What is a performance bond?
A performance bond act as a security guarantee that a project will be completed.
A performance bond is used to provide security between a client and a contractor. A contractor would be asked to provide a performance bond. The bond protects the client from the risk of the contractor failing to meet his contractual obligations.
How does performance bond work?
Instead of a retention sum of money that the contractor offers to the client that he can cash back only after he fulfills his project completion, he may choose to use performance bond instead as it will not lock up a big capital sum of money as the retention sum.
As such, to replace this retention sum, the contractor can get get a performance bond from a bank or insurance company. The bank or insurance company will act as the 3rd party to pay out to the client if the contractor fails in its project obligation. The client is also assured that he can be paid by the 3rd party in case the contractor is not financially possible to pay the “retention sum”.
The contractor will not need to lock up its capital, and only need to pay a small percentage of the retention sum as premiums.
Performance bond insurance in Singapore
It is more common for contractors such as construction companies to get performance bond insurance, where they pay a premium to the insurers to provide these bonds to the clients.
Performance bond insurance is provided to the client of a contract that promises to pay them if the contractor (or Principal) did not complete the legal obligation of a construction project in time and satisfactorily.
What is the cost of a performance bond?
The performance bond is usually less than 1% of the contract value for mid or large projects, and 1-2% if the contract value is small. The performance bond insurance premium may be 5-10% of the performance bond value, depending on the construction firm’s background.
Who pays for a performance bond?
Usually, the contractor is the one directly paying for the performance bond, and he will be sure to include the premium of performance bond insurance in his quotation to the client. The performance bond act as the 3rd party financing between the contractor and the client to ensure the project gets done.