What is a ‘Performance Bond’ (PB)?
A performance bond, also known as a contract bond that is written by a third-party guarantor, bank or other financial institution that guarantees the fulfillment of a particular contract as promised. Performance Bonds guarantee that the contractor will perform the contract as agreed. Performance bonds are important financial instruments to participants of building and construction projects.
The one and important reason why this performance bond is produced is so that the customer can be paid a specified amount of money if the contractor fails to perform or is unable to deliver the project as per established and the contract provisions.
Banks also recovers the payment on behalf of the customer if the contractor fails to deliver the contract in full. This type of bond can be on conditional or on demand. Performance bond rates vary for a number of reasons, including the project’s total cost and the contractor’s credit and financial history.
How does Performance Bond Work?
As soon as a contractor gets a project from a client, they offer performance bond to act as protection against failure to deliver on their part. A third-party guarantor is involved to hold the contractor accountable for finishing the entire project as per their agreement with the customer.
Advantages of Performance bonds for Owners
Owners do not need to incur additional costs.
The owner of a project is assured of the completion of the project.
Performance Bond allows owners to retain their working capital.
