The worst thing for a project owner is to have his construction project delayed or unable to continue due to issues with the contractor. Each day the project is over the target date of completion costs money, in terms of paying for labor and of course, the lost income or profit especially if the project is commercial in nature. However, because of performance bonds, the likelihood of the project being delayed or postponed is reduced significantly.
The performance bond will guarantee that the contractor will hold up their side of the contract and follow the terms and conditions specified there. Typically, these bonds amount to 50% of the contract price, but may also be equal to 100% of the contract amount. To get more understanding about them, see more about bonds here.
Benefits Of A Performance Bond
Protection Against A Default
The contractor might not be able to fulfill their end of the contract due to uncontrollable circumstances like a default. While surety companies issuing these bonds check the financial capacity of contractors carefully to avoid this situation completely, it is never preventable. When this happens, the project owner is fully compensated, allowing them to finish the project and fix any issues caused by the default. They also get peace of mind that they will never be left with an unfinished project and a higher project cost due to contractor problems.
Owners are protected fully, up to the last dollar. They will not have to deal with any deductibles or even co-payments. Because some performance bonds also cover 100% of the project cost, they will not end up with insufficient funds to finish.
Strict Pre-Qualification Process
Because surety companies might end up having to pay project owners money to finish construction, they are very strict about the process of issuing performance bonds. They analyze the financial strength of the contractor and also make sure they have enough experience and expertise to finish the project. This is the only way they are sure that they provide bonds only to contractors who are least likely to default. The performance bond itself is an assurance to the project owner that the contractor is financially sound and capable to do the job.
The Consequences Of Non-Performance
While contractors have to shell out money in order to acquire a performance bond, the stronger motivation to complete the project is the indemnity they face otherwise. This can end up being both personally and professionally devastating for them, so they would try to avoid jumping ship on the project.
In case of default or non-performance of the contractor, the surety company might also choose to fulfill the contract themselves, either by finishing the work in-house or hiring someone else to do the job.
Misconceptions Over Performance Bonds
First and foremost, a performance bond is not a source of quick and easy cash. Owners will also have to file a claim in order to get compensation and instead, the purpose of the performance bond is to ensure that they end up with a completed project within the agreed price and period of time.
Second, a performance bond is not a tool for dispute resolution. Should there be any disagreements during construction, owners should refer to the agreements and solutions agreed upon in the contract.
Lastly, a performance bond will not magically produce a finished project especially in cases like default or breach of contract. Unfortunately, delays and other consequences cannot be prevented, but with the help of the surety company, it is still entirely possible to finish the project successfully and in the shortest amount of time possible. This also ensures that the losses incurred by the project owner due to the delays and issues are minimized as much as possible.
Performance bonds are meant to provide assurance and security to project and building owners, but even just the process of acquiring one is already enough to ensure that only the most capable contractors win the job. Still, in the case of the unlikely actually happening, there is nothing better than having the financial security to know that they are covered if the contractor defaults or walks out of the job.