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What’s the difference between a Performance Bond and a Performance Guarantee?

by | Jul 23, 2018 | Guarantees | 0 comments

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.

difference between a Performance Bond and a Performance Guarantee

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.

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What is a Performance Guarantee?

A Performance Guarantee is a contractor’s promise to complete the construction project within the deadlines, while meeting all contractual conditions.

How do you get a Performance Guarantee?

When applying to get a Performance Guarantee, you’ll have to answer basic questions about your professional work experience and your company’s financial history. If your business has more than one owner, the financial credentials of all owners must be submitted.

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Contract Guarantees in the construction, engineering, manufacturing and mining service industries are almost mandatory. Our range of Construction Guarantees are as varied as your requirements. Here’s a short list of the four types of Contract Guarantees and what they insure.

When is a Performance Guarantee called on?

Building Contractors often ask us the question: When is a Performance Guarantee called on? When your company starts bidding on projects for cities, provinces or municipalities, you’ll be expected to provide assurance that you can meet the obligations detailed in the Contract.

This assurance comes in the form of a Performance Guarantee. Basically, what happens is that a surety company (an insurer or bank), for a certain fee, steps in and guarantees your performance. Surety companies don’t work directly with Contractors. Instead, they partner with brokerages like us.

How the tender process works

Landing a tender and the tender process can be a time-consuming and costly exercise, especially if you don’t understand the tender process, or you don’t adhere to the necessary requirements.

A bid in the tender process is issued by a private company or government department when they need to obtain specific goods or skills. The advertised bid is a Request for Quotations (RFQ) in the tender process.

What is Construction Bidding?

Construction bidding is the process of submitting a proposal/tender to build or manage a construction project. Public tenders, or those with a government department, follow different rules than private tenders. They must be advertised in advance, and they allow any qualified contractors to bid if they choose to. Private owners may opt to limit the construction bidding process to contractors they have chosen as bidders.

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A Fuel Guarantee is security against payment default by the Retailer for fuel delivered by a Fuel Company. The Guarantee covers fuel, lubricant, rent & more

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The first thing you need to do is find Tenders that fit your business. Tenders and RFQ’s are advertised in various places, ranging from newspapers to websites.

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Make sure you provide all necessary information as set out in the tender application. These include updated tax clearance certificate and shareholding certificates, amongst other requirements.

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