Did you know that about 60% of construction projects face delays?
Delays can cost a construction company a lot of money. For this reason, construction companies must take specific measures to protect the client. Signing a surety bond is one of the best ways to do that.
With that in mind, what exactly is a surety bond? How is it different from a performance bond? In this article, we will compare the terms surety bond vs performance bond: what they are and what they mean for a construction company’s protection.
Keep reading to find out!
Table of Contents
What Is a Surety Bond?
So what is a surety bond? Surety bonds are a type of insurance that companies purchase to protect themselves against financial losses resulting from the poor performance of another party.
For example, if a contractor fails to complete a construction project, the contractor’s surety bond would pay for any damages incurred by the property owner.
You may see more here about why surety bond is vital for any construction business.
What Is a Performance Bond?
What is a performance bond? A performance bond, also known as a surety bond, is a financial guarantee typically required by the obligee (the party requesting the bond) for a contractor to be awarded a job.
The bond ensures that the contractor will perform the work in accordance with the terms of the contract. If the contractor fails to do so, the bond will compensate the obligee for any losses incurred as a result.
The Benefits of Having Them
There are many benefits to using surety bonds and performance bonds. They provide financial protection against losses caused by contractual defaults and help ensure that projects are completed on time and within budget.
They also help to build trust between parties and create a sense of accountability. In addition, they can help improve the contractor’s creditworthiness and make it easier for them to obtain financing.
The Drawbacks of Having Them
When a company is looking to get a surety bond or performance bond, there are a few potential drawbacks that they should be aware of.
First, the bond cost can be quite high, depending on the amount of coverage required. Secondly, if the company does not have a strong credit rating, it may be required to provide collateral to secure the bond.
Lastly, if the company fails to meet the bond terms, it may be required to pay a penalty, which could be significant.
All About Key Difference of Having Surety Bond vs Performance Bond
If you are a business owner, it is important to understand the key difference between a surety bond vs performance bond.
Surety bonds will protect your business in the event of a default on a contract, while performance bonds will protect the other party if you cannot complete the work as specified in the contract.
If you are unsure which type of bond is right for your business, speak to a professional surety bond agent to advise you on the best course of action.
Did you find this article helpful? Check out the rest of our blogs!