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Understanding the Purpose of Performance Bonds

A performance bond helps to guarantee that the person you have contracted for work will perform their obligations as stated in the terms and conditions of the contract.

Typically the bond is in place of about 50% of the contract amount but can be varied and even account for up to 100% of the contract amount. It is also important to note that a surety is never liable for more than the amount of the bond as well.

Understanding the Purpose of Performance Bonds

All this being said, why should you consider getting a performance bond for contracted work? It can definitely help to ensure that things go without a hitch, but it is important that you understand how they work.

Here is a guide to help you understand the purpose of performance bonds.

Guarantees the Job Will Be Finished

Oftentimes if a contractor defaults during the job, you will receive a letter of credit or a LOC that will provide you with money to fix the problems caused by the contractor. The one issue here however is that the job is half done and you now have to look for someone new to complete it for you.

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If you are covered by performance bonds you will end up having your job completed as it has been stipulated in the contract. It is up to the contractor to find someone new to finish the job. This means you don’t have to worry about all kinds of stresses and hassles that can come about when a contract defaults.

Getting a performance bond will ensure that your work is finished no matter what.

Provides Protection

A LOC typically only covers about 10-25% of the contract amount. This means that as an owner, you might be stuck in a precarious situation when it comes to funding.

Not only are you losing money from the contractor defaulting on you, but you now have to go about finding a new contractor and paying them as well. This can result in you having to pay more money than you are able to, to have the job finished.

By getting a performance bond, you will be covered and have a safety net. Everything from getting a new contractor to repairing any damages caused will be covered within this bond.

If you are worried that your contractor is going to have trouble meeting his deadlines or completing the job, it is strongly recommended that you get a performance bond.

Not a Form of Physical Cash

Some people think that having a performance bond means that they are entitled to cash if a project does not go according to plan.

A performance bond as mentioned earlier is only there to help guarantee the completion of a specific job. You will not be getting cash on demand, but instead will be getting a completed project.

Performance Bonds Can Be Multi-Year

A performance bond can also give you protection multiple years after construction if it has been stipulated in the contract.

If the project is considered to be defective or faulty a few years after completion, you can once again use the performance bond contract to help have the job completed in a proper manner. This means that either the same contractors will come in to complete the job, or a new company will come in.

Regardless of who fixes things, you have some protection from poor craftsmanship.

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It Can Take Some Time to Solve a Dispute

If it comes time to invoke a performance bond, you should know that this is not something that is going to solve itself instantly. The performance bond will definitely help to speed up the legal process, but there is still going to be a large delay.

Along with that, the performance bond will not help to settle disputes between the contractor and owner during the construction process. Unless the regulations of the contract itself have been broken, you can not invoke a performance bond and get yourself a new contractor.

When it comes time to get a new contractor to finish the project, this too can take some time.

Arrangements will have to be made with a new contracting company to take over the unfinished work, and they will have to go about understanding how to complete the project.

These issues will occur regardless of if you have a performance bond or not, however, the performance bond will help you in terms of the financial aspect.

Overall, a performance bond is created to protect the owner from problems that the contractor can create. Especially in a business where contractors are known to overcharge and provide low quality work, you need all the protection you can get.

Do you plan on getting a performance bond?


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