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Performance Bonds protect project owners against potential losses during construction, installation, or maintenance projects.
If you need a Performance Bond, you’ve come to the perfect place. At Provide, we offer comprehensive & affordable Performance Bonds. Our quick turnaround times mean that you can have your insurance needs easily settled, allowing you to focus on running your business.
What are Performance Bonds?
A Performance Bond is an insurance policy that helps to ensure your contractor performs satisfactory work. If satisfactory work is not completed, the insurer will compensate you.
Performance Bonds are commonly seen in construction, real estate development, installation projects, and upgrading projects. In these types of projects, clients will often demand Performance Bonds as a condition of awarding their contract. Performance Bonds may also be required in Commodities trading to ensure that the commodities being purchased will actually be delivered.
How do Performance Bonds work?
Performance Bonds will pay out their insured amount to the client when the contractor does not fulfill their contractual requirements. To better understand how this process works, we need to first establish the main parties that are involved in any Performance Bond.
There are 3 parties in a Performance Bond:
1. Principal (the contractor who is the party performing the physical works)
2. Beneficiary (the client who awards the contract)
3. Surety (the insurance company)
In the event that the contractor fails to uphold their contract (e.g. does not perform satisfactory work for the client), the client can activate the Performance Bond. This is also known as “calling” the bond. Once the bond is called, the insurance company will pay the client the insured amount. Depending on the exact conditions of the bond, the insurer may then seek to recover certain amounts of their claim from the contractor who failed to uphold their contract terms.
When do you need a Performance Bond?
Performance bonds are frequently required when dealing with both private and government contracts. These could be construction contracts, installation and servicing contracts, or other physical works. Clients will require bidders who’ve won the contact to carry a Performance Bond policy to protect them from anything going wrong during the project.
Here are some typical examples of projects where Performance Bonds are typically required:
- Construction: Building a house or commercial structure
- Maintenance/Servicing: Painting buildings, repairing boats, servicing factory machinery, maintenance work for commercial equipment & systems
- Installation: Putting up commercial sign boards, installing electronic systems, installing other commercial/domestic equipment & appliances
How much coverage do I need?
The client (i.e. the Beneficiary of the bond) will stipulate the amount of coverage that the contractor must carry. Typically, the Performance Bond must cover the contract value that has been awarded.
What other bonds are commonly used, alongside Performance Bonds?
Performance Bonds are typically combined with other bonds to provide maximum protection for a client and their project(s). The most common bonds that are frequently purchased together are:
1. Payment Bonds: This is a bond used to ensure that all sub-contractors and suppliers who report to the main contractor are paid. Payment cycles in the construction industry tend to be long, and receiving payment can also be a difficult endeavour. This may result in cash flow problems for sub-contractors and suppliers, that end up affecting the project’s timeliness and quality. Payment bonds resolve this by having an insurance company guarantee that all sub-contractors and suppliers will be paid.
2. Advance Payment Bonds: This is a bond used to protect down-payments paid by project owners. Main contractors may request for down-payments to begin work. This bond protects the client against the contractor failing to start work, or going bankrupt/missing with the deposit money.
3. Maintenance Bonds: This is a bond used to ensure that the contractor fulfills their obligation to rectify defects, after the project has completed. Maintenance bonds ensure that project owners will not be left in the lurch by contractors who do not fulfill their defect liability responsibilities.
When working on construction projects, what other types of insurance should I have?
Projects that involve construction, installation, servicing, or other types of manual work carry inherent risks of injuries and potential property damage. Protecting yourself from these risks will save you from having to suffer significant financial costs.
First off, you’ll need to carry Workman Compensation Insurance (WICA Insurance). This protects your employees against work-related injuries/sickness. This is a legal requirement by MOM for all employees who perform manual work, or for any employee who is paid less than SGD 2,600/month. If any of your workers are foreigners, you’ll also need to have Foreign Worker Medical Insurance, plus a Foreign Worker Security Bond for them.
You’ll also want to carry a Contractor’s All Risk policy. A Contractor’s All Risk cover includes Public Liability Insurance, plus comprehensive cover for potential damage to your client’s property, and coverage for damage to your own machinery & equipment.
Lastly, every construction contractor should always carry Professional Indemnity (PI) Insurance. Claims and legal disputes are rife in the construction industry, so a PI policy will go a long way to protecting your firm against legal action.
On-Demand Performance Bonds vs Conditional Performance Bonds
There are two main types of Performance Bonds.
1. On-Demand Performance Bond: The client can call the bond at any time, for any reason. The insurer will then pay out the insured bond amount.
2. Conditional Performance Bond: The client can only call the bond if specific conditions are met. The client will have to prove that the contractor failed to meet specific conditions of their contract. This proof must be provided before the insurer will pay out the insured bond amount. In the event that the contractor becomes insolvent/bankrupt, the bond can be activated to protect the client.
How much do Performance Bonds cost in Singapore?
The premiums for Performance Bonds can range between 1-3% of your contract value. Performance Bonds will vary significantly depending on the profile of each applicant. The major factors that affect price include: financial stability of your company, financial stability of your client, the nature and level of risk involved in your project, past claims history, and the profiles of your company directors.
Because there is a wide variance in each of these factors, each Performance Bond application is underwritten and priced individually. The best way to get a quick quote is to send us an enquiry, so that we can begin working on your Performance Bond application as soon as possible.
With Provide, you save up to 25% on your premiums. Our digital operating model creates lower overheads, and we pass every dollar saved back to our clients.