Construction Financial Glossary

Performance Bond Definition

A performance bond is a financial guarantee issued by a surety company ensuring that a contractor will complete a project according to the terms of the contract. If the contractor fails to meet contractual obligations, the bond compensates the project owner for financial losses.

Why Performance Bonds Are Essential

Performance bonds protect owners against project delays, defective work, or contractor defaults. They are often required for public and large-scale private construction projects.

How Performance Bonds Work

    1. The contractor purchases the bond from a surety company
    2. If the contractor fails to perform, the surety investigates the claim
    3. The surety either funds project completion or reimburses the owner for financial damages


Related Terms: Bid Bond, Payment Bond, Surety Bond, Construction Risk Management

FAQs

How is a performance bond different from a payment bond?

A: A performance bond ensures contract completion, while a payment bond guarantees that subcontractors and suppliers are paid.

Who typically pays for a performance bond?

A: The contractor purchases the bond, and its cost is factored into the project bid.

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