What Do You Need to Know About Performance Bonds? |
Posted: April 18, 2016 |
What is a performance bond? A performance bond is a bond that assures that the bonded contractor will perform its duties as stated in the contract in accordance with the terms and conditions of the contract. These bonds are usually in the amount of 50% of the contract amount, but they can be issued for 100% as well. Keep in mind that the surety is never accountable for more than the total bond amount. The construction industry is the one in which a performance bond is commonly used. This bond is used as a means of insuring a client against the risk of a contractor not able to fulfill obligations in the contract to the client. If the contractor does not perform the required works in accordance with the building contract, the employer suffers a loss. Then the bank agrees to pay the employer for its loss considering up to a maximum sum. The best way to state how a performance bond works is to take a simple example of a homeowner hiring a contractor for doing some renovation. Like every type of surety bonds, a Performance Bond is a written agreement between 3 people. These people are: 1.Principal - person who needs the bond (the contractor) 2.Obligee - person who’s protected by the bond (the homeowner) 3.Surety - person who issues the bond (a surety company) Also known as a construction performance bond, this type of bond has largely been used for construction projects. This bond works as a protection for the project owner, or the state, that has a contract with the contractor. What are categories of performance bonds? Performance bonds can normally be segregated into two categories: on demand or on default. With an on demand bond, payment is generated by service of a written demand. These bonds rarely come into one’s sight or accepted by contractors. On the other hand, on default bonds are the ones that don’t only require the service of a written demand on the bondsman, but also proof that the contractor has caused the employer a loss being in default. Who can get a performance bond? These bonds are required in all 50 states. And before a contractor get starts with the construction project, they have to obtain a license and be bonded with a contractor license bond in the state. These bonds are mandatory for those construction projects that are owned by the state. And for federal projects over $100,000, these performance bonds play a crucial role. As with any instrument backed by the insurance, these bonds come at a cost, which is passed straight to the employer through the contract sum.
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