A performance bond is a type of bond that is provided prior to the issuance of a buyer’s letter of credit or other financing. It serves as a guarantee that the contractor will complete the work within the specified timeframe. In major international agreements, performance bonds are typically issued by banks or insurance companies. The face amount of the bond is usually 2% of the performance value, although it can occasionally be as high as 5%. Performance bonds can be categorized into nonoperative, operative, and revolving types.
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An Up-Front Performance Bond is a type of surety bond that guarantees the completion of a project or contract by the contractor.
Up-Front Performance Bonds are typically required by government agencies, construction companies, and other entities that hire contractors for large projects.
If the contractor fails to complete the project or contract, the bond company will pay the obligee (the entity that required the bond) a specified amount of money to cover the cost of completing the project.
The cost of an Up-Front Performance Bond varies depending on the size and complexity of the project, as well as the contractor’s creditworthiness and experience.
An Up-Front Performance Bond typically lasts for the duration of the project or contract.
If the contractor completes the project on time and within budget, the bond is released and the contractor receives their bond premium back.
If the contractor fails to complete the project, the bond company will step in and hire another contractor to complete the project. The bond company will then seek reimbursement from the original contractor.
It is possible for a contractor with bad credit to obtain an Up-Front Performance Bond, but the bond premium will likely be higher.
An Up-Front Performance Bond guarantees the completion of a project, while a Payment Bond guarantees that the contractor will pay their subcontractors and suppliers.
An Up-Front Performance Bond cannot be cancelled by the contractor. Only the obligee can cancel the bond.
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This glossary post was last updated: 17th April 2024.
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