Estimating Practice Exam

What can reduce the risk of bankruptcy by a subtrade?

1. performance bonds

2. insurance policies

3. advance payments

4. contractual clauses

The correct answer is: performance bonds

Performance bonds are a financial guarantee that a subcontractor will fulfill their contractual obligations. By requiring a performance bond, a general contractor ensures that if the subcontractor fails to complete the work, the bond can cover the costs incurred by the general contractor to either complete the project or hire another subcontractor. This reduces the financial risk associated with a potential bankruptcy of the subcontractor, as the bond acts as a safety net that can mitigate losses. In comparison, while insurance policies can also offer protection against certain risks, they do not directly guarantee the performance of a subcontractor in the same manner that performance bonds do. Advance payments can help secure a subcontractor's commitment but conversely can increase risk if the subcontractor then fails to deliver. Contractual clauses may provide some level of risk management through stipulations regarding performance, but these clauses do not offer the financial security that performance bonds provide, which directly addresses the risk of a subcontractor's bankruptcy.