Estimating Practice Exam

Which financial assurance can help secure a contractor against risks associated with subcontractor performance?

1. capital investment

2. insurance policy

3. warranty

4. performance bonds

The correct answer is: performance bonds

Performance bonds serve as a form of financial assurance that protects the contractor from potential losses caused by the failure of subcontractors to meet their contractual obligations. In a construction context, when a contractor hires a subcontractor to complete a specific part of the project, there is always a risk that the subcontractor may not deliver on time, meet the quality standards, or fulfill other agreed-upon performance criteria. A performance bond is a surety bond that guarantees the work will be completed as per the contract terms. If the subcontractor fails to perform, the contractor can make a claim on the performance bond to recover the costs associated with hiring another subcontractor to complete the job or to cover other losses incurred due to the default. This ensures that the contractor has a level of financial protection against the risk of subcontractor performance issues. Other choices, while relevant in their contexts, do not specifically address the performance risk associated with subcontractors in the same way. Capital investment refers to funds invested for the long-term in the business but does not mitigate performance risks. An insurance policy may cover certain liabilities but usually does not guarantee performance. A warranty provides a guarantee for workmanship or materials but is more about rectifying defects than ensuring that work will be completed as per the contract