Difference Between Performance Bond And Insurance
Running a construction business is easier said than done. It involves huge investments in terms of supplies and labor costs. At the same time, the contractor has to win the trust of the clients regarding the completion of projects. They also have to cover the risk in case of non-fulfillment of contracts. For this reason, it becomes important to insure the contracts. This is mainly done by getting performance bonds and contractor’s insurance. Contractors will usually require both of these. Though the purpose of both is same, these are quite different from each other. Let’s try and understand the difference between performance bond and insurance.
Performance Bond and Insurance: The Basic Difference
Before delving deeper, there is a need to go through the basics of performance bond and insurance.
Number of parties involved
Basically, there are three parties in a performance bond. The bond is issued by a surety (an insurance company or a bank) to the principal (a contractor). The beneficiary of the bond is the obligee (the project owner). The performance bond guarantees that the contractor would complete the project according to the specifications of the contract. In case he fails to do so (due to insolvency or some other reason) the project owner can claim the losses from the surety.
Insurance involves only two parties, namely the insured (contractor) and the insurer (insurance company). Contractors have huge work responsibilities such as organizing the labor, managing the equipment and ensuring project completion. They have to bear numerous risks such as worker injury, equipment failure, and structural damage. Contractor insurance is taken by the contractors to cover the financial risks related to such events. Here, the beneficiary is not a third party (as in performance bond) but the contractor himself.
Performance bond premium is usually a one-time expense which is to be paid when the contractor takes the bond. This is usually done after he wins the bid for the project and initiates it. The contractor pays the premium once and not again till the bond is to be renewed. A renewal is generally required once in a year, if the project extends over a longer time span.
On the other hand, the contractor has to pay the premium for insurance on a regular basis, usually every month. The policy structure is designed to cover the losses that the contractor may experience as a part of their working. The reason that the contractor is willing to pay insurance premium is that he gets full risk coverage with insurance. He can easily claim compensation if he incurs any financial setback due to an unfortunate reason.
Contractors need to be familiar with both, a performance bond and insurance. They should take the right kind of bonds to protect their business in every possible way. The best way to do so is to seek the advice of experts such as Swiftbonds. They can guide the contractors about the bonds that would be most relevant for their business. At the same time, they can help them secure the bonds at the right cost.