A performance bond is a type of surety bond that is issued by a bank or an insurance company. The purpose here is to guarantees a successful completion of a contractor’s project. A bond usually requires the backup of a collateral property against the surety. The bank or the insurance company acts as the surety agency.

The bond is meant to safeguard the interests of the private party or the government that commissions the project in case the contractor is unable to finish it in time or if it fails to meet the agreed upon specifications. For instance, if a contractor goes bankrupt as a project is going on, the performance bond will ensure that the party that commissioned the project will be compensated as per the bond.

The bond this way protects the property owner or the party that commissioned the project against any loss that occur due to the performance of the contractor. Performance bonds are demanded by both private parties and the government. Usually the project owner asks for bids from contractors. The contractor who wins the bid then has to submit a performance bond as a surety.

Performance bonds also require that some kind of collateral property is pledged to the bank or the insurance company. This is then used to compensate the project owner in case of default. The bond also requires that the parameters of the project are specified. A vague description means that a contractor can easily wriggle out of it.

When do you need a contractor bond?

Any project that requires a large scale investment in time and cost should be backed by a performance bond. This is especially important in an uncertain economy when companies are more likely to fold up or declare bankruptcy.

Benefits of a performance bond

There are some obvious benefits of a performance bond, such as:

— Guarantee that the project will finish in time
— Guarantee that the contractor will execute the project as per the contract
— Safeguards the project owner losses
— The threat of financial loss ensures that contractor will stick to the contract
— This forces a transparency in transactions, since the liability of each party is clearly defined.
— It adds to the marketability of the contractor.
— It provides business to the surety agency

A performance bond is a regular feature in large scale constructions and as the benefits show, it benefits all three parties of the contact.