insurance

Performance Bond

A type of surety bond that guarantees a contractor will complete a project according to the terms of their contract. If the contractor fails to perform, the bond provides financial compensation to the project owner to complete the work or cover losses.

Example

“The city required a $2 million performance bond before the construction company could begin building the new library, ensuring taxpayers would be protected if the contractor failed to complete the project.”

Memory Tip

Think 'PERFORM or PAY' - the bond ensures the contractor performs their work or pays for someone else to do it.

Why It Matters

Performance bonds protect project owners from contractor default, ensuring projects get completed even if the original contractor fails. They provide financial security for major construction projects and are often required by law for public works, giving taxpayers and private investors confidence in project completion.

Common Misconception

Many people think performance bonds are insurance policies that contractors buy for themselves, but they actually protect the project owner, not the contractor. The contractor pays for the bond, but if there's a claim, the surety company first pays the owner and then seeks reimbursement from the contractor.

In Practice

ABC Construction wins a $800,000 school renovation project requiring a 100% performance bond. They pay approximately $8,000-$24,000 for the bond premium. Six months into the project, ABC goes bankrupt with $300,000 of work remaining. The surety company pays the school district $300,000 to hire a replacement contractor to finish the work, then pursues ABC Construction and its owners for reimbursement of the $300,000 payout.

Etymology

From Old French 'parfournir' meaning 'to accomplish completely' and Middle English 'bond' from Old Norse 'bandi' meaning 'something that binds.'

Common Misspellings

preformance bondperformance bondperformence bondperformance bound

Related Terms

Surety Bond Payment Bond

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