The terms "Performance Bond" and "Completion Bond" are often used interchangeably in the market, as if they mean the same thing, or as if the Completion Bond is a more comprehensive form of a Performance Bond. In reality, however, they are two distinct types of insurance products.

The Performance Bond is a widely used insurance product in construction projects, aiming to guarantee to the project owner the fulfillment of contractual obligations by the contractor responsible for the project. In this insurance, the policy is taken out by the project executor (contractor) and the ultimate beneficiary is the project owner (contracting party).

On the other hand, the Completion Bond is a highly specific product, more applicable to infrastructure projects developed under the Project Finance model. Its primary purpose is to mitigate the risk of project completion for the project's financier. Unlike the Performance Bond, the Completion Bond is taken out by the project developer and the recipient of the funds, not the construction contractor. In the event of a claim, the ultimate beneficiary will be the project's financing bank, not the project owner.

In summary, while both types of bonds involve insurance to mitigate project risks, they serve different purposes and have different parties involved as policyholders and beneficiaries.

Both are classified as types of surety insurance and are currently regulated by Circular SUSEP No. 662, dated April 11, 2022. Surety insurances aim to guarantee the faithful performance of contractual or legal obligations.

After these initial considerations, it is now possible to delve into the main differences between these two categories of insurance, as well as their practical application.

The Performance Bond is a product designed to ensure the faithful execution of contractually stipulated obligations between the contracting party and the contractor. In a concrete case, the property owner and contractor of a construction project would require the contractor, as specified in the construction contract, to provide this insurance to guarantee the proper delivery of the project as outlined in the contract (1).

In this regard, the insurance policy is taken out by the contractor, with the contracting party of the project being the direct beneficiary of the indemnification (or a third party named as a co-insured in the policy). Since it is a surety insurance aimed at guaranteeing the fulfillment of the contractual obligation established in the contract, namely the delivery of the finished project, the Performance Bond covers not only any defaults caused directly by the contracted builder but also defaults by third parties, suppliers, and subcontractors (even if contracted directly by the owner of the project within the PMG contract) that affect the main obligation assumed by the builder. This is because the default of a supplier/subcontractor relevant to the project (e.g., a supplier of metal roofing for a logistics warehouse) can impact the project if that obligation is not honored by the construction company responsible for the project, even if through another supplier.

(1) In most insurance companies, this insurance is referred to as "Surety Insurance - Performer (Contractor, Supplier, or Service Provider)."

For this reason, it has become a market practice for the builder to require that the main companies contracted within the PMG, those in the so-called "A" and "B" revenue curves, obtain a specific Performance Bond for that contract. This represents the guarantee of the builder's right of recourse against that supplier.

Furthermore, when analyzing the Terms and General Conditions of the Performance Bond insurance policies offered by the leading insurers in the market, there is no explicit reference in the section on excluded risks in the policies to damages and breaches caused by subcontractors and suppliers.

On the other hand, the Completion Bond is a product specifically designed for Project Finance operations or other forms of financing. It's important to note that the ultimate beneficiary of the policy will not be the property owner or the contracting party of the construction project but rather the project's financier.

It's of utmost importance to highlight that in the case of the Completion Bond, the contracting party of the construction project cannot be the ultimate beneficiary in the event of a claim. This is because the purpose of the Completion Bond is to ensure the return of the funds invested in the project to the financier. Therefore, there is potential for the financier to utilize deliberate acts or omissions to fabricate a claim and unjustly receive any compensation paid by the insurer.

With this brief explanation, it becomes clearer that despite sharing some similarities with the Performance Bond, the Completion Bond has a very specific and distinct application. It is not primarily designed for the contracting party in the construction contract to protect themselves against the contractor's potential non-performance. Instead, it is a product created to guarantee the financier of a particular project the return on their investment through the proper completion of the construction.

In the current scenario, the Performance Bond is already widely used in civil construction contracts of various types and has become a standard practice in the market. In contrast, the Completion Bond has limited application, primarily because large Project Finance-funded projects are still relatively scarce in the Brazilian market.