What Are Performance Bonds?

Saad Iqbal | 🗓️Modified: August 22, 2022 | ⏳Read Time: 3 min | 👁Post Views: 49

A performance bond is a type of guarantee provided by a guarantor such as a bank, insurer, or any other financial institution to ensure that goods and/or services are provided by the supplier as per the terms spelled out in a contract. The issuer of a performance bond usually agrees to refund the buyer a certain pre-agreed amount of money in the event that goods and/or services are not delivered as per the terms of a contract or the supplier fails to deliver said items on time.

When taking a performance bond, it is important for all parties to understand that taking out a bond is not the same as insuring a product. This means that a performance bond is not subject to insurance premium tax. Organizations may therefore choose to rely on their bank to sponsor performance bonds, but it is also important for them to understand if the bank will ask for cash collateral.

Performance bonds are used in different industries with one key sector that uses bonds being the construction sector. For example, a guarantor can provide a bond on behalf of a contractor which acts as financial security for the construction firm. Performance Bonds Insurance means of insuring a client against the risk of a contractor or company becoming insolvent or failing to fulfill contractual obligations to the client.

What Are the Different Types of Performance Bonds?

There are different types of bonds that can be utilized by a guarantor. They include:

1. Conditional Bond

This type of bond is commonly used in the construction sector. Guarantors usually offer this bond with payment being given when one provides proof that they have incurred losses. In most cases, there is usually some form of litigation before this type of bond is paid up by the guarantor.

2. On-Demand Bond

This type of bond is commonly used in the power and petroleum industries. On-demand bonds are a standard requirement when suppliers are inking international contracts and they are often backed by banks. As the name suggests, the guarantor is usually required to make a payment whenever it is demanded.

Other Important Things You Should Know About Performance Bonds

Performance bonds issued in the UK typically cover 10% of the value of a contract but some organizations may demand 15% of the contract value. This percentage can be changed at any time as long as both parties agree.

Note that the cost of performance bonds typically depends on the length of the bond. Longer bonds usually incur higher rates. Other factors that influence the cost of performance bonds include the specific terms of the contract and the financial status/standing of the contractor seeking the bond.

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