Performance Bonds: What are they? Who do they protect?
Updated: Nov 1, 2022
A performance bond is often known as a contract bond in the construction industry. Performance bonds provide an obligee reassurance that the job will be completed to the contract specifications. If the principal that holds the performance bond does not complete the job or their scope to contract specifications, the obligee can file a claim on the bond with the surety company. Once a claim has filed, the surety will begin an investigation to determine if the claim is valid. Once the investigation is complete and if the claim is determined valid, the surety will then either bring in another contractor to finish/fix the project to the contract specifications or will write a check for the remaining contract amount. Any money the surety company pays out, the principal must pay back per the conditions in their general indemnity agreement.
Performance bonds are required on federal projects over $100,000; however, private obligees can require them as well to ensure protection for the project. General contractors can also require performance bonds from their subcontractors for the projects they are the prime contractor on to ensure their safety too. Due to the risk in the construction industry, trivial delays, defects, and supply issues can lead to large and unexpected costs for contractors. Performance bonds help with these large and unexpected costs because they help projects run in a more efficient manner. Typically, performance bonds are issued with payment bonds; however, that is not always the case and is uncommon to see them issued individually.
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