor’s responsibility to acquire a performance bond, so the choice of provider and cost is their decision. However, sourcing the right performance bond can be a complex process and that’s where we can help.
Surety Bonds is Ireland’s only specialist surety bond intermediary. We work with a large selection of global sureties, banks, and insurers. We have worked closely with the construction industry for many years, and are confident we can find you the best value performance bond for your next construction project.
Our process is seamless and requires very little effort from you. We pride ourselves on finding contract performance bonds that offer contractors the least amount of risk at the lowest possible cost. You’ll benefit from both our expertise, and our established relationships with global surety markets.
Simply get in touch today to tell us your requirements and receive a fast quote for a performance bond.