What Is A Performance Bond?

​Performance bonds are a financial assurance that fulfills the contract's stipulations. Banks, insurance firms, and surety brokers provide this type of insurance that covers unexpected mishaps. Performance bonds can assist your construction or real estate development projects get off to a smooth start with a low chance of default. 

On the other hand, performance bonds are often called margins in commodities markets. It describes the deposit of good faith money as collateral to settle futures contracts. What you need to know about performance bonds is outlined here.

Contract Bond vs. Commercial Bond
What's the difference between a contract bond and a commercial bond? You might not know, but it's an important distinction when you're looking to get bonded. 

Contract Bond and Its Types
In the construction industry, contract bonds come in different types. A performance bond is used to ensure the task is performed. The client can utilize bid bonds to lock in bids, and the payment bond ensures all parties get paid. The supplementary bond protects against situations that may arise.

Commercial Bond
Any surety bond that is not classified as a construction project is a commercial bond. Court bonds, official public bonds, several permits, and licensing bonds are utilized in various situations. It often ranges from guaranteeing that individuals follow particular rules to securing the safety of clients and consumers.

Three Parties Are Involved

1. Principal – It is the primary contractor or person to do the work
2. Obligee – It is the customer, which might be a federal government agency, a city, a state, a private corporation, or an individual
3. Surety – It is the bank or insurance firm that issues the performance bonds

How To Get Performance Bonds
Banks and insurance companies offer performance bonds, which are normally only accessible to creditworthy consumers. Several surety businesses can provide you with performance bonds. Should you need a performance bond, attempt to secure one from a bank or a surety firm with experience with the type of project you're working on.

When applying for a performance bond, you must provide the following information to the surety company:

• An application to the surety company 
• A copy of the principal and obligee's contract
• The principal's financial statements have been audited for several years
• The collateral associated with the contractor

A performance bond normally covers the entire contract amount. Obtaining the bond typically costs roughly 1% of the contract's value. The cost varies depending primarily on the bond's issuer's creditworthiness. 

It's essential to remember that performance bonds are not considered insurance. The contractor should continue to carry the appropriate liability insurance and other types of insurance that are common and required.

Conclusion
A performance bond is insurance that guarantees the contractor will complete the project according to the agreed-upon terms. If the contractor fails to meet these obligations, the insurer may pay for any damages or penalties incurred.

At Appletree Insurance, we do our best in making sure that our clients are well-protected with affordable and comprehensive policies. We make sure to go the extra mile to help you with your needs. To learn more about how we can help you, please contact our agency at (603) 881-9900 or Click Here to request a free quote. The coverage discussed in this article is not guaranteed. Please call our agents, we are happy to help you learn more about your plan and make sure you have the coverage you need.