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A performance bond is a surety bond
Surety bond

A surety bond is a contract among at least three parties:* The principal - the primary party who will be performing a contractual obligation* The obligee - the party who is the recipient of the obligation, and...
 issued by an insurance
Insurance

Insurance, in law and economics, is a form of risk management primarily used to Hedge against the risk of a contingent loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium, and can be thought of as a guaranteed small loss to prevent a large, possibly devastating los...
 company or a bank
Bank

A bank is a financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money. It is an institution for receiving, keeping, and lending money....
 to guarantee satisfactory completion of a project by a contractor
Independent contractor

An independent contractor is a natural person, business, or corporation which provides good or Service to another entity under terms specified in a contract or within a verbal agreement....
.

For example, a contractor may cause a performance bond to be issued in favor of a client for whom the contractor is constructing a building. If the contractor fails to construct the building according to the specifications laid out by the contract
Contract

A contract is an exchange of promises between two or more parties to do, or refrain from doing, an act which is enforceable in a court of law. It is a binding legal agreement....
 (most often due to the bankruptcy
Bankruptcy

Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay its creditors. Creditors may file a bankruptcy petition against a debtor in an effort to recoup a portion of what they are owed or initiate a restructuring....
 of the contractor), the client is guaranteed compensation for any monetary loss up to the amount of the performance bond.






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A performance bond is a surety bond
Surety bond

A surety bond is a contract among at least three parties:* The principal - the primary party who will be performing a contractual obligation* The obligee - the party who is the recipient of the obligation, and...
 issued by an insurance
Insurance

Insurance, in law and economics, is a form of risk management primarily used to Hedge against the risk of a contingent loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium, and can be thought of as a guaranteed small loss to prevent a large, possibly devastating los...
 company or a bank
Bank

A bank is a financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money. It is an institution for receiving, keeping, and lending money....
 to guarantee satisfactory completion of a project by a contractor
Independent contractor

An independent contractor is a natural person, business, or corporation which provides good or Service to another entity under terms specified in a contract or within a verbal agreement....
.

For example, a contractor may cause a performance bond to be issued in favor of a client for whom the contractor is constructing a building. If the contractor fails to construct the building according to the specifications laid out by the contract
Contract

A contract is an exchange of promises between two or more parties to do, or refrain from doing, an act which is enforceable in a court of law. It is a binding legal agreement....
 (most often due to the bankruptcy
Bankruptcy

Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay its creditors. Creditors may file a bankruptcy petition against a debtor in an effort to recoup a portion of what they are owed or initiate a restructuring....
 of the contractor), the client is guaranteed compensation for any monetary loss up to the amount of the performance bond.

Performance bonds are commonly used in the construction and development of real property, where an owner or investor may require the developer to assure that contractors or project managers procure such bonds in order to guarantee that the value of the work will not be lost in the case of an unfortunate event (such as insolvency of the contractor). In other cases a performance bond may be requested to be issued in other large contracts besides civil construction projects.

The term is also used to denote a collateral deposit intended to secure a futures contract
Futures contract

In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a standardized quantity of a specified commodity of standardized quality at a certain date in the future, at a price determined by the instantaneous equilibrium between the forces of supply and demand among competing buy and sell orders...
, commonly known as margin
Margin (finance)

In finance, a margin is collateral that the holder of a position in security , Option , or futures contracts has to deposit to cover the credit risk of his counterparty ....
.

Performance bonds are generally issued as part of a 'Performance and Payment Bond', where a Payment Bond guarantees that the contractor will pay the labour and material costs they are obliged to.

Performance bonds have been around since 2,750 BC and, more recently, the Romans developed laws of surety around 150 AD, the principles of which still exist.

See also

  • General contractor
    General contractor

    A general contractor is a group or individual that contracts with another organization or individual for the construction, renovation or demolition of a building, road or other structure....
  • Independent contractor
    Independent contractor

    An independent contractor is a natural person, business, or corporation which provides good or Service to another entity under terms specified in a contract or within a verbal agreement....
  • Shop drawing
    Shop drawing

    A shop drawing is a drawing or set of drawings produced by the contractor, supplier, manufacturer, subcontractor, or fabricator. Shop drawings are typically required for pre-fabricated components....
  • Subcontractor
    Subcontractor

    A subcontractor is an individual or in many cases a business that signs a contract to perform part or all of the obligations of another's contract....
  • Submittals (construction)
    Submittals (construction)

    Submittals in Construction Management are shop drawings, material data, and samples. Product data submittals, samples, and shop drawings are required primarily for the architect and engineer to verify that the correct products will be installed on the project....
  • Surety bond
    Surety bond

    A surety bond is a contract among at least three parties:* The principal - the primary party who will be performing a contractual obligation* The obligee - the party who is the recipient of the obligation, and...


External links

  • - An association dedicated to suretyship in the United States
  • - NASBP is the association of and resource for surety bond producers.