The Different Types of Performance Bonds
There are various types of performance bonds that you need to be aware of as a contractor, and not all of them will be suitable for the project you are completing. That is why knowing the types of performance bonds and their differences is important.
The two main types of performance bonds are conditional bonds and on-demand/unconditional bonds. The key difference between conditional and unconditional/on-demand performance bonds lies in the conditions for activation and the beneficiary’s claim requirements.
Conditional bonds require proof of a contractual breach or specific conditions being met, whilst on-demand bonds provide immediate payment to the beneficiary upon a valid demand, without the need for proof of non-performance.
This article will discuss the difference between the types of performance bonds, and when each one is required.
What Are Conditional Bonds and Will I Need One?
Conditional bonds are a type of surety bond that is contingent on specific conditions or requirements being met before the performance bond becomes enforceable.
The conditions for the contract performance bond’s activation are detailed in the bond wording. They 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 On-Demand/Unconditional Bonds and Will I Need One?
An on-demand performance bond, also known as an unconditional bond or demand guarantee, is a type of surety bond that provides a guarantee of performance by a contractor or principal.
They do not require the beneficiary to prove a breach of contract or fulfil specific conditions to trigger the performance bond. In essence, it is a more straightforward and immediate form of financial protection for the beneficiary.
With on-demand performance bonds, the beneficiary can make a claim and receive payment from the bonding company immediately upon presenting a demand for payment. The beneficiary does not need to show evidence of non-performance or contractual violation.
Other performance bonds
- JCT Performance Bonds — A JCT performance bond is a bond that is detailed and recommended within a Joint Contracts Tribunal (JCT) contract.
- ABI Performance Bonds — The Association of British Insurers (ABI) provides specific and standardised template wording for performance bonds. An ABI performance bond is therefore a conditional bond that uses this standard wording.
ABI performance bonds
An ABI performance bond is simply a bond that uses The Association of British Insurers standard wording. These are typically the most common performance bonds we deal with are in ABI standard wording, and many beneficiary/housing associations request them to be worded in this way.
However, if an ABI performance bond isn’t right for your situation, then we can procure a performance bond for all other non-ABI wordings.
Performance Bonds and More from CG Bonds
CG Bonds specialise in the procurement of surety bonds. This includes the different types of performance bonds. We can help you decide which type of performance bond is right for your project, and can also help you with your application process.
Get in touch today to speak to a dedicated member of our surety bonds team.
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.
