Performance Bond Requirements

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Performance bonds are a class of bonds that are used widely in the construction and real estate industries. A third party financial institution stands guarantee to the contract of the bond. These are designed to provide coverage to the client. The third party guarantees that the contractor would complete the work as per the specifications of the client. Otherwise, the money would be refunded back to the client.

Terms and Conditions

  • When getting into the contract, both the parties define the specs of the project to be completed. They fix on the budget of the project, the time to completion and the task to be accomplished. If the client is required to pay a portion of the money upfront, they also agree on that. The client also explains the legal recourse he would take if either the work is not completed on time or if he is not satisfied with the end product.

Bond Rate

  • Both the parties approach a financial institution to evaluate the viability and stability of the proposed project. This is also essential as this institution would guarantee the project. The bank would evaluate the project on several counts and then sets a bond rate. The bond rate is the maximum permissible money within which the project must be completed by the contractor.

    The bank would assess the financial position of the contractor, the associated risks in the project, the time to completion, the market conditions and the money involved before fixing the bond rate.

Contractor's Credentials

  • Financial institutions are willing to only stand guarantee to well-established contractors. These are contractors who have in the past successfully completed similar projects. When the client and contractor approach the bank for a third-party guarantee, the contractor is required to submit copies of his past credentials. On the basis of their past records, the contractor's are able to command a good rate for the project. The better his credentials, more would be his bargaining power.

Legal Action

  • If the client is not satisfied with the quality or quantity of the final output, he can legally sue to reclaim his money back. The contractor is required to pay the full amount plus the damages incurred. Ideally this situation must not arise. As all the specifications of the contract are already spelled out beforehand, the contractor has an in-depth understanding of what he is required to do. If the client is not happy with the work, he can start legal proceedings.

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