In the world of construction, especially with public construction that is overseen by a certain government body, the idea of acquiring bonds is necessary. In fact, they are required by law, particularly with public construction projects. This is to ensure that the parties involved in the project are secured by the bonds and that, in the event that there is a loss, the guarantor is there to pay for the amount of the bonds.
The common form of construction bond used in the project is the performance bond, which is exactly like how bonds generally work. Performance bonds are commonly utilised as a way to insure the client in protection from the risk of the event that the contractor fails to uphold the obligations in the contract for the client, albeit this can also be required from the other parties. The amount of the performance bond is usually set at ten percent of the value of the contract. Because of this, it will enable the client as a defense against the difficulties that will happen when the contractor’s non-performance occur, which will be then the way for clients to look for a new contractor to take hold of the project to be completed. The one that will pay for the amount of the bond will either be the contractor or the guarantor, in which the latter can also be referred to as the surety.
But performance bonds are not the only bonds that work in the construction project. There is the advance payment bonds, a kind of bond wherein if the client approves on making the advance payment, also the same with down payment, to the supplier, the bond may be needed in order to guarantee the payment against the default made by the contractor. It can also be referred to as advance stage payment or advance payment guarantee. The client typically requires the advance payment bond in a construction project if a request is made by the contractor when it comes to advance payment in order to aid them in meeting significant procurement costs that needed to be acquired in order to being the construction project. An example of this is when the contractor needs to buy a high value plant, materials or equipment that is designed specifically for the construction project. This particular bond will be used to secure the client at the time when the contractor has failed in fulfilling the obligations on the contract, such as the insolvency of the contractor.
Normally, the advance payment bond is on-demand, which means that the bondsman will pay the money arranged in the drafting of the bond right away, thus on demand, without the need for any conditions in order for it to be approved. This is different from conditional bond, which is also referred to as the default bond, wherein certain conditions need to be met in order for the payment to be made. This also means that the bondsman will only be held liable upon the condition if there is an established agreement with the breaching of contract.Read More