What is a performance bond for?
A performance bond is also known as an “ergo bond” or simply a performance, and it’s designed to guarantee that you get the work done. It protects the owner if you fail to complete your contract duties in accordance with all of its specifications beforehand.
The specifics will vary depending on project requirements, but typically speaking, any number of activities (e.g. pouring concrete for foundations) must be completed before construction can move forward—and completion often isn’t possible without the proper materials which are often only available after certain tasks have reached substantial completion.
What are the different types of Performance Bonds?
Non-Bonding Performance Bond:
This type of bond is used when the contractor does not have a good credit rating. The work they do may be substandard or below average but this will not harm their reputation. There is no guarantee that the subcontractor will complete the work to specifications and they may not even finish it at all.
Undisbursed Partial Performance Bond
This type of bond is similar to an undisbursed performance bond except that it protects against faulty workmanship rather than just non-performance. The payment under this type of contract will usually be put on hold until after the project is finished. If the contractor fails to meet initial requirements, the funds will be withheld. If the subcontractor does abide by contract specifications, they should receive pay for their work.
Undisbursed Final Performance Bond
This type of bond is another common type of performance bond which protects against faulty workmanship. The payment under this type of contract will usually be put on hold until after the project is finished. If the contractor fails to meet initial requirements, the funds will be withheld. If all requirements are met, though, then you should receive full payment minus any withholdings that may apply.
Unpaid Partial Performance Bond
This type of bond protects projects where substantial completion has occurred but final payment has not yet been made to the contractor.
What Are Some Risks Associated With Letting a Subcontractor Work Without Any Performance Bonds?
When you let subcontractors work without performance bonding, they are taking on the full responsibility of completing the project. If they don’t finish by the deadline or if their workmanship is substandard, then you’ll have to pay for it out of your own pocket.
You could potentially lose your whole investment or even land in legal trouble with other interested parties (e.g. customers) who end up dissatisfied with contracts that were not fulfilled as promised.
What are Some Tips for Preventing Non-Performance Issues?
A surefire way to reduce risks associated with letting subcontractors work without any performance bonds is to only hire those whose ability you trust whose reputations are beyond reproach. Here are some more tips you can use to help prevent issues down the road:
- Require background checks on all subcontractors.
- Ask for references.
- Get recommendations from other people who have had experiences with them in the past or who can vouch for their credibility and trustworthiness.
Who benefits from a performance bond?
A performance bond protects everyone involved in a project. The general contractor benefits because the owner of the construction site will have to pay if their subcontractors do not meet contract specifications.
Contractors benefit, too, because they know for sure that they will be paid at the end of each stage. If you cannot finish certain tasks through no fault of your own, then you are still entitled to compensation for work done so far without being penalized. Owners also benefit from these types of bonds because their projects are completed on time and within budget requirements.
Are there any alternatives to Performance Bonds?
To minimize costs, some owners or contractors might opt out of purchasing performance bonds all together and simply trust that everything will go according to plan (i.e. no payment will be withheld).
However, this is not the wisest choice because of the risks associated with hiring subcontractors without any performance bonds in place. They could end up losing money or having many problems with non-performance (e.g. not meeting deadlines) if they do not make their employees use them.
What if I Don’t Have a Performance Bond?
There are steps you can take to provide some level of protection to yourself. If the contractor is using a subcontractor, they must be bonded so it might be possible for you to use their bond as well if that’s an option that’s available to you.
Otherwise, just make sure that your contract includes specific stipulations that any disputes or disagreements will be resolved via arbitration rather than litigation which should save you time and money. Some contracts may even include clauses against certain behaviors such as price gouging in order to protect consumers from unreasonable or unfair prices.
This usually comes about during times of natural disasters or emergencies when there isn’t enough supply for demand leading prices to increase dramatically due to a lack of alternatives. The way these clauses work is by forcing any disputes down the road to be resolved in arbitration instead of litigation which is much faster and considerably less expensive.