The term Performance Bond is often misleading, which can leave contractors confused about the difference between a performance bond and a performance guarantee. Most construction Performance Bonds are actually Guarantees. Bonds and Guarantees are related but are different. The right to claim under a Guarantee is linked to non-performance of the underlying contract. Under a Bond, the bank usually pays on demand regardless of the underlying contract. Project owners typically accept both Performance Guarantees issued by insurance companies and Performance Bonds issued by banks.
The difference between a Performance Bond and a Performance Guarantee at claim stage?
The difference between a Performance Bond and a Performance Guarantee becomes more noticeable at claims stage.
Performance Guarantees will:
- Finance the original contractor or provide support necessary to allow him to finish the project
- Arrange for a new contractor to complete the contract
- Assume the role of the contractor and subcontract out the remaining work to be completed
- Pay the amount of the bond
Performance Bonds:
Because banks will be holding a substantial amount of cash as security, and because they don’t mediate in contract disputes, banks will be inclined to pay out the money to the Employer and look to the Contractor for re-imbursement.
