What is a Performance Bond and How Does It Work?
Are you going to enter into a contract or trade deal? Is your counter party demand an assurance in regards to your performances on the project or trade deal? Apply for Performance Guarantee! This will give the assurance to your counter party. So, what is Performance Bond? And how it works for contractors and suppliers? Let us explain:-
What is a Performance Bond?
Performance bonds are issued by the banks to assure the positive outcome of the project or trade deal. It is mostly used by the contractors in building projects to provide assurance to the project owners. This is to say; that they will comply with the terms of the contract without fail.
Also, this assures that in case, if the contractor fails to act as per the signed contract. Then, the counter party has a right to claim the bonds. By this way, the project owner will cover their losses incurred in the project. For example, it could be – the cost of finding the new contractor to complete the pending work.
It is also used by the sellers in commodity trade. Whereas the buyer asked the seller to provide a Bank Guarantee for their performances, as per the signed contract. In case, if the seller fails to comply with the contract terms for the supply of goods; the buyer has a right to claim this Bank Guarantee.
Once the contractor / the seller are bidding for a contract or trade deal; as the first step, they need to provide Bid Bonds to honor the terms of the bid. And once they awarded the project or supply contract; it will replace by Performance Guarantee.
Once the contractor or the seller requires advance payment from the project owners or buyers; then they need to provide them a Bank Guarantee to cover their fiscal risk.
How Does Performance Bonds Work?
Performance bonds work in a way to assure the positive outcome of the work done by the contractor or the seller. In case, if there is any default occurs in performing the project or trade deal within the set time limit; then these bonds can be claimed by the project owner or the buyer.
Further, these Bonds also protects the project owner or the buyer against any default in which the contractor / seller declares bankruptcy; or can’t able to complete the work due to any fiscal issues.
Types of Performance Bonds
On Demand – As the name suggests, the bank is required to make the payment under the bond; whenever it is demanded. There is no need to prove that the contractor is in breach of its obligations.
Conditional – This means that the amount is payable only after the occurrence of any unforeseen event. Usually, this includes – delay to complete the works within the set time limit; or a failure to clear the defects after the completion of works.
Key Benefits of Performance Bond
When a project owner wants to protect the investment made in a project, they demand the contractor who won the bid to provide a performance bond before the work begin. Further, this guarantee will provide the assurance that a contractor will complete the project; as per the terms of contract.
For Contractors and Sellers:
- Enhances liquidity
- Improves the ability to bid on more tenders
- Opens up more business opportunity by proving fiscal strength and assuring the positive outcome
For Project Owners and Buyers:
- Gives assurance that the project will complete; even if the contractor or the seller can’t or won’t meet their performance terms
- No need to add additional funds for completion of works
Avail Performance Guarantee
When you require a Bank Guarantee on your company’s behalf; you normally contact your banker. But to issue such MT760, banks may require certain percent of the bond value as a cash margin. If you didn’t meet the banks demands, then you won’t be able to get the MT760 on your behalf. But, we, the Performance Bond Providers in Dubai are here to assist you to avail the required Bank Guarantee without blocking your cash funds.
Do you require a Bank Guarantee to assure your counter party? Avail Performance Guarantees from us! We provide the required MT760 from rated banks within 48 working hours.
Are You In Need of Performance Bond to Guarantee Your Performances?
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