What is Performance Bond Insurance?
If you’re interested in securing big contracts in the construction industry then you are going to have to develop an understanding of performance bond insurance. A performance bond is a kind of contract bond.
A contract bond protects a contract provider from any loss that results from a contractor’s failure to fulfill their obligations. This assurance is provided by the bond provider, otherwise known as the surety. A contract bond might refer to various aspects of the contract such as the contractor’s obligation to pay for services and materials, to enter into a contract if awarded a bid, or to maintain a certain location for a period of time.
Performance bond insurance is a contract bond that guarantees a contractor will complete any work they have agreed to do. Performance bond insurance is the norm in the construction industry. When large institutions like government departments need a building constructed, they require a performance bond to insure that they do not experience a financial loss should the contractor fail to complete their work.
If a contractor fails to complete their work it is usually because they went bankrupt. In this sense performance bond insurance is kind of like ‘contractor bankruptcy insurance’. Performance bonds have existed for thousands of years and are a major industry in developed economies like the United States.
Performance bond insurance is often issued in a package with a payment bond. This is called a ‘performance and payment bond’. A payment bond obligates a contractor to pay for materials and services necessary for the completion of the contract. Contractors will sometimes seek performance and payment bonds from their subcontractors.
In the United States and many other countries performance bond insurance is compulsory for all state projects. If you have a state contract, or require a performance bond for a private project, you should contact a good insurance bond agent. Such bond agreements can be quite complex so it is important to have the guidance of an expert.
