Performance Bonds are a type of guarantee provided by a bank or surety company to reduce the risk involved in major construction, infrastructure and other projects. It is one of many types of bonds used in the construction industry and can help to mitigate risk and relieve the construction project of liability in the event a contractor fails to deliver.
How They Work
The owner(s) behind the construction project will sign a performance bond with one or more of the contractors involved in the project, particularly the prime contractor. The bond contains detailed terms and conditions with regard to the contractor’s obligations and delivery timelines etc…
Thus, if a contractor fails to deliver, or worse if the prime contractor goes bankrupt before the completion of the project, the company behind the project makes a claim on the performance bond. The bank or surety company will then be required to compensate the owners and or engage the services of an alternate contractor to complete and deliver the work in accordance with the performance bond. <./span>
The benefits of a performance bond, while largely accruing to the owners behind the construction project, will trickle down to everyone involved. Other contractors and subcontractors will be prevented from taking losses and or having their work delayed and workers will likely remain paid. Overall, they end up ensuring that construction projects are completed on time and to specification.
Obtaining a Performance Bond
Procedures may vary from jurisdiction to jurisdiction, but it is hard to go wrong when you choose a reputable international bank that is capable of acting as a surety. Depending on jurisdiction, some types of projects, particularly involving the government, or where the value of the project exceeds a certain monetary value, performance bonds become mandatory. At Euro Exim Bank, our team of financial specialists is capable of arranging performance bonds of any size, based upon the requirements of our clients, and has established a strong track record as an international financial services provider.
Claims
In the event of a claim, the bank or surety company may resolve the matter in a few different ways:
A Payment – For the amount of the bond or the cost to complete the remaining work, whichever is lower.
Financing – If the contractor was close to completing the work and is still able to do so with financial support, the bank may end up financing the contractor to complete the remaining work.
Arrangement – The client and bank will work together to find a contractor and complete the work.
Takeover – In the worst case, the bank will take over full responsibility and find and fund a contractor of its own choosing to complete the work.
