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Have you ever wondered how massive construction projects like raising skyscrapers get funded despite countless risks of delays or budget issues? The secret lies in this unique bond insurance that unlocks financing – we are talking about the completion bond insurance.
This bond allows contractors to get financing for large, complex initiatives that would otherwise be considered too risky. Completion bonds give teeth to contractors’ commitments when the stakes are high.
Read on to learn more about the completion bond and how it differs from the performance bond.
What is a completion bond?
A completion bond is a surety bond that ensures a project will be finished on schedule, within the allocated funds, and lien-free. Though most often seen in the construction sector, completion surety bonds have also found their way into the entertainment and media sectors.
A completion bond company is the third-party guarantor that provides completion bond insurance to the contractor and the lender. Completion bonds frequently play a role in intricate projects with several investors or substantial monetary volumes.
A contractor will provide a completion bond to guarantee a loan to a lending institution to get the required funding. With this bond, you can be sure that the project will stay on track, under budget, and free of any liens.
The completion bond insurance covers the risk of non-completion or default by the contractor. It ensures that the lender will receive the principal and interest even if the project fails.
When a third-party guarantor ensures the specific risks associated with a project, they will evaluate the project’s completion risk and get compensation. Therefore, even if the project is not completed, a completion bond guarantees that a creditor will still get principal and interest.
A completion bond differs somewhat from a performance bond or conventional contract bond. Separate contract bonds may also be needed for a project that requires a completion bond to ensure that particular aspects are completed successfully.
Understanding the completion bond in construction
The completion bond holds a contractor accountable for finishing a project that they have promised to do. It ensures the project owner that their contractor will finish the work whether or not payment is received.
The parties involved in the agreement are the obligee, the contractor, and the surety company. If the obligee files a claim against the completion bond, the contractor may be held accountable for not finishing the project.
Next, the surety firm will decide whether it is legitimate after looking into the claim. If so, they will settle the contractor’s claim and demand full payment.
What is a performance bond?
Regarding construction bonds, performance bonds are among the most prevalent. A performance bond is a financial assurance to one party under a contract against the other party’s default. A contractor often gets a performance bond from a bank or insurance provider to complete the project.
Such bonds frequently come in handy for public projects, among other reasons, to guarantee that the contractors engaged have the resources and expertise to finish the projects they are bidding on.
If a surety bond provider is ready to back a specific business for a project, they’ve done their due diligence on the contractor’s capacity to do the job as promised.
Completion bond vs performance bond
What sets a completion bond apart from a performance bond? Here’s how to tell them apart:
| Completion bond | Performance bond |
| An agreement that provides for full payment upon completion of a project. | An indemnification bond that ensures a contractor will satisfactorily complete the task under contract. |
| Often used for construction projects, the entertainment industry, and some mortgages. | Often used for public construction projects, but not exclusively. |
| Usually used for complicated initiatives with large financial resources or multiple investors. | Usually reserved for project-specific contracts |
| Provides more coverage than a performance bond | Provides less coverage than a completion bond |
Conclusion
As we have seen, completion bonds guarantee a financial safety net that transforms visions into realities. The completion bond promises to enable complex initiatives to progress confidently in industries burdened by financial risks.
However, investors should evaluate their risk tolerance and the completion bond’s risk-reward ratio before investing, although completion bonds may be a great low-risk investment option.
FAQs
A completion bond protects the lender or the owner of a project from the risk of non-completion or default by the contractor. It ensures that the project will be finished on time, within budget, and free of liens.
A completion bond is typically required for complex projects involving large sums of money or multiple investors. These bonds are commonly used in various construction projects, such as:
Large-scale commercial buildings
Commercial developments
Residential developments
Industrial facilities
The contractor or the principal who promises to complete the project or contract purchases the completion bond from a third-party guarantor or surety. The guarantor assesses the risk and collects a premium for insuring the project.
A bank guarantee is a promise by a bank to pay a specified amount of money to a beneficiary if the principal fails to fulfil a contractual obligation. A performance bond is a type of surety bond that guarantees satisfactory completion of contract work by a contractor.
A performance bond ensures that the contractor will perform the contract work as agreed. An advance bond ensures that the contractor will use the advance payment received from the owner for the intended purpose and not divert it for other uses.
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