Advance Payment Bond vs Performance Bond

In the financial and construction sectors, several types of bonds are used to manage risk, with Advance Payment Bonds and Performance Bonds being among the most common. However, the distinction between these two is not always widely understood, and they are often mistakenly considered interchangeable.

This blog will discuss everything you need to know about Advance Payment Bonds and Performance Bonds, their significance in contractual agreements, the key similarities and differences, and which is most suitable for your project. 

CG Bonds help contractors acquire Advanced Payment Bonds and Performance Bonds at the lowest market price. Contact us for a quote today.

Advanced Payment Bond Key Details

Advanced Payment Bonds are financial guarantees often used in construction contracts to ensure the contractor fulfils their contractual obligations when receiving advance payments. Issued by a surety company, the bond safeguards the employers financial interests in case the Contractor:

•  Fails to deliver the work or materials
•  Becomes insolvent, or
•  Misuses the advance payment

If the Contractor (Principal) defaults, the employer can call upon the bond in the interest of compensating and reimbursing them for any losses that have occurred. This mechanism enhances trust between parties by mitigating financial risks associated with advance payments.

There are typically three parties involved in an Advanced Payment Bond agreement. These are the Contractor (Principal), the employer or beneficiary, and the surety (lender). 

Performance Bond Key Features 

A Performance Bond is a type of surety bond issued to ensure the contractor completes the project according to the terms of the contract. It protects the obligee from financial loss due to non-completion or defective performance. It is commonly required in construction and other industries where project completion is critical.

Performance Bonds are used to ensure that the project is completed as per the contract terms, including the timeframe and quality of the project, and they also cover any potential defects in the first 12 months of the project.

Find out more about Performance Bonds in our guide to Performance Bonds.

Comparison between Advance Payment Bond and Performance Bond

Whilst there are many similarities between Advanced Payment Bonds and Performance Bonds, there are also some differences that set the two apart. There are three main differences between the two Bond types, which are their purpose, their coverage and conditions, and the legal and financial implications of the two.

Purpose

• Advance Payment Bond: Protects the obligee’s advance payment against contractor default before work commences.
• Performance Bond: Ensures project completion and quality, protecting the obligee against non-performance or defective work.

When Issued

• Advance Payment Bond: This is typically issued before work begins and when the employer provides the upfront payment. 
• Performance Bond:  These bonds are usually issued after the contract has been awarded and before or during the construction phase. 

Trigger for Claim

• Advance Payment Bond: Contractors failure to deliver goods/services after receiving advanced funds.
•   Performance Bond: Non-performance or insolvency of the Contractor throughout the project lifespan.

Bond Value

•  Advance Payment Bond: Usually equals the value of the advance payment being made. 
•   Performance Bond: Typically, 10% of the full contract value.  

Risk Covered

• Advance Payment Bond: These bonds cover the risk of loss of advance payment due to non-delivery of the Contractor.

•  Performance Bond: These bonds cover the costs associated with appointing a new contractor to complete the works and fix any defects. 

How do you choose the right bond?

The Bond Wording will clearly define the type of bond you require. If you or your client are unsure on what Bond you require for your project, speak with a member of our Client Account Team who can work with you to determine the exact cover required for the scheme. 

CG Bonds specialise in Performance Bonds and Advanced Payment Bonds. We have a quick, easy online application process, and dedicated account managers who provide an over-the-phone application assistance service.

Advanced Payment Bonds and Performance Bonds From CG Bonds

CG Bonds is a specialist Surety Bond broker that can source and secure the best value construction Performance Bonds for your construction project in the market, whilst using our years of unrivalled experience to make it a stress-free and simple process. With our extensive and exclusive underwriting panel, we can offer a Best Price Guarantee, whilst also maintaining our 100% track record in fulfilling bond requirements.

We specialise in both Advanced Payment Bonds and Performance Bonds, so we have the expertise to help you whatever your requirements are.

Get in touch with our advisory team today to start your Performance Bond or Advanced Payment 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.