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ABI or On-Demand Performance Bonds? What is the difference.

08 November 2023

Performance Bond Overview

Performance bonds are an important part of many construction contracts. They are designed to provide a degree of financial security for the parties involved in a construction project by ensuring that the contractor fulfills their obligations under the contract. Two common types of performance bonds are the ABI performance bond and the on-demand performance bond. While both types of bond aim to provide financial security, there are some key differences between them.

What is an ABI Performance Bond

An ABI performance bond, also known as a conditional bond, is a type of bond where the surety (the party providing the bond) agrees to pay the beneficiary (the party receiving the bond) a certain amount of money if the contractor fails to fulfill their obligations under the contract. However, the beneficiary must first provide evidence of the contractor's breach of contract before they can make a claim on the bond.

In practice, this means that the ABI performance bond provides a degree of protection for the beneficiary, but only if they can prove that the contractor has breached their obligations under the contract. This can be a more complex process than with an on-demand performance bond, as the beneficiary must provide evidence of the breach before they can claim on the bond.

What is an On Demand Performance Bond

In contrast, an on-demand performance bond is a type of bond where the surety agrees to pay the beneficiary a certain amount of money if the contractor fails to fulfill their obligations under the contract, without the need for the beneficiary to provide evidence of the breach. This means that the beneficiary can make a claim on the bond as soon as the contractor fails to fulfill their obligations under the contract, without the need to go through a lengthy process of proving the breach.

In practice, this means that an on-demand performance bond can provide greater financial security for the beneficiary, as they do not need to provide evidence of the breach before they can claim on the bond. However, it also means that the contractor may face greater financial risk, as the surety is obligated to pay out on the bond as soon as the beneficiary makes a claim, regardless of whether the contractor has actually breached their obligations under the contract.

Summary

Overall, the choice between an ABI performance bond and an on-demand performance bond will depend on the specific requirements of the construction project and the preferences of the parties involved. While an ABI performance bond may provide a greater degree of protection for the contractor, an on-demand performance bond may provide greater financial security for the beneficiary. As with any type of performance bond, it is important to carefully consider the terms and conditions of the bond and seek professional advice before entering into any agreements.

Here at SB&G we can cater for any tye of wording and for any Bond amount, to see how our team can help support your next tender please get in touch today.

Enquire today to see how Retention Bonds can help your business release any tied up capital. Telephone: 02476 017646