Surety (Performance) Bonds
Surety bonds can be referred by various different headings / titles – retention bonds, performance guarantees, rent guarantee, retention bond, deferred payment guarantee, advance payment guarantee, bid bonds, trade credit guarantee, rolling purchase guarantee, media guarantee, gap guarantee, construction guarantee, maintenance guarantee, contract guarantee, contract surety, completion guarantee, to mention just a few. Surety bonds protect their acceptors against contract default, insolvency or proven nonperformance under contract.
Surety bonds are normally a tripartite agreement between the two contracting parties and the third party surety provider often called the bondsman, who undertakes to pay a sum of money or be responsible for (makes good) the default to the acceptor (beneficiary). When party being guaranteed (Contractor) fully performs his contractual obligations, the performance bond naturally expires (practical completion).
The most common form of surety bond is a conditional bond, meaning there is a need to prove that the acceptor (beneficiary) has suffered a loss. On demand bonds are less common, do not require proof of loss and as such are imprudent for the party being guaranteed (Contractor) in many situations.
Surety bonds can be obtained from Bondsmen & Banks although Banks rarely issue conditional bonds and on demand performance bonds will hold 100% counter indemnity against the party being guaranteed (Contractor), normally as a charge against cash held or credit lines. Bondsmen or surety can be more flexible with counter indemnity and more reputable providers will make separate insurance arrangements particularly against the insolvency of a guaranteed party.