Both Performance Bonds and Insolvency Cover provide protection in construction projects, but there are slight differences.
A performance bond is a type of surety bond that protects the client in the event that the contractor fails to fulfil their contractual obligations. Insolvency Cover, on the other hand, is financial protection or insurance designed to mitigate the risks arising from a contractor’s insolvency. This can include cover for losses incurred if a contractor goes into administration.
This article will focus on some of the key differences between Performance Bonds and Insolvency Cover.
The Key Differences Between Performance Bonds and Insolvency Cover
A Performance Bond is a proactive risk management tool that guarantees a contractor will fulfill their contractual obligations, typically covering project completion in the event of default, including insolvency. Insolvency Cover, however, is more reactive. It’s designed to mitigate financial losses specifically resulting from a contractor’s insolvency. A Performance Bond provides protection against contractor insolvency, similar to Insolvency Cover, but also extends to breaches of contract.
Both are valuable tools in construction and similar sectors to manage the risks posed by financial instability in the supply chain.
Their Purpose
A Performance Bond primarily guarantees the completion of a project in line with the contract terms, whereas Insolvency Cover offers financial protection if the contractor is unable to fulfil their obligations due to insolvency.
Coverage
Performance Bonds cover the cost of completing a project if the contractor defaults on their contractual obligations, which can include insolvency, but also covers other forms of non-performance. In contrast, Insolvency Cover is a broader term that can refer to specific financial protections triggered by insolvency.
Accessibility
A Performance Bond can serve as an alternative form of security for employers when a developer or contractor is unable to obtain Insolvency Cover through their new homes warranty provider. Insolvency Cover is typically offered to A1-rated builders who have stronger financial accounts and a well-established track record. As such, Performance Bonds can be a viable option for SME developers and contractors whose clients require a form of guarantee, but where Insolvency Cover is not available.
Duration
In some cases, Insolvency Cover provided by warranty providers only applies during the construction period. In contrast, Performance Bonds can be tailored to include post-completion stages, such as the maintenance period or the making good of defects. As such, a Performance Bond is particularly useful when an employer requires a broader period of coverage for their project.
Performance Bonds and More from CG Bonds
CG Bonds is a specialist Surety Bond broker that can source and secure the best value Performance Bonds in the market. We use our extensive and exclusive underwriting partners to obtain the best terms in the market.
Our dedicated client account managers make the application a stress-free and simple process. Get in touch today to start your Performance Bond application.
The information provided in this blog is not intended to constitute legal advice or any other advice of a professional nature. The recipient of this information contained in this blog should always consult legal or professional advice.
