DEFINITION of Completion Bond
A completion bond is a financial contract that ensures that a given project will be completed even if the contractor runs out of money or if any measure of financial impediment occurs during the production of the project. Completion bonds are used in many industries, including major films, video games, and construction projects.
A completion bond is also known as a completion guarantee.
BREAKING DOWN Completion Bond
A surety bond is a financial guaranty that compensation will be paid to a given party if a contract is not performed to satisfaction or completion. A surety bond is a contract entered into by at least three parties: (1) the obligee – the client, owner, or party that requires the bond to be posted for its protection; (2) the principal – the primary party that promises to complete the project or contract; (3) the surety or obligor – assures the obligee that the task or project can be fulfilled to completion. One type of surety bond is the completion bond.
Completion bonds are often standard pre-project material for any large construction project or complex project involving large sums of money and/or multiple investors. In order to secure the financing necessary to complete a project work, a contractor will make a loan guarantee to a lending institution or bank in the form of a completion bond. The bond guarantees that the project will be completed on-time, within budget, and free of liens. A third-party guarantor will assess the risk to the projects completion and collect a premium for insuring the particular risks of a given project that is expected to be completed on time and on budget. Thus, a completion bond ensures that a creditor still receives principal and interest on a loan even if the project itself fails to reach completion.
Since construction projects can take many months or even years to be completed, without the bond, the potential risks for investors’ capital investments could be high. Investors become much more likely to get involved if a completion bond is provided, knowing that the project will be completed in order to generate revenue so they can recoup their investment.
A completion bond provides more coverage than a performance bond which is an indemnity bond that guarantees satisfactory completion of a contract work by a contractor. Whereas completion bonds create a guarantee between the obligor and its lender as obligee, performance bonds create a guarantee between the obligor and the contractual obligee. The obligee receives compensation for any losses incurred if the obligor breaches the contractual terms of the agreement entered into. Multiple completion bonds may be required for each contract within a project.
Completion bonds are a longstanding tradition in the entertainment business, where many variables can come into play which may affect the completion of a large movie project. In this case, producers of the film will provide a completion bond to a bank to finance the film project. In return for guaranteeing repayment of the loan, the producers generally do not have to make any loan repayment until the project is completed. Any professional contracted to work on the film project benefits from the completion bond since producers are discouraged from terminating the project prior to completion.
A completion bond may be part of a mortgage financing deal, and serves to protect both the mortgagor and mortgagee. A third-party financier, a completion guarantor company, is typically brought in to provide the financial backstop in the event that original financing is insufficient to complete the project.