What is an Advance Payment Bond?
Advance Payment Bond is one of the types of surety bonds that covers the project owner (or employer) in the event of an agreement that the owner will pay an advance payment to the contractor before commencement of work. Such advance payments are usually employed in facilitating the acquisition of materials by contractors, the labour force or mobilisation. The bond safeguards against the possibility that the contractor defaults in executing his duties or embezzling the money, the bond guarantees to the employer that the advance payment can be obtained on the surety. This is important since upfront payments are quite risky- particularly in the case of insolvency of the contractor or when he/ she abandons the project. This surety is a comfort to the employer who is assured that the funds that have been given beforehand shall be reimbursed should the contractor not complete the work. It is some kind of financial security that enhances the confidence of the parties and allows the contractor to finance the initial phases of the job.
What is a Performance Bond?
A surety bond is not an insurance policy; it is a promise to pay money. The principal (usually an independent contractor or business), the obligee (the person or company that needs the bond), and the surety (the company that gives the bond) are all involved. What is a contract bond? It’s a specific type of surety bond used to guarantee the fulfillment of contractual obligations, often seen in construction projects. The surety bond makes sure that the principal will do certain things, like completing a building venture or pay subcontractors. The obligee can claim the bond if the principal doesn’t meet these obligations because they are bankrupt, don’t do their job, or for some other reason. The surety company will look into the claim and, if it is true, will pay out money. But the principal is eventually responsible for paying back the surety for any money that is paid out, unlike insurance.
Key Differences:
The fact that the two bonds ensure the employer, they happen to work differently and at different phases of the project. These are the main differences:
- Purpose of the Bond:
An Advance Payment Bond can hold the money of the employer in case the money for the advance payment is misused by the contractor.
A Performance Bond is a type of bond that makes sure that the contractor delivers the project according to the contract.
- The Bond Timing:
Advance Payment Bonds are to be provided most often at the start of the project, before the beginning of work.
Performance Bonds are operational during the construction process; beginning with the initiation of the construction process to the end of the project.
- Claims Trigger:
Claims against an Advance Payment Bond emerge in case the contractor does not properly spend the advance payment or does not start working.
Performance bond claims arise when the contractor defaults or fails to perform as per the specifications in the contract or does not meet the quality or time delivery standards.
- Beneficiaries:
The two bonds are beneficial to the employer although in varying aspects. Where an advance payment is made, the bond will cover the initial investment. When it comes to performance, it ensures the delivery of the project at the end.
What Bond Are You Requiring?
Whether to apply for an Advance Payment Bond or Performance Bond is relative to the type of contract and its composition. Sometimes, it might need both to provide full financial security to the employer, in terms of funding it in the first phases, and delivering it in the last phases.
In case an advance payment is involved in the transaction, then an Advance Payment Bond is necessary to cover the same. Performance Bond is essential in case of a threat of non-performance or where the employer would be interested in guaranteeing the success of the project.
