What is a Performance Guarantee Agreement?
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A performance guarantee agreement is another name for a surety known as a performance bond. These are usually given to a construction company when they need to be bonded for a job requiring a surety bond. In addition, this contractual agreement is usually granted in conjunction with payment bond. They are normally required for any governmental contract as dictated by the Miller Act. Most states have also passed statutes that require a performance and payment bond in their own states and these laws are known as little miller acts.
A performance guarantee agreement guarantees that the Obligor (the contractor) will perform according to the terms of the contract. If not, the surety will step in and provide another contractor to finish the job. If they cannot find another contractor to finish the job, then they will pay damages to the Obligee (the owner of the property/project). A payment bond, which is typically issued at the same time as a performance guarantee agreement, assures that the Obligor will pay all subcontractors and vendors (like material providers) for the job.
What is a Performance Guarantee Contract?
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A performance guarantee contract is another name for a performance surety known as a payment or performance bond. This is usually given to a contractor along with a payment bond. It is a contract that guarantees that a contractor will perform according to the terms of the underlying contract. The underlying contract will have certain requirements, such as when the project will be completed and how it will be done as well as quality assurances. Thus, the performance guarantee contract will ensure that the contractor can actually perform according to those terms.
Performance Guarantee Bond
A true performance guarantee is a guarantee made by one party regarding the performance or action on a specific task. In a typical contractual situation, such as a construction site, the guarantee is provided by the company that is actually doing the work. In this situation, the business is providing just a bit more than a contract. In addition to the contractual remedies upon the end of the job, the company is providing a guarantee that the work will be done timely and according to the specifications within the agreement. This provides several types of implied warranties of performance.
Another type of true guarantee is when the owner of the construction company provides a guarantee on behalf of the company. This personal guarantee will make sure that the company does the work timely and usually is a good indication that the work product will be of the quality needed. That's because the owner is now personally invested - even more than just having their company invested.
The final type of performance guarantee is the performance bond. This is oftentimes written in conjunction with a payment bond and is a guaranty that the company will provide the work timely and according to the terms of the contract. However, unlike a guarantee, the performance bond is provided by a third party. This third party (normally an insurance company, like Zurich or AIG) is the one that has underwritten the company. So, if there is a dispute regarding the contract, the owner will contact the surety. If it is a valid dispute, the surety will find another contractor to finish or fix the job. If the surety is unable to do so, it will pay damages to the owner of the job. The surety will then try and recover those payments, including attorneys fees, costs, etc. from the contractor.
What is the Guarantee Insurance?
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The Guarantee Insurance is another name a surety bond, such as a payment bond or a performance bond. This type of guarantee can be in one of two ways. The first way is a standard performance bond that we see here in the U.S. These performance surety bonds are guarantees that a company will perform according to an underlying construction contract. In this type of bond, the owner will have assurance from the surety that they will be able to finish the job on time and in the manner described in the contract.
This can be compared to a financial guarantee. A financial guarantee does not have an underlying contract that needs to be fulfilled. Instead, the financial guarantee can be called at any point. There does not have to a problem with any underlying agreement.