Contracts are normally drawn up between two parties, one which requires a certain service or action performed, and the other which has the expertise and experience needed to complete the requirement of the other. While such contracts or agreements are legally binding, it does not in any way safeguard the customer requiring the service or offer a guarantee that the contract ill be completed as stipulated.
A performance bond, which is often made a condition of awarding contracts, is a surety that guarantees the satisfactory completion of the contracted project. This bond is issued by insurance agencies or banks and can be encashed by the customer in case of unsatisfactory completion. Performance bonds are often limited to a certain value of the contract and are issued by the insurers or banks which will require being convinced of the capabilities of the company that has applied for the bond.
Performance bonds are very commonly used in the development of real estate and large constructions. This bond gives the owners of the project a guarantee that the work will be completed. In most projects, payments are made to contractors based on the work done, and this ensures that the work has already been carried out for the value of the work that is paid for. When work is suspended for any reason, the performance bond value is often to cover the costs of restarting the work and terminating the contract of the previously contracted party.
In many cases, the guarantor who has issued the performance bond will often step in to see if matters can be sorted out before they are expected to make the payment. The bond is also a guarantee that the work will be completed as stipulated in the contract in terms of quality, quantity and time.
Before a performance bond is issued, the financial strength of the contractor and credit history is examined in detail. Bonds are issued against a payment, often fixed at ten percent of the value of the bond. Contractors have to take this into their costs when they undertake any contract. Higher rates can be charged, if the issuer of the bond is not happy with the financial and credit history presented, or sees a definite risk in the project.
Bonds can be conditional or to be paid on demand. In the case of conditional bonds the lack of performance has to be proved and authenticated. The financial strength of the contractor asking for the bond may determine the number of bonds that can be asked for, and this often places a limitation on the number or value of projects that can be undertaken.
A performance bond is a signed undertaking that is deposited with the customer, who can then use it as per the agreed terms of the contract. Often these bonds remain with the customer until the end of the defects liability period, that is often specified in contracts. Performance bonds are issued to guarantee the obligations of the contract and offers customers financial compensation in case of non-compliance. A well reputed company that issues such bonds is Bonds Express.