Differences between Bid and Performance Bonds
Understanding the difference between bid bonds and performance bonds is absolutely crucial to making the most out of your construction projects. Bid bonds and performance bonds can cost a different amount of money and when looking at the value of a bond it can be easy to be fooled when you don’t consider the overall cost. Performance bonds generally include extra costs because much of the money is recouped if the contractor fails to actually complete a contract pursuant to the terms of that contract. With other types of bonds there is always a chance that a project might not be completed (or get changed enough that the bond is no longer valid) and you won’t recoup the total cost of the bond that you’ve taken out.
Performance bonds and their cost
A performance bond comes with a guarantee from a special third-party guarantor, called the surety (usually an insurance company or a bank). This insurance policy insures that the owner will end up getting some type of payment if the contractor fails to fully complete the construction contract as outlined in the bond. These types of bonds are not to be considered the same as fidelity bonds, instead the guarantor will have to recover the funds. This can mean that the owner may not be able to recoup the funds immediately, which can lead to extra costs and a longer waiting time to recoup the owner’s expenses.
A bid bond is a cash deposit or guarantee that the winning bidder will have to submit after a contract has been won. Contracts can only begin when a bid has been created and a bid bond is submitted. A bid Bond basically works to assure that if an individual bidder is successful at bidding on construction contract they will eventually be the one to execute the contract and provide all of the required security bonds. Bid bond penalties vary greatly from the cost of performance bonds and penalty usually involves paying back just 10% of the tender price. Many contractors prefer these types of bonds because they are far less costly and they don’t tie up a lot of money or time with banks and other insurance institutions.
Understanding the differences between these two bonds can help you in any construction project and if you are interested in investing in construction or running your own construction business. Different contractors and construction companies will have different preferences when it comes to bonds so it’s important to know potential customers going into any bidding process.