What Are the Two Types of Performance Bonds?
The two main types of Performance Bonds are On-Demand Performance Bonds and Conditional Performance Bonds. The two Bond types share some similarities, but are also suitable for different uses, making them also different in ways.
This blog will give you all the information you need to know about the two different types of Performance Bonds and how to determine which is the most suitable for your construction project.
What is an On-Demand Performance Bond?
On-Demand Bonds do not require the employer (typically the project owner or client) to provide evidence of a breach of contract or to fulfil specific conditions to call upon the Performance Bond.
With On-Demand Performance Bonds, the beneficiary can make a claim and receive payment from the bondsman immediately upon first written demand for payment. The beneficiary does not need to show evidence of non-performance or contractual violation. In essence, it is a more straightforward and immediate form of financial guarantee for the beneficiary.
What are Conditional Performance Bonds?
Conditional Bonds are the opposite of On-Demand Bonds. The employer requires evidence of breach of contract, and the payment terms to the surety providers are often less demanding.
The conditions under which a Performance Bond becomes enforceable are detailed within both the Bond wording and contract. This may include the following scenarios:
- The contractor’s failure to complete the project within the agreed-upon timeframe.
- Failure to meet specific quality or performance standards outlined in the contract.
- The contractor’s financial default or inability to pay subcontractors and suppliers.
- Other specific conditions that are stipulated in the contract.
What are the Differences Between On-Demand Performance Bonds and Conditional Performance Bonds?
The primary difference between On-Demand Performance Bonds and Conditional Performance Bonds is how they are activated: an on-demand bond requires immediate payment from the surety company upon the client’s claim of default, while a conditional bond requires the client to first prove the contractor’s failure to meet contractual obligations and the resulting loss before payment is triggered.
Differentiators of On-Demand Bonds
Activation: The client can claim payment by simply making a demand for it, usually in writing, without needing to provide evidence of the contractor’s default.
Beneficiary’s Burden: The beneficiary’s obligation is triggered upon the first demand, and they generally don’t need to demonstrate a breach of contract or financial loss to receive payment.
Common Use: More prevalent in international projects or higher-risk situations due to the immediate financial access they provide to the beneficiary.
Contractor’s Risk: The contractor faces a greater risk because payment can be made even if they dispute the claim, with the burden on them to prove the call was fraudulent or improper after the fact.
Differentiators of Conditional Bonds
Activation: Payment is conditional on the client providing proof that the contractor has failed to fulfill their contractual obligations and has caused a measurable loss.
Beneficiary’s Burden: The client must demonstrate the contractor’s default, which may involve providing evidence, certificates, or an adjudicated decision.
Common Use: The standard type for domestic (UK) construction contracts, offering protection to contractors against unfair or unjustified calls on the bond.
Contractor’s Risk: Less exposure for the contractor as they are protected from immediate payment and can contest the claim before any funds are released.
A Complete Range of Performance Bonds from CG Bonds
Here at CG Bonds, we work with an exclusive underwriting panel to secure Performance Bonds for contractors across the country. We’ve designed a new streamlined bond application form that’s easy to fill in and will help you complete it. Utilise our application completion service today.
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