Reasons why getting a performance bond is important for project owner

If you are a project owner, you must understand how challenging it is to get high-quality work done by all the contractors.

As a project owner, there is no sure shot way to ensure that you are getting the best work timely. All the contracts in the world are often not as effective in extracting the best performance from a contractor as a performance bond.

Governments mainly required performance bonds for publicly funded projects, but now many private firms are making it necessary if a contractor wishes to apply for the tender.

But, what is a performance bond?

It is a bond between three parties, the project owner, the financial institution, and the contractor, for those who do not know. The contract gets a bond issued for fifty percent or even a hundred percent of the contract value. Suppose the contractor fails to deliver as per the contract deadlines or deliverable’s quality. In that case, the project owner can raise a claim, and the surety will fulfill the reimbursement or the compensation for the project owner. The surety might pay a sum of money to the project or might help them find a new contractor and cover the costs; it all depends on the factors of each case.

You must be pondering if you need performance bonds from the contractors or not; well, the short answer is that yes, you must ask them to provide a performance bond.

Here are some reasons why getting performance bonds is important for project owners and investors.

• Ensures a higher quality of work.

There will be a significant difference between the quality of work provided by the contractor when they are working under a performance bond. Everything in the contract will be taken care of, down to the last detail, when you hire bonded contractors. A performance bond makes the contractor more accountable for the project as well.

Furthermore, this safeguards the property owner from any shortcomings from the contractor as you would be assured of getting the best quality of work as per the contract.

Even if there would be any shortcoming, you are entitled to raise a claim from the surety.

So, in a broader sense, you are more likely to get the best quality of work and a guarantee that your conditions would be met as per the initial contract.

• Ensures timely delivery

The performance bond also statutes the timeframe provided to the contractor to complete all the deliverables as per the quality mentioned in the contract.

As a project owner, you can not face any push backs or delays in the schedule because of the contractor; in some cases, it might turn into a loss.

However, a performance bond guarantees that the contractor will complete the tasks timely, or else you have the right to raise a claim.

No matter how many hurdles come along the way, you can be assured that the work will be completed on time or you will be compensated for any losses you might face owing to late deliveries.

• More viable than insurance

Insurance works on the assumption that things will eventually go wrong only; on the other hand, bonds are issued assuming that there will be no losses.

So, the primary ideologies are quite different.

Moreover, the premium you would pay for insurance would be much higher than the fees for a performance bond.

You might have to pay thirty to forty percent of the total contract’s cost as the insurance premium.

Furthermore, a performance bond will only cost up to one to three percent of the total contract’s cost.

The fees tend to get lower as your project amount increases. In many cases, performance bonds are more viable than insurance.

• You can trust the contractors more.

When you make it necessary for a contractor to submit a performance bond with the bid, it ensures that all the unqualified people will not place the bid. So, this ensures that you are getting the bids and have chosen a good contractor.

A bond helps to establish certainty for you and the contractor. You get the assurance that

you will get the work you expect, whereas a contractor gets the assurance of timely payment.

What is a performance bond, if not a guarantee, given to you by the contractor?

• Protects your financial interest

In case of any shortcomings by the contractor, you will not have to spend any additional funds as the project owner or the investor.

If you want the job done, you will not be required to pay the contractor more than you estimated as you can raise a claim, and the surety will take care of the rest.

These are some benefits of having performance bonds for your construction projects.