Before knowing what all those different types of bonds are, you should familiarize yourself with what a performance bond is. The DRS Bonds specializes in these kinds of bonds, and they help clients on how to manage them. Amongst the bonds involved with public construction projects, performance bonds and retention bonds are always inquired about since they act as a security for clients when the construction project they bid on is not fully performed by the contractor.
Think of the performance bonds as a way to promise the payment or a kind of guarantee that is provided by another party, usually referred to as the guarantor or the surety to the client or employer. This is a security against the contractor’s failure, being the principal, for upholding their promise stated according to the contract. This guarantor or surety is usually a financial institution, like an insurance company or a bank. The security amount that will be provided in the performance bond would be around ten to twenty percent of the underlying value of the contract. In the recent years, the use of performance bonds for construction projects has really become prevalent and is a result of the increasing number of the insolvencies due to the reduction of the security given by other instruments in risk management, like the guarantees made by the parent company. One advantage of these performance bonds is that it is favorable for employers or clients. The bond will take effect upon the result of the failure of the contractor’s insolvency or done by the parent company. The client will retain some of its security through calling on the third party, which will be responsible for paying the amount of the bond.
In the recent times, this has performed really well for employers, but employers are advised to seek both the parent company and performance bonds when it comes to construction projects, especially when paying attention carefully to the drafting of the performance bonds because, with recent cases of the law, it highlights the careful drafting of the performance bonds as to avoid the pitfalls when there is a need to call on the bond.
It is also important for employers to look out for the clauses when it comes to the bond’s expiry date, especially when provided a relationship between the underlying contract and the expiry’s trigger. The clauses that deals with the bond’s expiry may include particular procedures in extending and renewing the bond when the circumstances stated in it are met. This is why there is a need to carefully consider drafting the performance bond, since there are clauses that might not be favorable to the employer, when in fact the use of these bonds is to protect against the contractor’s failure. This depends on the type of the bond purchased by the employer. There might come a time that a need for the bond’s extension over the expiry date will be called for the purpose of fulfilling the conditions of the procedure required in order to create a valid call of the DRS Bonds.