The construction projects involve many financial risks as the project owners put a massive amount of money into completing the project. The project owner often has to deal with many problems, such as project delays, increased costs, delayed cash flows, and poor communication among the stakeholders.
On top of all these problems, they also deal with abrupt project terminations due to issues with the contractors. That’s why many project owners rely on construction performance bonds to protect themselves from liabilities. But what is a construction performance bond? What purpose does it serve for project owners, and how do they help to reduce the risks and liabilities associated with construction projects and contractors?
Construction performance bond
Before learning what is a construction performance bond, here are a few things you need to know.
Construction project owners hire contractors to work on the construction and complete the project on the agreed timeline. Despite the agreements, many reasons can lead to disputes between the contractor and the owners, which severely affect the project timeline and might lead to project termination.
It offers a legal guarantee that the contractor is obligated to deliver the terms mentioned. It is also known as contract bonds and binds the contractors to complete the project per the agreed budget, timeline, structure, and quality.
If contractors fail to fulfill the terms and conditions in the contract bond, the project owners can receive financial compensation for the project. That way, the contractors are legally obliged to complete the project, and the project owner can significantly reduce the risks involved.
Benefits of performance bonds for construction project owners
Here are some ways they can benefit the project owners.
Reduced financial risk
Project owners invest a substantial amount of money in construction projects. They pay contractors to complete the construction on their behalf. But, due to different reasons like defaults and bankruptcy, contractors may not be able to deliver their obligated responsibilities regarding the project, which significantly increases the financial risk for owners as they have already invested a lot of money and the project isn’t complete yet.
If such a situation arises, the project owner can claim a bond that obligates the contractor to fulfill the terms of the contract. That way, the owner can be assured of the project’s completion or receive financial compensation for it. It significantly reduces the financial impact of the project.
Reduced project cost
Project delays and termination can have catastrophic consequences on the project cost. Every day of stopped work reflects the increased cost of resources, labor, and utilities. The owner might have to pay additional amounts to retain the labor and fulfill regulatory compliance requirements and the future risks caused by the abrupt termination of the project. The owner can prevent these costs by claiming a contract bond if the contractor fails to deliver what was agreed upon. That way, the owner can make a necessary decision to reduce the escalating project cost.
It is a legal contract that protects the rights of project owners. It helps them complete the project or receive compensation to deal with the financial burden caused by project termination. Keep in mind that this is not insurance but a third-party arrangement between you, contractors, and an external regulatory party or a company.