Performance Bond

Definition

A performance bond is a bond secured by a general contractor that guarantees the contract will be performed. It is an undertaking by a surety that a contractor will perform a contract.

Purpose

The purpose of a performance bond is to protect the project owner from financial loss if the contractor fails to complete the project according to the terms and conditions of the contract. It ensures that the contractor fulfills their obligations and provides a guarantee of performance.

Examples of Use

• Construction Projects: Required in construction contracts to ensure the completion of building projects.
• Public Works: Used in public sector projects to protect taxpayer money by guaranteeing contractor performance.
• Large-Scale Developments: Applied in significant real estate developments to mitigate the risk of contractor default.

Related Terms

• Surety Bond: A three-party agreement where the surety guarantees the performance or obligations of the principal to the obligee.
• Bid Bond: A bond that provides financial assurance that the bidder will honor their bid and sign the contract if awarded.
• Payment Bond: A bond that guarantees payment to subcontractors and suppliers involved in the project.

Notes

• Claims: In the event of contractor default, the project owner can file a claim against the performance bond to cover the cost of completing the project.
• Premiums: The contractor typically pays the premium for the performance bond as part of their project costs.