What are the pros of a performance bond?
Many contractors and subcontractors will require a performance bond of their own clients for many reasons. One reason might be because the contractor or subcontractor is not comfortable with the ability of the client to pay in case they are forced to take them to court.
Another reason might be because, when it comes time for final payment, both parties need assurance that the contractor or subcontractor will be paid in full before they receive the final payment.
One of the best reasons a contractor or subcontractor may require a performance bond is because it also acts as a safeguard against an unknown risk, such as a fire that completely destroys property that was insured.
In cases where there is no performance bond and the contractor or subcontractor is held accountable for the project and has to pay for damages, they may not have sufficient funds to cover what they owe. The performance bond should be able to help ease some of those financial burdens and should be taken into consideration before any contract is signed.
What are the cons of a performance bond?
Another advantage to requiring or receiving a performance bond is that it holds either party accountable. For example, if the contractor refuses to complete work after taking payment upfront, they are held accountable because they cannot simply walk away from the job without having to confront their client and then pay back any money that may be owed after arbitration by the surety company.
The only con that comes with requiring or receiving a performance bond is that, in most cases, there is a fee that is associated with it. Even though these costs may seem minimal when compared to the benefits of having the bond in place, they are still fees associated with getting the security in place.
All things considered, this covers what can be considered to be the pros and cons of requiring or having a performance bond in place. As with any decision, each party must carefully weigh out the advantages and disadvantages before making any commitments. What works for one business may not work for another, but it is imperative that all options are explored before a final decision is made.
What are the benefits of a performance bond?
The main benefit of a performance bond is that it holds the contractor accountable for doing their job. This includes not only completing the work but also ensuring all safety measures are taken. The bond has to be large enough to cover any potential damage.
Another important benefit of having a performance bond comes if the contractor fails to complete his end of the bargain. In this case, the bond ensures that any money advanced by a client is returned.
Finally, with a performance bond in place, subcontractors who have been hired to complete the job are also protected because they will not lose their pay should something go wrong. This gives everyone involved peace of mind when working on large projects where there are many parties involved.
What are the disadvantages of a performance bond?
One of the most significant concerns surrounding performance bonds is that they can be expensive to obtain. This can be especially true for small companies that are just getting started and may not have the capital necessary to acquire one. If this is the case, they may have to wait until larger contracts are signed so they can afford to obtain a bond.
Another problem with performance bonds is that, if the contractor defaults on the contract, the client may have to wait for their money to be returned. In some cases where there is significant damage done, it could take months before a claim is paid out. Finally, if a company neglects to properly document their expenses, it may find it difficult to recoup the money they are owed.
How can a performance bond protect you?
A performance bond can help protect you from potential risks such as:
- If the contractor fails to complete all work
- Loss of income if a contractor leaves and no other take their place
- Allowing subcontractors to be paid for labor and supplies provided for your project
The purpose of a performance bond is to protect the people who hire a contractor. This includes not only providing a safety net should an individual or company default on their promise, but also covering the costs associated with any damages that may occur as a result of them not following through. In some cases, this can cover medical expenses as well as the costs associated with rebuilding.
Is performance really helpful?
The most important thing to remember about performance bonds is that they are only helpful when the contractor follows through with their end of the bargain. This means completing all work in a timely manner and ensuring it meets any required specifications.
A bond will not give you any kind of insurance should they damage your property, injure one of your employees or fail to pay subcontractors.
At the end of the day, the only way to know if performance bonds are right for you is to understand exactly what they can and cannot do. While this article has provided some basic background information on what they are and how they work, your individual situation will determine whether or not bonding with somebody makes sense.