The Advance Payment Bond is very different from a Performance Surety bond in the sense that it is a well written statement that clearly stipulates that should a contractor fail to deliver as agreed on the contract, he has committed to settle or repay the advance payment that was made by a project owner. The bond makes it clear that should the contractor fail to execute their obligation, then the obligator will have no choice but to give back everything that was paid as an advance payment as per the mentioned contract. It is a legally binding bond that ensures all parties involved are held responsible for their actions.
The advance payment surety bond is also used in the import and export industry, whereby the exporter will pay an advance amount to the importer to finish up a contract. Because of the payment, the exporter will get a statement stating clearly that should they fail to honor their end of the deal, they will be legally responsible of repaying back the advance figure that was initially paid at the onset of the deal. Importers generally rely on this binding statement to recover back their money should anything go wrong in between the time of placing the advance payment and exporting the stuff.
The amount covered by the advance payment bond statement is normally between 10 and 30 per cent of the total cost of the contract. The same surety bond is used in the building and construction industry, especially by building contractors guaranteeing the project owners that they will fulfill their part of the contract within the specified period of time, failure to which the project owner will be compensated in full.
When comparing an advance payment bond against purchase insurance, it means that if any loss or damage occurs in favor of the seller and not purchaser, then the insurance company will cover or make up for the loss. A surety company however can only cover a loss if the project owner cannot be able to utilize the down payment offered by the contractor or in the event that they cannot be able to refund back the amount of money placed as a down payment by the project owner. An insurance company cannot be able to pay for any loss should a building project go wrong or is incomplete because of issues such as terrorism, war etc.
The major benefit of an advance payment bond is the fact that it guarantees the a deal will be done by the end of the day and should anything occur contrary to the contract, at least the advance payment will cover the damage or loss.