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.

  1. Construction Bond

    A construction bond is a type of surety bond used in construction ...
  2. Maintenance Bond

    A maintenance bond is a type of surety bond purchased by a contractor ...
  3. Bond Violation

    A bond violation is a breach of the terms of a surety agreement ...
  4. Surety

    A surety is the organization or person that assumes the responsibility ...
  5. Project Completion Restriction

    A type of clause, seen most often in municipal bond indentures, ...
  6. Guaranteed Bond

    A guaranteed bond is a debt security that offers a secondary ...
Related Articles
  1. Investing

    The Basics Of Bonds

    Bonds play an important part in your portfolio as you age; learning about them makes good financial sense.
  2. Investing

    Investing in Bonds: 5 Mistakes to Avoid in Today's Market

    Investors need to understand the five mistakes involving interest rate risk, credit risk, complex bonds, markups and inflation to avoid in the bond market.
  3. Investing

    How Interest Rates Impact Bond Values

    The relationship between interest rates and bond prices can seem complicated. Here's how it works.
  4. Investing

    Bond Funds Boost Income, Reduce Risk

    Bond funds can provide stable returns for those who depend on their investment income.
  5. Investing

    5 Fixed Income Plays After the Fed Rate Increase

    Learn about various ways that you can adjust a fixed income investment portfolio to mitigate the potential negative effect of rising interest rates.
  6. Investing

    How to Manage Risk With Bonds in Your Portfolio

    Bonds are not immune to risk, so be sure to diversify your portfolio with proper asset allocation.
  7. Investing

    Find The Right Bond At The Right Time

    Find out which bonds you should be investing in and when you should be buying them.
  8. Investing

    U.S. Corporate Bonds: The Last Safe Place to Make Money

    There aren't many other sources right now for relatively safe, steady income.
  9. Investing

    Key Strategies To Avoid Negative Bond Returns

    It is difficult to make money in bonds in a rising rate environment, but there are ways to avoid losses.
Hot Definitions
  1. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  2. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  3. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  4. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
  5. Return on Investment (ROI)

    Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency ...
  6. Interest Coverage Ratio

    The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a company can pay interest ...
Trading Center