When a developer wants to build a new subdivision or a contractor puts in a bid to construct the city's new public library, the city involved with each project may ask the builder to put up a cash performance bond. A cash performance bond puts a predetermined amount of money in the city's control to use in the event the promised work is not satisfactorily completed.
A cash performance bond provides funding for remedies in the event contracted work is not completed in the manner it was contracted to be completed. This can mean the work isn't done within the specified time frame, the work was not done in accordance with the agreed upon specifications or the work is done, but there are problems and the contractor does not repair the problem.
Costs of a cash performance bond vary with each project. The entity requiring the bond, many times a government agency, determines what cash bond it will require in order for various contractors to bid on the project. Those who bid are aware up front that a cash performance bond for a predetermined amount of money must be included in the bidding process. Cash performance bonds are often for what it would cost to build the entire project from scratch to ensure that any problem, large or small can be covered if needed.
Once the contractor wins the bid and completes the project, there is usually a walk-through conducted by the contractor's representative and a representative from the entity buying the work. A punch list is completed, in which every aspect of the project is listed. The inspection team checks off each punch list item as it is deemed complete to the contract's satisfaction. The punch list is typically dealt with once the entire project is done. If any item on the punch list is not finished, for example, the grade angles on the land surrounding the building are not correct, the contractor is expected to correct the issue in a reasonable time frame. If he does, or if there are no corrections needed, the cash performance bond is released.
Funds from the cash performance bond are only used if the work is not complete as contracted and the contractor does not repair the issue within a reasonable time frame. One example of this would be the contractor not completing the project in the time frame that was agreed upon in the winning bid. The purchasing entity has the right to extend the time, or to start fining the contractor a predetermined amount of money each day the project goes over the time line. The money for the charges come out of the cash performance bond. Typically, there is a time frame in which the cash performance bond must either be used or released.