A performance bond is a financial guarantee to one party in a contract against the failure of the other party to meet its obligations. It is also referred to as a contract bond. A performance bond is usually provided by a bank or an insurance company to make sure a contractor completes designated projects.
A payment bond and a performance bond work hand in hand. A payment bond guarantees a party pays all entities, such as subcontractors, suppliers, and laborers, involved in a particular project when the project is completed. A performance bond ensures the completion of a project. Setting these two together provides the proper incentives for laborers to provide a quality finish for the client.
Parties Involved
- The principal (usually a contractor), is the person or company who is providing a service
- The obligee is the party that is paying the principal to perform certain work
- The surety is the party that provides a performance bond to guarantee that the principal will complete their work. In the event of a partial or total failure by the principal, the surety will pay any additional costs for completion, up to the limits of the performance bond
Target Classes
- Real property construction and development
- Commodity buyers
