Performance Bond
A performance bond, also known as a contract bond, is a surety bond issued by an insurer or a bank to guarantee the satisfactory completion of a project by a contractor, supplier or service provider. The bond provides protection to the obligee, typically a government agency, municipality, or other organization with a financial interest in the outcome of the project, that if the principal obligation is not met, the surety is obligated up to the penal amount of the bond to ensure the completion.
Performance bonds guarantee that the contractor will provide all of the services required in the contract, and that all of those service will be completed at an acceptable level of quality and at a reasonable price.
When a contractor is awarded a contract, they typically secure the bond from a surety bond company. The bond company works with the contractor to ensure that they understand the requirements of the project and have the financial ability to cover the cost of the bond. The surety then underwrites the bond by verifying the financial statements and other supporting documents to establish the contractor’s credit worthiness.
The performance bond is a three-party agreement between the contractor (principal), the obligee who is the customer, and the surety company providing the bond.
The obligee should be aware of the contents of the performance bond before accepting bids from contractors. The bond should include the terms of the project, the completion date, and the penalty for failure to complete the project. The penalty should be a reasonable amount and should be discussed with the contractor and surety.
The surety’s role in the performance bond is to ensure that the contractor completes their obligations and that any damages incurred by the obligee are covered by the bond. If the contractor fails to complete the project and/or fails to provide quality services, then the surety will rearrange for completion of the project and/or reimburse the obligee for losses that may have occurred.
Performance bonds are typically required on construction projects where the customer has a financial interest in the successful completion of the project. The bond serves as a guarantee that the contractor will complete the project in accordance with the contract. In most cases, the bond is completed at the same time that the contract is signed, and must be paid before the project is underway.
Performance bonds provide invaluable protection to the obligee in case of any unforeseen problems on a project. The surety is obligated up to the penal amount of the bond to complete the project, if necessary, and to pay for any damages caused by the contractor’s failure to fulfill their obligations. In this way, the obligee is essentially insulated from the financial consequences of a contractor’s failure to perform.
