Performance Bonds
What is a Performance Bond?
According to the dictionary, a performance bond is a bond issued by a bank or other financial institution, guaranteeing the fulfilment of a particular contract.
According to those working within the Surety (Bond) market, a performance bond is a tripartite agreement whereby a Surety (the Guarantor) guarantees the contractual obligations of a principal (the Contactor) to the obligee (the Employer) in the event that the principal breaches the contract or becomes insolvent.
Essentially the Guarantor promises to pay the Employer damages up to a fixed percentage of the contract sum. Subject to this limitation, the liability of the Guarantor under the Performance bond shall be co-extensive with the liability of the Contractor under the Contract.
What is a Bond?
New to surety bonds or just need a refresher? Here’s a quick guide to the essentials.
A surety bond is a guarantee that protects businesses from losses if a contractual obligation isn’t met. It ensures that if the Principal (the party responsible for fulfilling a contract) fails to do so, the Surety (the guarantor) will step in and cover the costs, providing financial security to the Obligee (the party requiring the bond).
Principal
The business taking out the bond, committing to meeting its contractual obligations. For the Principal, a surety bond functions similarly to insurance.
Surety
The guarantor that promises to compensate the Obligee if the Principal does not fulfil its commitments.
Obligee
The party that requires the bond, ensuring protection against financial loss in case the Principal does not perform as agreed.
When might a Performance Bond be required?
The obligation for a principal or contractor to provide a performance bond under a contract is subject to the discretion of a beneficiary or employer. A beneficiary might always include the provision for a performance bond within their standard contract template but this requirement can be waived or enforced by the beneficiary depending on the circumstances.
Typically a principal would need to provide a beneficiary with a performance bond when entering a contract with a value in excess of £1,000,000. but it has been known for a beneficiary to insist that a principal provide a performance bond to cover a contract of a lesser value. Equally, it is quite common for the requirement to be waived on schemes well in excess of this value.
Can PS Surety help?
PS Surety is a dedicated surety bond brokerage and we would be delighted to assist any contractor with placing performance bonds. We are fully regulated by the FCA and we guarantee that we provide our clients with:
The best possible terms available in the market
An honest, open and joint approach to our client’s Surety needs
Detailed client dashboard providing information on every bond ever placed
Communication when bonds become overdue
A single touch point within our organisation for wording reviews, quotes and queries
Rapid responses
That sounds expensive!
Our service is completely free to contractors. We are paid a commission by the surety providers on each bond that we place with them on behalf of our clients, the details of which are fully disclosed in our client dashboard.
The surety providers are happy to pay our commission because we specialise in bringing them business which fits their ever changing underwriting criteria. We also deal with frequent queries, wording issues, bond drafting and general administration.
The price that you pay PS Surety for a bond is the same price that you would pay any Surety if going direct.
Frequently Asked Questions – Performance Bonds
What is the value of a Performance Bond?
A Performance Bond is a type of surety bond that guarantees the contractor will complete the project according to the terms and conditions outlined in the contract. If the contractor fails to meet their obligations, the bond provides financial protection to the project owner, allowing them to claim compensation to complete the work or rectify defects.
Why are Performance Bonds required?
Performance Bonds are often required by project owners (the obligee) to protect against the risk of contractor non-performance. They are typically needed when:
- The project involves substantial financial or operational risk
- The contractor is required to meet certain completion deadlines or standards
- The owner wants to ensure that the contractor fulfills their obligations to avoid delays or additional costs
Who benefits from a Performance Bond?
The project owner or employer (the obligee) is the primary beneficiary of a Performance Bond. If the contractor fails to perform their duties, the project owner can claim compensation from the bond to cover the costs of completing the work.
What is the typical bond amount?
The typical bond amount is often 10% to 20% of the total contract value, though this can vary depending on the project, the contractor’s financial standing, and the perceived risk. The bond should cover the cost of completing the work if the contractor defaults.
How long does a Performance Bond last?
A Performance Bond remains in force until the project has been completed, accepted, and any defects liability or warranty periods have expired. This typically lasts until all contractual obligations have been met, which could range from a few months to several years depending on the nature of the project.
How does a Performance Bond differ from a Retention Bond?
A Performance Bond guarantees that the contractor will complete the project to the required standard. A Retention Bond, on the other hand, typically replaces a portion of the contract value that is held back (retained) by the project owner as security during the defects liability period.
What are the advantages of using a Performance Bond?
- For Project Owners: The bond offers financial protection in the event of contractor default, ensuring the project is completed to the required standard.
- For Contractors: It helps establish credibility and trust with the project owner, and provides an alternative to providing upfront cash or other forms of security.
- For Both Parties: It ensures that both sides are protected and can proceed with the project with confidence.
How do I apply for a Performance Bond?
To apply for a Performance Bond, contact PSS. We will assess your project requirements, negotiate with A-rated sureties, and arrange the best bond terms available to protect your project and interests.
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