A Performance Bond is an instrument that supports a company’s contractual obligations and is usually purchased by the contracting party. It provides financial protection to the project owner against loss from a breach of contract, or default, by the contracting party under the arrangement.
As such, it is not actually a contract of insurance and does not attract IPT.
Benefits of Performance Bonds and Guarantees
Very often, contractors may be required to keep cash with the Beneficiary during a contract or secure a bond from a bank. Both of these options can have a huge impact on cash-flow.
Any organisation committing to contractual obligations may need a Performance Bond or Guarantee, for example:
- A building contractor provides a Bond to their employer (beneficiary).
- An importer provides a Bond to HMRC (beneficiary) to support a duty deferment facility.
- A manufacturer provides a Bond to a purchaser (beneficiary) for an advance payment.
Types of Bonds Available
Each bond is tailored towards a specific contract and is dependent on a number of factors when applying. These are the standard types of performance bonds available:
- Contract Performance Bonds – Mostly used in the construction and service industry, usually between 10 and 20% of contract value and provided to an employer against loss or damage in the event of a contractor or supplier failing to perform the terms of the contract. These types of contractual obligations are commonplace throughout the world.
- Retention Bonds – Predominantly relate to the Construction Industry as most construction contracts entitle the employer to withhold a percentage of money at each certified payment during the contract.
The contractor can provide a bond as an alternative and obtain the full amount of certified payments.
- Development Bonds – Used in Planning, Highways Roads and Sewer Bonds, these are normally utilised by Property Developers or House builders, as guarantees on behalf of a property developer or house builder that it will complete the roads and sewers to enable them to be adopted by the appropriate local authority under the relevant Highways Act or Water Industry Acts.
- Customs Bonds – Used by any company that imports goods, providing importers with the flexibility to defer payment of Duty and VAT for up to 45 days rather that paying it immediately upon importation.
- Reinstatement Bonds – Mostly used by Waste management, quarrying and mining/extraction companies, these are usually provided to a local authority or the Environment Agency, guaranteeing the restoration of land to agreed standards after work has been completed.
- Advance and Stage Payment Bonds – A guarantee in favour of a customer to provide security for monies which have been paid in advance of the goods or services being provided.
- Rural Payments Agency Guarantees – These are guarantees that certain Agricultural producers and importers will provide to the Rural Payment Agency to satisfy the requirements of the EU under certain schemes and quotas imposed under Common Agricultural Policy (a common requirement across Europe).
With Finch Commercial you can rest assured that we will work hard to establish an effective way to minimise the risk associated with any contractual obligation that may affect you.
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