Everyone expects that the person they hire should complete the assigned job. But there can be instances when that job is not completed as intended, or not completed at all. A surety bond binds the contractor taking up the project to deliver what he committed to do. In case he doesn’t, the surety bond compensates the loss incurred by the project owner, charging the contractor for the same later.
Understanding Performance Bonds
Performance Bonds ensure optimum performance by the contractors throughout the project duration. These bonds are the most commonly used surety bonds for public work contracts that have an estimated value of $100,000 or more. However, that is only one of the conditions for issuing them. These bonds can also be used for managing company operations that may not be bound by this cap. Bidding could be done initially, post which the winning contractor has to furnish a performance bond as a guarantee for successfully completing the project.
These bonds create a win-win situation for all, bringing lucrative contracts for contractors and ensuring highly satisfying results for the project owners.
How Performance Bonds Work
Performance bonds safeguard the interests of the project owner if a work is not done satisfactorily or if the contractor has defaulted deliberately or even unwillingly. Since this risk of default is always there, surety bond institutions (banks/insurance companies/private lenders) run an extensive check on the contractor’s history before issuing the bond. They take into account his past experience, risk capital, financial statements, and more. Under the circumstance where the contractor’s history doesn’t seem credible enough, he is not issued the bond, thereby denying him the chance to win a contract too.
This way, there is a very little scope for a miss to ever happen. And if it happens, the surety bonds take care of the losses. There are rarely any government or private projects involving large investments that happen now without performance bonds.