Glossary of Business Credit Terms

# A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Performance Bond

What Is A Performance Bond?

A performance bond is a guarantee to a project owner that contract will be completed by contractor according to terms and conditions. The basic function of performance bond is to provide financial protection to the owner should there be a default on behalf of contractor.

How Does Performance Bond Work?

To establish a performance bond, it takes three primary parties to be involved in the whole process:

  • Contractor - who pays for the bond
  • Surety bond agency - who officially post the bond
  • Owner - one who is secured by the bond

There are many federal and local regulatory bodies who emphasize that performance bonds must be utilized for most public projects. This is because this bond gives payment assurance for material suppliers, contract obligations and subcontractors.

Now, if a contractor neglects to standby their end of the deal, then this performance bond will allow bond company to fulfill every aspect of the contract. In a situation when you cannot accomplish the assigned job, the bond company who is accountable for paying the bond’s value will follow the alternative route, that is either they complete the work themselves or put the job out to bid with few contractors.

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