What is a performance bond? That is the question most people ask when they come across the term. It belongs to an unfamiliar territory and only those who know anything about bonds would anything about it. But don’t you worry, though, because in this article, we are going to tell you more about performance bonds.
In a few short words, performance bonds is a form of insurance. It ensures that a service provider fulfills his end of the bargain by providing a service that meets the requirements that are stipulated in a contract. How does it work?
When a contract for the creation of a project is signed, the contractor enters into a bond agreement with an insurer or a bank. The bond is paid. Hopefully, the contractor will fulfill his obligations under the project contract but if the company fails to deliver, the bond pays the amount to the second party in the contract.
A performance is not entered out of the goodness of the hearts of contractors. They are required by law. Specifically, the Miller Act requires for all public work contracts worth over $100,000 to covered by a performance bond. Projects that require a performance bond are usually bidded and the winning contractor is required to present the bond before the project can get started.
It is not a two-way street, though, as payments bonds always go hand-in-hand with performance bonds.|
While performance bonds protects the project owner from financial consequences if the contractor becomes insolvent before the completion of a project, a payment bond ensures that the contractor who did the work still gets paid even when the other party goes bankrupt.|
A performance bond is widely-used in the real estate industry, however, there are other industries that use it too. A great example would be a sale contract that promises the delivery of goods at a certain time. The performance bond will pay for the losses that the buyer acquired because of non-delivery.
Aside from the banks and insurers, there are special financing companies out there that specialize in performance bonds and you can find out more from The Islands Attorneys and Law. You can easily find them online by doing a quick search on Google. How much money an applicant can get really depends on the credit rating and overall financial standing of the company. Obviously, the higher the credit score, the higher the amount.
There are companies that have a low credit score and who fear that they will not be able to get a bond. Well, the fact of the matter is that there are bond companies out there that are willing to extend themselves to companies with poor credit. If your company belongs to this category, you should find yourself a bond provider even before you bid for any project.
With a bond already in place, you will be able to bid on as many projects as possible. It is really better than bidding now and finding a bond later, which is really a time-consuming process.