What Is The Difference Between Performance & Warranty Bonds?
Performance and Warranty Bonds are both Surety Bonds that are used in the construction industry, but both serve different purposes. From a Performance Bond guaranteeing that the contractor will complete a construction project to practical completion, to a Warranty Bond that provides assurance that the contractor will address any issues that arise after project completion and during the making good of defects period.
In this article, we will be discussing what Performance Bonds and Warranty Bonds are and their benefits.
Performance Bonds VS Warranty Bonds
When comparing Performance Bonds and Warranty Bonds, it is important to understand that they serve different purposes and apply at different stages of a construction project.
- Purpose: The Performance Bond guarantees the completion and performance of the project during the construction phase, whilst a Warranty Bond ensures the contractor will make the necessary repairs to issues that arise after the project’s completion, and during the defects liability period.
- Coverage: The Performance Bond covers the entire duration of the project during the construction period, whilst the Warranty Bond covers the construction project after completion.
- Activation Trigger: The Performance Bond can be utilised when the contractor defaults or fails to meet the appropriate standards, whereas the Warranty Bond is utilised if issues arise in the work after practical completion is achieved.
What Is a Performance Bond?
A Performance Bond, also referred to as a performance guarantee, is a type of Construction Bond offered by a surety company as a financial guarantee. A Performance Bond is acquired to support the satisfactory completion of a project as outlined in the terms and conditions of the contract.
If the contractor fails to meet their obligations, the Performance Bond will act as a financial protection for the employer or obligee. This is often due to either breach of contract or insolvency of the contractor.
The Advantages Of Performance Bonds
From offering protection for the employer/bond beneficiary in the case of contractor default to ensuring high-quality work for the construction project, Performance Bonds offer many advantages.
- Ensures High-Quality Work – If the contractor fails to meet the particulars detailed within the contract, the Performance Bond can be called upon by the employer in order to compensate them for any losses that have occurred, and to rectify and complete the works to the appropriate standards.
- Protection For The Employer – With a Performance Bond, employers receive additional financial security in the event their appointed contractor fails to meet their contract terms.
- Faster Resolution Of Issues – The Performance Bond allows the employer to quickly access the funds from the Surety Company to complete a project if the contractor defaults. Therefore, the Performance Bond resolves the issue quickly and efficiently with minimal delays.
- Contractor Accountability – Having a Performance Bond in place acts as a strong deterrent against non-performance by the contractor and provides reassurance that contractual obligations will be met.
What Is a Warranty Bond?
A Warranty Bond is an agreement between three parties. These three parties include: a surety company, a contractor, and the employer. The purpose of a Warranty Bond is to offer a guarantee that the contractor will correct any defects in their work during the warranty/maintenance period. This is also known as the making good of defects stage, or the defects liability period. If the contractor fails to meet their obligations in the warranty/maintenance period, the surety company will compensate the employer for any losses incurred.
The Advantages Of Warranty Bonds
From offering protection and risk mitigation to the employer, Warranty Bonds offer many valuable advantages to the obligee.
- Protection For Employer– Warranty Bonds act as a financial protection guarantee for the employer if problems arise during the post-completion stages of a project. With a guarantee in place, employers can receive peace of mind that the Warranty Bond can act as a financial safety net.
- Encourages Quality Workmanship – Contractors are more likely to adhere to high standards, knowing they are liable for post-completion defects. Therefore, reducing chances of corners being cut.
- Alternative to Retention Money – Instead of holding back part of the contract payment, a client can request a Warranty Bond, which improves a contractor’s cash flow, whilst still offering protection for the employer.
Your Performance & Warranty Surety Bond Specialist: CG Bonds
Whether you’re looking for a Performance Bond or a Warranty Bond, we are specialists in the procurement of Surety Bonds within the construction bond market at CG Bonds. From offering you the best price guarantee whilst also maintaining our 100% track record in fulfilling bond requirements, you can trust us at CG Bonds to provide you with exceptional customer service.
If you have any questions or queries regarding our Performance Bonds or Warranty Bonds, please contact us and our team at CG Bonds will be more than happy to help you with their expertise and knowledge.
