When you are involved in a construction project, you will hear advice from someone that you need to secure a performance or retention bond, but this is usually conducted by the client that has paid for the construction. The use of such bonds are to insure the client from the any losses as a result of the contractor’s failure in doing their duty according to the promise in the contract. The most common form of bonds issued by the client upon the start of a construction project is the performance bond, which is used in order to insure the client from the risk of the contractor’s failure of his obligation to the client.
Performance bonds are required by most places around the world by law, particularly when construction projects are public ones. These are not the only type of bonds used for construction. In fact, there are more. Aside from retention bonds, there are the advance payment bond, off-site materials bond, bid or tender bond, defects liability bond, and adjudication bond. Each of these bonds has a role to play in public construction projects, all favoring the client that will protect them from the loss resulting to the failure of the contractor to perform according to the contract. Most of the construction projects around the world are accomplished by the private firms, and in order for the bonds to work, the surety bonds play a role in this.
Reading all these bonds seem like it behaves the same way that insurance do, but they are not the same. Performance bonds fall under the surety bond, which is a sort of guarantee. The surety will guarantee that the principal or the contractor stated in the bond will perform his or her obligation, as stated in the contract. An example to this that the obligation stated in the bid bond, which is also another form of surety bond together with the performance bonds, is that it will be the contractor that will honor the bid. The contractor’s obligation is to finish the project properly and that the obligation meant in the contract is a payment bond that the contractor will pay to the suppliers and the subcontractors. There is a condition stated in the bond that if the performance bonds is performed well by the contractor, the bond becomes void; otherwise the bond becomes active and will take effect upon the result of the stated condition. This condition is the failure of the obligation by the contractor – both the surety and the contractor are expected to uphold the agreement in the bond. They can be sued and the whole liability might be collected there from the surety or the principal.
The amount stated in the bond is referred to as the “penalty amount”, thus either one of the parties involved into paying will be the one responsible to complete it. The reason why they are necessary is because they will protect the client from such pitfalls should the contractor fail to uphold the promise according to that stated in the contract.