A contract agreement requires all parties involved to adhere to the particulars of the contract. There is always a chance that one or more of the parties fail to deliver on their side of the agreement. While this is easily remedied in most cases since contracts are legally binding and the aggrieved party can be compensated through court procedures, it is an added burden for owners of building/construction or development projects. If a building contractor fails to deliver, the owner of the project loses money as well as precious time, which will translate to even more monetary losses. How, then, can project owners protect themselves from such a situation and guarantee the completion of their projects? The best way to do that is through a type of bond known as a “performance bond”. A performance bond is a financial guarantee provided by an insurance company or a bank for the completion of a project in the event that the contractor fails to deliver on their obligations under the contract agreement.
Performance bond process
Construction projects are awarded by project owners only when a Singapore performance bond is provided by bidding contractors. This gives assurance to the owners that the contractor will be held accountable for their actions. There are three parties involved in a performance bond:
1) Insurer â the insurance company or bank,
2) Principal â beneficiary of the guarantee, the owner of the project,
3) Contractor â the client of the insurance company who pays for the performance bond.
When awarding a contract, project owners usually require contractors to provide a performance bond as an insurance for the completion of the project on-time, within contractual guidelines and within the budget. If a contractor is able to fulfil their contractual obligations, the performance bond will become null and void. However, if a contractor is unable to complete the project or goes beyond the budget or delivers sub-par quality of work, the project owner can make a claim against the performance bond. After a claim is made, the insurer investigates and determines whether the claim is valid or not. Therefore, in order for the bond to be effective, guidelines in the contract as well as the bond need to be very specific so as to not leave room for vague interpretations. If the claim is found valid, the project owner is covered for losses by the insurer as stipulated in the performance bond. The insurer will then get the payment reimbursed to themselves from the contractor.