Performance Bond Guarantee
A performance bond is also known as a contract bond, it is issued to one party of a contract as a guarantee against the failure of the other party. If the contractor fails to deliver the agreed work, the bond offers protection to the other party by covering losses.
It is usually provided by a bank or an insurance company to make sure a contractor completes the designated project.
Key Highlights
Purpose of Performance Bonds
Performance bonds are widely used in construction and real estate development. In such situations, investors or Project honours often require contractors to secure a performance bond to safeguard against any unexpected failures, such as delays, et cetera.
These ensure that even the adverse situations, the value of the work will not be lost in any case of an unforeseen negative event.
Protection of Parties
Performance bonds serve as a security shield in case the contractor provider becomes insolvent or fails to complete the project. When this happens, the compensation provided for the company that issued the performance Bond may be able to overcome financial difficulties and other damages.
A payment bond and a performance bond are often issued. This combination guarantees both project completion and payment to suppliers and subcontractors.
Commodity Contracts
Performance bonds are also crucial in commodity contracts. Here, a seller is asked to provide a bond to reassure the buyer that if the commodity being sold is not delivered, the buyer will at least get some compensation for the loss.
This is especially crucial in international trade, where the delivery risk can be high and also can impact operations or profits.