The Role of Performance Bonds in Construction Projects

In Singapore, performance bonds are a requirement in construction projects. Performance bonds protect project owners from monetary loss due to incomplete or failed projects where the contractor is at fault. They are usually provided by insurance companies or banks and applied for by contractors (in favour of the project owner) who need to furnish them as part of their bid for a project. The security provided by performance bonds need not only be for the completion of a project but also in other situations like securing advance payments to the contractor or the tender security deposit submitted at the time of the tender. However, performance bonds are mostly used to secure the performance of the contractor’s work on the project.

Types of Performance Bonds

There are broadly two types of performance bonds – €conditional€™ and on demand€™(or unconditional).

1) Conditional performance bond – in this case, the insurer is required to pay only if the contractor defaults on the underlying construction contract.

2) On demand or unconditional performance bond – the insurer is required to pay the amount specified in the bond without having to prove that the contractor’s breach of obligations as per the underlying construction contract. The insurer can only refuse to pay if the claim made is fraudulent.

Uses of performance bonds

Performance bonds are most widely used in construction and development projects. Project owners require contractors to be accountable for the quality of work that they do, so performance bonds ensure that contractors deliver on what they promised under the contractual agreement. Performance bonds are provided by insurance companies or banks to a contractor in favour of the project owner. In case a contractor fails to deliver on contractual agreements, be in in terms of quality of work, budget or deadlines, a performance bond ensures that the project can carry on and be completed. When a contractor defaults, the insurer pays out an agreed sum of money to the project owner or arranges for a new contractor while covering all the expenses for that. The insurer will then recover their expenses from the contractor who defaulted since the performance bond was issued to that contractor. Performance bonds are widely used because project owners want to secure the completion of their project(s) without having to incur any additional costs due to failure of the contractor to fulfil their obligations under contract.