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Performance bonds are a surety to safeguard the satisfactory work of a project. This takes place between two parties, the owner and the contractor. Performance surety helps the owner in case of any loss caused due to the contractor’s shortcomings mentioned per the contractual agreement. For the performance surety to work, the project or property owner should document all the necessary points, like the work to be done, and use legally sound terms to avoid any interpretations from the contractor’s side.

For example, in a performance bond construction the project owner or property owner has the right or is eligible to claim a performance surety. When the contractor that provides the services, labor, material, etc., has failed to meet the deadlines or any other terms mentioned in the security instrument’s contract, the performance security instrument helps in compensating the owner for the losses incurred, the completion of the project, or provides a firm to complete the project.

A performance security instrument is a type of construction assurance contract. Various other construction contracts like bid and maintenance bonds help ensure better work and a smoother project process. The kind of security differs based on contract coverage terms. The terms will specify the amount expected to be reimbursed in case of unsatisfactory work from the contractors. Performance surety covers approximately 50-100% of the contract value. According to security instrument experts, there are broadly two types of performance bonds:

Conditional Bond:

Are also known as Default security, where the developer (the project owner) has to present evidence in case of any breach of contract from the contractor’s side. The risk is shared between the project owner and the contractor.

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Unconditional Bond:

On-demand or unconditional security instruments do not require the developer to provide evidence of any losses incurred and easily access the surety bond. The contractor will likely pay a premium amount to get this surety instrument for the employer/developer. Even in cases where the contractor can prove that there isn’t any breach of contract from their side, the developer will only reduce the reimbursement amount.

Apart from ensuring the completion of the project, the performance bonds have numerous advantages.

  • If you are a developer, these instruments will protect your development investment in any situation where the contractor fails to meet the obligations stated in the surety.
  • Problems like contractor’s insolvency, contractor declaring bankruptcy, etc., where the developer would be liable to pay for the costs of looking for a new contractor, will be saved if you opt for this security.
  • It can act as an alternative to bank assurances.
  • Although the surety is brought in by contractors for the employer, the rights to claim surety stay with the employer.

Final thoughts:

As different provinces revised their Construction Acts during the last few years, the necessity for surety has increased dramatically. Apart from the legal requirement, a performance bond for construction provides the obligee security from any financial loss they may incur. Before selecting the security instrument, go through the documents and research the security provider before finalizing. This will give you a better understanding of what is suitable for your requirements.